Leverage your farm’s success to access credit
By Lekan Oguntoyinbo
A large part of financial success depends on understanding true production costs.
"Farmers need to know how many dollars it takes to produce a bushel of wheat and not just guess," says Brian Eggebrecht, a CPA and third-generation grain farmer. "You need to know exactly what you have in seed and fertilizer and break it down on a per-acre basis. This way, when you are marketing, you know if you’re in a negative cash flow situation."
He predicts that in the coming years, those who fail to demonstrate financial savvy will have a hard time staying in business. "Most bankers only want to lend to farmers who thoroughly understand their finances," says Eggebrecht, who farms 10,000 acres in Malta, Mont.
To help, two of Purdue University’s farm and financial management experts offer up some advice.
Financially savvy farmers study their balance sheet, list assets and liabilities andcompare their income statements from year to year. For the most accurate measure of profitability, use accrual accounting.
Cost Control. "Be conscious of what you pay for inputs," says Mike Boehlje, farm management expert. "It’s not what you sell the crop for but what you pay for inputs. If you pay too much, it’s hard to make it back through better prices."
Not only do you need to manage input costs, but also the cost of debt. If you haven’t already, transition a portion of your debt to a fixed interest rate, he says.
Additionally, farmers should study their balance sheet to better understand which transactions have the biggest impact on their financial position, says Freddie Barnard, a financial management expert. The balance sheet should include assets, liabilities and owner equity, he says. These can only be valued in dollars.
Asset inventory should be done at the same time each year, which will give you a more accurate picture when looking at your balance sheet and comparing it from year to year, Barnard says.
When listing assets and liabilities, he advises splitting them into current and non-current categories. Current liabilities are due the next year, and non-current liabilities are due years after. Include contingent tax liabilities so you’re aware of potential financial obligations, Barnard says.
Farmers can use their balance sheet to assess progress from year to year and to better understand their mix of outside and inside investment or sources of financing. They can also use it as collateral to support loan requests, Barnard says.
Last, keep an eye on your income statement, which helps summarize revenue and expenses. If possible, use accrual accounting, which reports net farm income. "This allows you to take cash transactions and adjust them by including changes in inventory, accounts receivable and accounts payable," he says, adding that this system is a more accurate measure of profitability.
For more recommendations from Barnard and Boehlje about farm accounting, visit www.TopProducer-Online.com/farm_accounting.
- December 2013