Bulletproof Your Blanace Sheet
Whether crop prices are high or low, it’s wise to watch your balance sheet closely. Certainly, today’s tight-margin environment demands extra attention. Working with farm operations of all shapes and sizes has given Farm Credit experience seeing what success looks like. We also see how individual farms can start to slip into financial trouble. In addition to looking at each farm’s profit and loss numbers, we can benchmark farms and see how they compare against the key financial metrics of successful farms.
To see how each farm stacks up on its financial health, we watch a few common financial ratios. These are guides and not absolute measures. Each farming operation is unique, but being significantly outside these measures will often create challenges.
Source: Farm Credit Mid-America
In broad terms, we look at working capital (current assets minuse liabilities) as a measure of the amount of funds available to meet the payment of all current liabilities. Working capital compared to VFP (Value of Farm Production) relates the amount of working capital to the size of the operation. The higher the ratio, the more liquidity the farm operation has to meet current obligations and, more critically, how much adversity you can withstand before asking your lender for additional operating funds. Another way to think of this is working capital per acre, which equates to commodity price and bushels per acre and eventually how you develop your risk management plans. The ratio varies across farm types and other farm characteristics.
The USDA projects that many corn and soybean producers will be operating at a loss at today’s low grain prices, so you’re not alone if your farm expenses exceed income in 2015. But that’s no reason to be complacent. In fact, it’s much better for your farm’s financial health to address liquidity and cash burn rates early.
Questions to Consider
- Are you getting the right kind of utilization?
- Are you over-equipped? Are you under-equipped?
- Do you have more labor than what you really need?
- What inputs give you the best value?
- Can you renegotiate cash rents without losing land and production capacity?
- If you are losing money, what’s your capital burn rate? How long can you produce at a loss until the grain market or rental market adjusts?
Read the full Farm Credit Insights Report for more information or visit e-farmcredit.com