Cost-cutting Mistakes

April 9, 2009 02:07 PM

Taking an ax to your budget may seem like the smart thing to do to manage to-day's tighter margins, but a scalpel might be your best choice of financial cutlery.

The health of your business is at stake when you focus on saving money rather than keeping an eye on the future, says Danny Klinefelter, an economist with Texas AgriLife Extension. "Keep your long-term goals in mind and don't overlook potential opportunities as you look internally to carve out waste and improve efficiency," he says.

With that in mind, Klinefelter and other leading business consultants offer the following tips on common money-saving missteps to avoid.

1. Tax avoidance. "Over the years, even sharp managers have done some not-sharp things because they didn't think through the tax consequences appropriately," says retired Purdue University farm management specialist Howard Doster. 
"Farmers who do a good job of maintaining overall equipment have a much lower per-acre cost for machinery and equipment than those who keep buying equipment for tax reasons," Klinefelter adds.

For large-acreage farms, he says, the decision to turn the fleet each year probably makes sense. However, "rolling machinery over every year is not for every farm," he says. "For guys in the 2,000-acre to 3,000-acre range, it may or may not make sense."
Proper machinery maintenance can help you avoid adding costs when machinery isn't fully utilized.

2. Pass up cash discounts. "When cash is tight, it may be tempting to wait until the end of the month to pay," Klinefelter says. Terms often are 2/10, net 30: You get a 2% discount if you pay within 10 days, but you pay the full amount if you pay within 30 days. "If you wait the extra 20 days to pay, that 2% lost discount is like a 36% interest carrying charge on an annual basis," Klinefelter says. "So it makes for very expensive credit, or, on the other side, a very high rate of return."

3. Buy only on price. As a general rule, Klinefelter says, there is a tendency to buy on price and not value when margins squeeze the balance sheet. "This may be on labor, on equipment or on inputs." Buying for the right reasons is more important than buying something just because it's the lowest-cost alternative.

4. Go cheap on technology. In every country except the U.S., when farmers have a difficult year, that's when precision agriculture companies tend to sell more of their products, says Wade Stewart, field marketing manager for AutoFarm, which manufactures GPS receivers and precision ag solutions for automatic steering systems.

Most American farmers, however, tend to hunker down in tough times such as these and cut back on precision farming and technologies that can provide a high rate of return.

"The U.S. is the only country where farmers start with the cheapest technology they can find, only to become unsatisfied, get rid of it and buy the next-cheapest product," Stewart says. "The key is to buy everything you need and only what you need the first time around."

5. Overlook labor's impact. Acquiring the right equipment and technology is essential if you want to stay competitive, Doster says. "If you're going to be a competitive, low-cost Corn Belt crop farmer, you must use big machinery.

"Why? Per-acre field machinery costs are more or less size-neutral; per-acre labor costs go down as one operates bigger machinery," he says. "If you can't or don't want to rent enough land to own one set of big field machinery, find a way to join up with others."

6. No marketing tools. Refusing to use futures and options because they require a cash outlay is penny-wise, pound-foolish, says Carl German, University of Delaware grain marketing specialist.

The past year is a case in point. In June, when German participated in a Top Producer webinar, he suggested setting a minimum corn sales price by buying a $7.60 December put at a cost of 90¢/bu.

"That would have locked in $6.90, while leaving the upside open and not tying you into delivery should you have a yield shortfall," he says. By harvest, corn futures fell to $4.55 and below. "So by spending 90¢, a grower could have done $2.15 better than harvest sales—a 239% return on that investment."

Futures hedges don't carry a premium cost, but may require cash flow for margin calls, especially if prices move against you, German adds. "But in many cases, they swing back and the only real cost is the interest on the margin."

7. Don't budget. Budgeting is usually an area for improvement on any farm, Klinefelter says. Proper analysis and monitoring of your fi-nancial situation will allow you to take advantage of opportunities.
"If you're not on top of it, you may not catch those little windows where you have the chance to make a profit."   

8. No to consultants. "The best way to cut fertilizer back 10% is not to cut 10% across the board. Cut back 20% in areas where you can manage it and don't cut back at all where you shouldn't," Klinefelter says. Pest management is another example. Don't be afraid to shell out some cash for a crop consultant.

9. Let fear rule. "There are two scenarios where farmers show a tendency to get lax or get frozen," Klinefelter says. "One is when things are going extremely well, because it's too easy to say things are going really well and it's working. You wonder, Why change? The other is when your back is against the wall. You get locked down because you're afraid to do anything. It's just fear."

To contact Greg Vincent, e-mail

Top Producer, Spring 2009

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