Financial Due Diligence

January 20, 2018 03:44 PM
Corn plant growing in money

Anew year brings new opportunities and challenges—a chance to reflect on previous years to prepare for whatever lies ahead. Start 2018 off right by focusing on the following five areas:

Assess land—is it profitable? First, look at each piece of land you manage and determine whether it contributes positively or negatively to the cash flow of your operation. “Don’t just look at this past year; go back and look at multiple years so you really see the trend,” says Alan Hoskins, CEO of American Farm Mortgage. “Look at the rent you’re paying and determine if it really makes sense to continue to have that in your operation.” Although this can be a difficult decision, it is important to evaluate if you can profit off the ground or not.

Have a marketing plan. If you don’t have a marketing plan, this is the year to put one in place. “The market has offered a number of opportunities to sell at prices that will get a farmer in the black,” says Tanner Ehmke, manager of CoBank’s Knowledge Exchange Division. “But so often those opportunities are there and then they’re gone. It’s very short lived.”

The basis of your marketing plan should be your cost of production, says Chris Barron, director of operations and president of Carson and Barron Farms Inc., in Rowley, Iowa, and a financial consultant for Ag View Solutions. “Know your true cost per unit based on your five-year production history,” he says. Then you can set time and price targets for making sales. “Keep marketing simple and stay disciplined,” he says. “Document when and why you make a sale and review your plan every day.”

Know your partners. “From the farmer’s perspective, you need to know who you’re in business with and know your counterparty risk,” Ehmke says. You should know the position your lender is in and how the risk of interest rates rising could affect your business. For example, think about how a possible rise in chemical prices due to Chinese regulation could affect your ag retailer. Then consider how this could affect your operation in return, Ehmke suggests.

“You only get those kind of opinions when you have a really good relationship with those people in your supply chain,” he says.

Seek advice. When planning for the year, make sure to speak with all parties that contribute to your business. This might include your banker, accountant, attorney, crop insurance agent and merchandiser.

“None of those individuals are going to tell you how to run your operation, but what they can do is give you insight into their area of specialty,” Hoskins says. “The farmer is the CEO of the company, and it’s always wonderful when a CEO reaches out for input.” Having a professional’s point of view will help make you more confident in your plan to move your business forward, but remember you have the final decision on how your operation develops.

Re-evaluate living expenses. Big houses, vacation homes, recreational vehicles and other forms of leisure create fun, memorable experiences for your family, but they can add stress if they stretch your financial resources, says Matt Davis, vice president, agribusiness, Farm Credit Mid-America.

“Assets purchased with available cash during good times are easier to maintain,” he says. “But when assets are financed, it might be difficult to sustain extra payments and recurring maintenance costs while trying to trim the family budget to help the farm cover its overhead expense.”

Create a family budget so you can adjust any expenses that don’t align with your farm’s business goals. “Rather than thinking of budgeting as something that limits your family’s quality of life, it may be helpful to consider it something that protects your family’s quality of life for years to come,” Davis says.

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