Working capital is the lifeblood of any farm or ranch. As Scott Anderson, a South Dakota-based farmer and entrepreneur points out on his latest “Cash Cow Farmer” podcast, a business can’t grow without access to this capital through debt and equity.
Knowing you need it is the easy part. Improving your working capital position is a bit more tricky. But Anderson says the following five strategies can help.
1. Eliminate nonproductive assets. “A word of advice,” Anderson says. “If you haven’t used it in two years, sell it, rent it out, or scrap it.”
Farmers are often guilty of “collecting junk,” and while Anderson can appreciate the nostalgia or sentimentality, it just isn’t a good business decision, he says.
2. Refinance any debt to improve interest rates or terms. Interest rates are still at near-historic lows, but they may not always be that way. The Federal Reserve suggested it may raise rates again as early as September.
“If you have 10 years left on a land loan, you may want to go to your bank to refinance it to a 30-year deal at a better rate,” Anderson suggests. “Try to refinance to get your terms down so your annual cost of capital is as low as possible.”
3. Invest excess cash into productive assets. This advice comes straight from Warren Buffett’s playbook, Anderson says.
“Huge opportunities come to those who are prepared,” he says. “There is no luck, there is only preparation and patience.”
4. Use government programs to increase cash flow. Are programs like CSP, EQIP or CRP an option for your underperforming acres? Anderson says it may be worth further investigation.
“If you’ve got a 100-acre field, and 10 of those acres are always wet or problematic, [see if you can] turn that into a CRP program,” he suggests. “You can probably collect anywhere from $80 to $150 a year on that land, and you’re not wasting seed or fertilizer. I think the farm programs are some of the lowest-hanging fruit and great ways to increase little dividends.”
5. Stress-test your fields and commodities. Farm financial software can help do this. Anderson cheerfully suggests his own product as one of several options available, although he says a diligent farmer can get the job done through spreadsheets or even pen and paper.
On Anderson’s own farm, he discovered the operation was losing money too often growing wheat versus their alternative commodities.
“We haven’t farmed wheat for four years, and our profit margins have risen hugely because we don’t have wheat sucking the profit away,” he says.
Listen to more farm finance insights from Anderson on the Cash Cow Farmer podcast at http://cashcowfarmer.libsyn.com/.