Peter Martin: Follow the Money

January 5, 2018 10:07 AM

Financial health is a top goal for farmers going into 2018, and it’s not likely you can count on a major upswing in commodity prices this year to fuel your profits. Instead, make the dollars flow by scrutinizing the cash that moves in and out of your business. Pay attention to the following four buckets of cash management to see where your money is going. They’re a great way to help your operation thrive or avoid running out of cash while you’re trying to grow.

1. Profitability. The best farmers look at expenses, line by line, and cut the fluff. Follow suit and examine what you’re spending for major inputs such as labor, seed, chemicals and fertilizers. Even your phone bill can add up to surprisingly high levels when you consider all the cellphones and data plans your business pays for. You can probably shave down even those costs. Also, compare your input expenses to what your fellow farmers are paying. Your bank, your accountant and others can help you with those comparison numbers. Many businesses are even engaging third parties to examine their expenses, question their necessity and point out whether those costs are out of line with what others are paying.

2. Financial leverage. As part of your New Year’s financial-health resolution, meet with your banker, and even a second lender, to see about optimizing your debt structure. Has your operating line of credit gotten mucked up with old debt? With the past two years of farm losses, carryover debt has become a concern. Can you clean up your debt? Refinance? Get a better interest rate? Whether you’re in survival or growth mode, make sure your financial structure allows you to maximize your collateral and borrowing capacity.

3. Asset efficiency. Consider whether you’re using your assets wisely. Do you have too much equipment? Did you rush out to buy a high-priced tractor to capitalize on the tax benefits of Section 179? Your competition is doing more with less, so think twice about purchasing new equipment. Although Section 179 will remain in the new tax-reform legislation, don’t be tempted to spend on things you don’t really need. Spend time studying whether you can trim your asset base to generate cash and improve your solvency.

4. Profit retention. Just where are your profits going? A lot might be going into excessive family expenses. Farm families have increased their quality of living in the past decade and rightfully so. Not so long ago you lived on $70,000 a year, but now that number has jumped to $270,000, so a closer look is needed. Paying for family members’ fuel, cellphone and other expenses can become expensive and drain the profits from your company. You might want to continue providing these benefits, but just know the true numbers of dispersing your profits. They’re almost always higher than you think.

It’s easy to get so focused on financial results you start sacrificing your operations and people for financial gain. Remember how important your staff and key assets are to your success. Remove what needs to go, but keep what you need to survive and grow.

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