Imagine you are boarding a commercial airliner. You assume your personal safety is paramount to the pilot and his team. But once seated, you discover the pilot has disregarded his preflight checklist.
Would you stay on the flight?
The point of a checklist is to ensure all systems are operating correctly. They allow pilots to be proactive if there is a problem with any system onboard the aircraft. Reacting to a problem as opposed to proactively preventing a problem can have catastrophic results.
Let’s draw a comparison between a plane and your farm’s financial system. Your financial aircraft has flown in moderate to severe turbulence. Are your internal financial conditions still structurally intact?
Early Assessment. We are dealing with low commodity prices and other financial challenges, and we are likely to fly through additional storms. As we come in for a landing on our 2017 financials and begin to look toward takeoff in 2018, it is time to build our financial checklist. Being proactive now can save us from some potentially catastrophic problems in the future.
Here are 10 key items you might want to add to your financial checklist.
1. Monthly Pulse: At the end of each month, generate consistent reports that show cash on hand and loan balances. Review accounts receivable and accounts payable. Examine the balances of any lines of credit, including all other third-party loans and especially seed or crop-protection loans. These often are not included in the annual line of credit and can be easily overlooked.
2. Cash Flow: Stay focused on this category weekly or monthly, at a minimum. Compare projected versus actual cash flow, and keep your projections current.
3. Manage Production Costs: Analyze spending on each input line item. Make investments where productivity can be improved or protected. Question spending on anything that isn’t directly, or at least indirectly, related to productivity. Ask difficult questions. Is this expense a need, want or wish?
4. Commodity-Marketing Plan: Dial in cost of production to an estimated or actual cost per bushel. Determine your profit margin, and then establish price objectives for your plan. Manage basis and carry in the market, and be decisive. Make decisions with 50% to 60% of the information you need. If you wait for all the information, it’s often too late.
5. Risk Management: Complete a comprehensive insurance review annually. Keep crop-insurance coverage to the highest feasible level. Learn not only to implement new practices but also to reduce mistakes.
6. Debt Service: Evaluate total principal and interest payments quarterly. Are you able to stay current with all payments? Are your payments for long- and short-term debts feasible on a per-acre basis?
7. Working Capital: Do you have ample liquidity to operate from one year to the next? If cash is tight, what options do you have to access additional capital? If cash is sufficient, are you maximizing opportunities?
8. Contingency Planning: This covers the “what ifs” that arise in operating a business. What if your annual budget is short on income by $200,000? What if your key employee resigns? What if production is 20% below normal? The scenarios are endless.
9. Long-Term Financial Vision: What are your financial goals three, five and 10 years from now? What are your annual ROI objectives? How will you survive several years of negative returns?
10. Lender Relationship: Consistent communication is key. Meet at least quarterly to discuss cash flow and talk about how the season is progressing. Make sure you and your lender are on the same page in understanding your financial system and the details being reported. Make sure your lender understands constructive criticism is welcome.
Starting Point. Use this list as a guide to prompt questions and ideas as you develop your checklist for a smooth and safe business flight into the future.
Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a financial consultant for Ag View Solutions and appears regularly as a guest on Farm Journal Media radio and TV affiliates.