It's natural and appropriate to step back and reflect during the last week of the year. How did you do this year? How can you do better next year? When it comes to farm finances, Tina Barrett, executive director of Nebraska Farm Business, Inc., has several ideas she hopes farmers will try in 2016.
1. Know your costs. Even if the results are painful, it’s an important first step, Barrett says.
“Knowing your costs, good or bad, is the first step to managing them,” she says. “As we move into a time when prices and costs have squeezed a nice profit margin into little or no profit, knowing your costs may be difficult, but that doesn’t make them less important.”
Start with keeping accurate books. That includes records that are reconciled to bank statements, account for all transactions, include accurately coded expenses, and track sales to match production and prior inventories.
“It always amazes me when we find 10,000 bushels at an elevator in in a bin that someone has forgotten,” Barrett says.
2. Control family living. Making a bunch of small cuts could add up to big benefits, Barrett notes.
“It’s hard to imagine a $5 coffee a day makes much of an impact, but that it adds up to $1,800 a year,” she says. “If you can find 10 things like that to cut, it’s $18,000 and that starts to make a significant impact.”
Also, if you put yourself on salary, you may not be as tempted to overspend when your personal expenses have access to a large operating note, she says.
3. Evaluate your debt load. Barrett saw average debt load in Nebraska more than double from 2014, from $450,000 to just over $1 million.
Debt can be a helpful way to manage and grow business, but more debt equals more risk. If you want to reduce debt, there’s one main way to do it, Barrett says.
“Reducing debt load requires an operation to recognize taxes,” she says. “Although paying taxes to reduce debt seems counterproductive, it really is the only way. You must be generating more cash income than you are expensing in non-deductible expenses to have cash available for extra debt reduction.”
4. Select inputs carefully. Could there be wiggle room in reducing inputs? Maybe not – but it’s important to carefully evaluate each input. About 35% of the total cost to produce an acre of corn comes from seed, fertilizer chemicals and crop insurance.
“Also consider shopping around for inputs,” Barrett says. “While loyalty and trust are important in any business relationship, it’s also important that you get the best price for your inputs. Shopping around and keeping your suppliers competitive will help reduce your costs without hurting yield potential.”
5. Watch lease agreements. Barrett says one of the most frequent questions she fields is about what farmers can do about cash rents. As taxes increase, landlords want higher rents. But as commodity prices decrease, tenants want lower rents.
“There is no right answer in this battle, but the reality is that the free market doesn’t seem ready to fully back off,” she says.
It’s easy to come up with more questions than answers, especially when dabbling in flexible cash leases, but it may pay off to look into the many kinds of arrangements out there to find one that will work best for your particular situation.
Barrett has additional detailed farm finance advice at: http://cropwatch.unl.edu/5-resolutions-farm-finances-2016.