For young farmers today, risks are endless—but also are rewards. To secure a foothold and pave the way to success, financial skills are a must. You have to be able to convince your family, partners and lender that you are worth the risk. Are you willing to be an exceptional farmer?
“If you think about the loan officer sitting with you, that’s what he or she wants to know,” says Gary Matteson, vice president of young, beginning, small farmer programs and outreach for the Farm Credit Council. “They want to know, what’s so different about you? Are you capable of running the business?”
First, understand how lending partners measure you and your operation. “They use the five C’s of credit to decide if you’re a good credit risk,” says Linda Keith, a CPA from Olympia, Wash. Those factors:
- Character—Does the borrower possess the managerial ability to have a strong chance of success?
- Capacity—Does the borrower have the resources to repay?
- Collateral—Does the borrower have property or large assets that can be used to secure the loan?
- Conditions—What are the current conditions? Can the borrower weather the storm if conditions are not ideal?
- Capital—How much does the producer have invested in the operation?
“I would like to add another ‘C’—communication,” says Keith, who trains lenders on how to make smart loans. In today’s tough ag economy, farmers need to maximize their relationships with their lenders.
“I train lenders to ask borrowers good questions,” Keith says. “But wouldn’t it be wonderful if you, as the borrower, did that too?”
Ask your lender: What works well on other farm operations? What financial metrics do you watch the closest? How frequently are you reviewing my financials?
“You want a mutually beneficial relationship,” Keith says. “You are bringing them business, but they also bring value to you, in terms of the things they know.”
Financial management is one of the biggest challenges farmers face, regardless of age or experience. Make it a priority to study, analyze and improve your financial knowledge.
“As farm managers, you cannot avoid difficult tasks or problems,” Matteson says. “Being fluent in the language of monthly cash-flow budget is the single greatest skill a beginning farmer can have in convincing someone else that they are competent, committed and have clear expectations of the future.”
Use your cash flow and balance sheet to guide your business decisions. Should you rent more ground? Should you add a new enterprise?
“If every business decision you make in your whole life you ask yourself ‘what will this do to my balance sheet,’ you’ll make good decisions,” Matteson says.
Your Business Equation
How do you prove you’re a business-savvy farmer? Be able to describe your operation in a 45-second elevator speech and tell your story in a business plan, says the Farm Credit Council’s Gary Matteson.
Compile a monthly cash flow budget, and explain your business in terms of:
Sales – Cost of Goods Sold (Variable Costs) = Gross Margin – Overhead (Fixed Costs) = Profit (Net Margin)
“That’s the equation for business,” Matteson says. “If a beginning farmer can use those five terms—total sales, costs of goods sold, gross margin, overhead and net margin—a loan officer’s jaw will drop. After the intro speech, if a young farmer can hand over a monthly cash flow budget, the loan officer may have to be revived with smelling salts.”
Young farmers can build their management and financial skills at the Tomorrow’s Top Producer conference, Jan. 15-17 in Chicago. Learn more and register at TPSummit.com