Farmers are good at business. They know how to make decisions. They know how to plan, they know how to think on their feet.
The challenge, says Larry Lindquist, is to not be satisfied with that. It’s like the old rule of the good being the enemy of the great. If you feel you’re already good at business, then of course it makes sense to spend the afternoon in the shop instead of staring at a column of numbers.
Lindquist, a farm financial adviser based in Edmonton, says real business success comes from knowing the details. It comes from making better use of financial and management tools because you know — really know — your numbers. It comes from better planning, better management and better marketing because you’ve created an on-farm climate that supports better decision making.
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The fact that your farm is viable today despite the million and one weather, market, political and agronomic factors stacked against you proves you’re already doing a lot right.
So we went to the experts and asked them to help us produce a list of realistic, achievable resolutions that can make a real difference in your bottom line this year. The best thing is, they’re worth a read even if you’re doing them all already, because it’s good to remind yourself of what is driving your success.
And if there are some where you can improve… there’s no better time for change than the first of the year!
Resolution 1 I’ll Get Help!
Don’t make the mistake of thinking that your strengths in other aspect of running your farm will compensate for your lack of interest in and commitment to financial management. Get help.
Hiring a financial expert provides you with instant expertise and a fresh perspective on your choices and struggles. Best of all, the advice doesn’t depreciate.
“There comes a point when everyone needs to outsource,” says Liz Robertson, executive director of the Canadian Association of Farm Advisers (CAFA). “It’s a necessity of business. A lawyer outsources his food supply. A producer can’t be expected to be a legal expert, tax expert and financial expert too.”
If you aren’t fully confident managing the numbers behind your business, then outsource. More and more of your neighbours are already doing it.
Lindquist recommends that, as a bare minimum, all farm businesses should get a thorough financial checkup once per year. “It’s the same as going to your doctor for a medical checkup,” explains Lindquist, also a CAFA member. “Even if you feel fine, the doctor may find something that needs to be addressed.”
The danger of not getting a checkup, adds Lindquist, is that “sometimes you’re not aware of the things you don’t know.”
An annual financial review looks:
—Backwardsat the last year’s revenues and expenses, with a conversion to accrued.
—Right nowat assets, debts and net worth.
—Forwardat projections for the coming year.
If meeting with a banker or accountant sounds like slow death to you, and if the financial lingo and terminology is confusing, then it’s time to make a decision. Is it your problem, because you haven’t really invested the energy to keep up? Or are you using the wrong adviser, perhaps someone who doesn’t understand the specific business needs of farms in general and your farm in particular?
When you’re shopping for an adviser, you’ll see the CAFA initials attached to some names. To qualify, financial advisers must be accredited, experienced experts in a wide range of advisory disciplines who engage in ongoing training, are well connected, and are recommended by their peers. All have at least two years of working with farm families (90 per cent come from farming backgrounds).
Resolution 2 I’ll look back, both at my financial success and also my shortcomings
Everyone should know how much money they made last year. Period. This is the most basic check on your financial pulse.
The reality though is that when Lindquist teaches farming financial workshops and asks producers to put up their hands if they know how much money they actually earned in the prior year, “not a hand goes up,” he says. “Most don’t know. Many don’t have a clue.”
Of course, there’s a good explanation for that. Most of those same farmers would put up their hands if you asked them how much cash flowed in and out of their farms in the past 12 months.
At issue, however, is the fact cash flow isn’t the same thing as profitability.
Cash statements, which most producers are generally comfortable with, track money received versus expenses paid (strictly in versus out). However, cash statements don’t give any indication of the health of your overall farm. For example, if you received production cheques over the last quarter but didn’t pay any bills, your business could look very profitable, even if it isn’t.
The accrual method means you track when money is actually earned versus simply received, and you include the value of your “inventory” (livestock, crops, inputs, etc). While cash statements are a good method for income tax purposes, measuring your net income with accrual accounting gives a far more accurate and up-to-date picture of profitability.
On top of that, accrual accounting means you can create reports that provide a fuller picture of your business success, including balance sheets, statements of retained earnings, and income statements.
That’s particularly important in farming, where your business success is tied to the cyclical nature of agricultural production and to the markets.
“Producers tend not to look at last year so much, because ‘last year is past and I can’t do anything about it anyway,’” says Lindquist.
You’d hardly be alone if you’ve put last year behind you, saying it wasn’t average because of the rain, frost, disease, the markets or anything else.
There’s a rule in financial analysis, however. It’s easy to remember. The bottom line is the bottom line.
The simple truth is, reviewing and understanding your past year’s performance will allow you to make better decisions going forward to ensure those bills are payable.
If you are not confident in converting your revenues and expenses to accrued, or you are having trouble honestly reviewing your past years’ performances, see Resolution #1.
Resolution 3I will take the time to understand my current business financial ratios and markers
A lender’s worst nightmare is the farmer who phones on Monday morning and says, “I was at auction on Saturday night and bought a $100,000 piece of equipment. How can we finance it?”
Three financial indicators that your business will live or die by include:
— Current ratio, i.e. current assets divided by current liabilities.
— Leverage ratio, relating equity, assets and debts. (Net worth ratio is the same thing stated a different way.)
— Debt service ratio, comparing your debt service ability to the payments you’re already making.
As well, you need to understand your cash flow and operating loan requirements.
Knowing these ratios is important to understanding the financial position of your business. Often more important, however, s tracking how they change over time. Not only can a sound financial understanding of your business and how it is changing help you make better, more timely decisions, it can affect how others treat you and your business.
“If you can keep your financial ratios and indicators where they should be, your lender will be more interested in working with you,” Lindquist agrees. “And if your business is strong financially, and you and your lenders know how it is doing and why, you will be in a better position to get the best interest rates.”
Why? Because producers who have decent financial statements and projections can prove that their business decisions are based on calculated analysis. To a banker, that means they’re better at business, and a safer lending bet.
Resolution 4 I’ll prepare for the worst-case senario
There are two types of people, those who pay for insurance, and those who say “it’ll never happen to me.” When it comes to your farm business, planning for all contingencies is vital to your long-term success.
Almost all farm businesses face some kind of crisis — a natural disaster, health issue, family breakdown, accident, or unexpected financial loss — at some point in their evolution. As the old adage goes, hope for the best, but prepare for the worst.
Farm businesses that survive crises best generally do so because of sound financial pre-planning. In order to make key decisions during high-stress crisis situations, you need to have good numbers in place and a clear understanding of your financial situation and options.
Unfortunately, says Lindquist, many farmers are already in crisis when they turn to a farm financial adviser. In fact, they’ve often been referred by a lender as a last ditch effort to save the farm.
The message is clear, say Lindquist and Robertson: Don’t wait for crisis to occur before you figure out contingency plans and options.
Resolution 5
’ll plan for the future
If your farm business isn’t struggling and isn’t in crisis, you are likely weighing different options for implementing some kind of change or growth. Or maybe you’re only daydreaming.
The difference is, daydreams can turn into nightmares.
As entrepreneurs at heart, few producers are content with the status quo. Be it increased profitability, expanded acreage, more diversity, or some form of transition, most farmers imagine some kind of improvement in their future.
Yet, for many producers, actively working towards implementing growth and change gets no more technical or strategic than day-dreaming.
If you are serious about your expansion or transition plans, work your key financial numbers through all scenarios. The answer are there.CG
