Maybe Benjamin Franklin said it best. “An investment in knowledge pays the best interest.” If you find yourself in financial trouble, it’s smart to ask for help.
Art Lange is president of AJL Consulting in Edmonton, and in an article from our October 2020 edition, he and an Alberta farm couple worked together to share their story about how, despite their growing money woes, the couple was able to restructure significant debt and turn their financial prospects back in the right direction.
Now, we go back to Lange, and in this Q and A, we ask him to take a deeper dive into what other farmers in similar situations can learn from professional advisors.
CG: Tell us about those very first meetings when you and a farmer or a farm family in trouble sit down to talk about finances. Everybody has got to be pretty nervous at the start. Are there all sorts of emotions close to the surface? Or maybe they’re just so fatigued by the time they get to you.
AL: We usually have the first meeting in my home office. I find that most people are subdued and thoughtful. Probably, by the time they come to me they are acutely aware of the fact that there is a serious situation that has to be addressed.
Also, they don’t know me so they probably are sceptical if I can really help them. They probably wonder what can I do for them that they, or somebody else, hasn’t tried already. I try to be upbeat and say that I have dealt with problem situations and can usually find a way forward, but I caution them that it will probably not be their first choice.
CG: What’s the first question you ask?
AL: After we have done the introductions and gotten over the first awkwardness, I ask them to tell me about their farm and its history. Most people are proud of their history especially if the farm has been in the family for several generations. After that I transition the conversation to the financials. I use a farm financial analysis spreadsheet called ABA (Agricultural Business Analyzer). I start by listing all the assets and liabilities to create a net worth statement. That immediately gives me an opening snapshot of their operation and the likely source or sources of their financial woes.
CG: You’ve helped many farm families get back on better financial footing. What are the most common underlying reasons today why farmers fall into financial difficulties?
AL: There are several reasons for financial difficulties such as divorce or other family issues, bad weather, animal diseases, loss of on-farm or off-farm income, too much debt and others. I would say that the most common one is too much debt. So when there is a downturn in their income they try to borrow more money to get themselves out of the hole, as in the example from the previous article.
Unfortunately, that usually just pushes the problem down the road, since a fundamental financial restructuring of the farm and finances is what’s really required.
Land and machinery purchases are other causes of financial woes. Farmers are optimistic people by nature, or else they wouldn’t be farmers. So when a piece of land comes up for sale that’s close by, the urge is to buy it. Farmers say that that piece will likely not come up for sale again in their lifetime so if they don’t grab it when there is the opportunity then it is lost to them forever.
Machinery is another popular attraction for grain farmers in particular. Farmers love their iron but sometimes they love it far too much. Small- to medium-sized farms are in a real bind when it comes to machinery since most of it is built for large farms and the price tags are huge.
I encourage these farmers to consider getting a custom operator if it’s possible when needed, or sharing or renting equipment, or even borrowing equipment in return for labour or other considerations.
CG: What are the main options farm advisors like yourself lay out for farmers in financial difficulties?
AL: I usually outline five options. Sale of assets, which is not popular; off-farm income, which may or may not be possible depending on ages and location; diversification, which is usually costly so it isn’t really an option; expansion of the existing operation, which may be possible; and, finally, financial restructuring, which is the usual outcome.
Most situations require financial restructuring, usually in combination with asset sales and/or expansion of the existing operation. If a farmer has to sell land to get the debt load down, it’s especially hard for them. In this case I remind them they may be able to rent the land back so it’s not a total loss. In other cases we have been able to get a buy-back clause in the sales agreement. That means the seller has the opportunity to buy the land back usually within five years at a pre-agreed price.
CG: In your experience, do farmers tend to turn to their advisors/lenders for help early? If not, what’s your advice?
AL: The people that I work with have obviously left the situation too long. The ones that deal with it early, I don’t hear about. I think it’s human nature to ignore our problems or at least delay dealing with them in hopes that something will come along to alleviate the situation, and that next year will be better.
Unfortunately, that usually just pushes the problem down the road. My advice is to talk to your lender or lenders as soon as a problem appears. If your existing lenders will not work with you, it’s time to try to find new ones. Changing lenders is a cumbersome and costly process with all the paperwork and legalities involved so try to work with the lender you have, if at all possible.
CG: What sorts of things should farmers be doing on an ongoing basis to improve and strengthen their relationship with their financial institutions?
AL: I recommend that farmers take a proactive approach with their lenders. Most lenders are required to prepare an annual financial review for each of their significant clients. So at the end of your year, calendar or fiscal, prepare a summary of the past year operationally and financially — what worked and what didn’t, along with your income tax returns or financial statements.
If some things didn’t work as expected, list the changes you’re going to make to “fix” the problems. Also outline your plans for the next year and get the lender’s agreement.
If the lender will not agree to your plan, change it. Remember you need the lender to be your partner in your farm operation. You need him or her to be on your side, so be nice to them and make life easy for them and maybe even buy them lunch. That will shock them.
If lenders have to chase you for requests such as late payments, financial or production information, you’re not going to be popular with them. Try to get your income tax returns or financial statements to your lenders within three months of your year-end (calendar year for individuals or partnerships), or fiscal year for incorporated companies). It can be difficult for accountants to meet the latter deadline but do your part by getting your data to them quickly and then prod them gently.
CG: Farmers today manage substantial budgets and have huge financial commitments. In your opinion, how well is farm financial planning keeping up with the increased value, size and complexity of present-day farms?
AL: In some cases farm management is keeping up with the increasing complexity. In others it is not. In my opinion those people, usually younger, who have embraced technology and see the value of outside consultants are doing a better job of managing their farms effectively.
One thing that some farmers have a problem with is their changing roles over time. When famers start out they usually perform most or even all of the physical and managerial work themselves. Then as the operation grows and they have employees, they have a hard time transitioning from the hands-on farming to management farming.
CG: How do you observe farmers’ approaches to managing their finances changing over their lifetimes?
AL: Younger people are usually gung ho in their approach to farming, which usually means significant debt and financial risk. If they are in a multi-generational operation, this usually causes some distress for the older members.
People in the middle years, their 40s to 60s, usually want to maintain the status quo. They’re usually comfortable operationally and financially and want to stay that way. Once people get into their 60s and on they want to continue to farm as long as they are physically able but start to be concerned about retirement income and security in their old age. In a multi-generational farm there may be problems if the senior generation wants to hang onto management.
CG: How often should farm managers be reviewing their annual budgeting processes, or implement a budget process if there isn’t one in place already?
AL: As mentioned above, at a minimum I recommend an annual review and budget process. The review is what happened last year and the budget is what they want to happen next year, operationally and financially. If significant purchases are to be made, (provide) a detailed explanation of that with projected new expenses and income (if applicable, as in land purchases) in addition to the existing income and expenses.
In the case of significant expenses, it’s important to get the lenders on side BEFORE they are incurred.
CG: Does the family usually know trouble is brewing, or is it more common that they sense that something just isn’t right. At what stage can there be open discussions with other family members?
AL: Most of the situations that I work with are family situations and the adult members are fully aware of what’s going on. If there are older children in the family, it’s up to the parents to decide if they involve the children or not. It would depend on the children’s level of maturity and business or financial acumen.
In any event, I recommend telling the children that there are financial problems and that it will probably require a reduction in household expenditures.
CG: What are the best ways to facilitate open discussions about farm finances in the family?
AL: I am a firm believer in laying all the cards on the table. In other words, be open and explain the situation to all adult members. Maybe some of the “non-involved” adults have some innovative ideas.
CG: What are some important resources you would recommend for farmers seeking advice that could help inform their decision-making if they are facing financial difficulties?
AL: I am a member of the Canadian Association of Farm Advisors (CAFA). We are an association of accountants, lawyers, consultants, etc. that share expertise on the best ways to help farmers in their business management. So if a farmer needs a business advisor, that is a good place to look. For reading material, I usually recommend Country Guide. It’s excellent material for lay people to read and understand in a concise form.
Farm Management Canada has an excellent website with a variety of farm business management aids. There’s also a brief explanation of financial ratios on the FCC site, and a useful piece called the Five C’s of Credit at corporatefinanceinstitute.com.
Remember though, if there are serious financial issues such as lenders threatening action, it will probably require professional help such as a lawyer, accountant and/or consultant to help them.