Understanding your farm’s historical performance is critical in developing a viable financial management plan, according to Peter Manness, farm management consultant with Meyers Norris Penny.
Manness recently spoke to a group of producers at the Farm Outlook 2015 hosted by the Dauphin Agriculture Society about financial management in difficult times.
“There are a lot of challenges and opportunities facing farmers today in terms of where the industry is,” said Manness. “Having and revising a farm plan is essential. Your farm financial plan is like a road map. It gives you some direction and tells you where you are going.”
Manness described six key factors that need to work together in order to achieve an optimal farm plan — understanding your historical performance, projected cash flow and working capital, projected profitability and cost of production, risk management, debt security, financing and long-term outlook.
Understanding the operation’s historical performance is critical to accurately projecting what to expect in the future. Mannesss said it is important to have a thorough understanding of what these records say about your business.
“It is imperative to understand the production and operations of your business over the course of a year or production cycle,” he said. “You need to understand this because this will show you whether your farm made money, or generated a profit, and these statements are really your operations resumé to the outside world.”
When evaluating working capital Manness recommends ensuring you have 50 per cent of your upcoming year’s expenses available as cash or cash equivalent.
“If you think about your operation, take your current grain inventory, minus any outstanding payables that you’ve got and your 2014 cash advance and the number you are left with should be greater than 50 per cent, in terms of your expenses on a go-forward basis,” he said.
“If you are not at that level, it doesn’t mean you are going to have trouble this year. But if you lose money this year, or the year isn’t as good as expected, it is going to be more difficult to operate in the future and eventually you are going to hit a wall.”
Producers are encouraged to determine their true cost of production, projected profitability and compare those figures to fellow farmers and industry counterparts.
“Comparison to your peers or an industry target is important. How are you on an efficiency level in terms of the amount of crop you’ve got off of your direct input, your seed fertilizer and chemical? How do your overhead costs or machinery costs compare to your neighbours?”
When looking at risk management, Manness recommends thinking about mitigating risk in every decision that is made and maintaining a thorough understanding of risk management tools.
“You need to think about all those risk management tools that you have and how they work together. How will they work or not work for your business and is it something that you understand and are utilizing to the full potential?”
Understanding where your working capital is and when you need to act in securing financing is also crucial in avoiding financial pitfalls.
“If you are already trending below that 50 per cent working capital rule and you haven’t had a conversation about what your options are, looked or talked to your banker about things that you can do to restructure the debt on your farm, then you are waiting too long,” said Manness.
Farmers were encouraged to build a farm plan but refine that plan throughout the year. Manness suggests reviewing and updating your plan in the summer and fall. Use adviser services as much as possible.
“Have frank discussions with your lender, your accountant, farm management consultant, ask them hard questions. We really look forward to this because it shows us that you are engaged in your business and we are there and want to help you through the process of developing and implementing a successful plan.”