If you grew up on a farm or visited your grandparents’ farm frequently, you probably can picture it right now. Farming today, you know how much has changed since those times, too.
Farm finances and financial management have really changed over the past few generations. In the past, farming was a lifestyle. It’s still a lifestyle today, but requires more intensive business management for a successful operation.
Along with the many other changes impacting their farms, farmers are going through a change in focus, from being craftsmen to thinking as business leaders. The types of skills that CEOs hone are becoming a competitive advantage for farm success.
Farms Of The Past
Think about your grandpa and his farm or, if he didn’t farm, think about someone you know from that generation who farmed. In those days, if he worked harder, longer days than his neighbor and planted more seed, then he probably had higher yields and was more successful. He was able to purchase more land, which helped him grow the farm.
Today it’s not about more hours in the tractor, but about becoming more knowledgeable about areas of your business that impact your success the most. It’s about putting processes in place that help you execute plans for your business. It’s about doing contingency planning so you have backup plans when things change.
In the past, when farmers decided to work hard at production, that alone often was enough to give them an advantage. But now we have to work smarter, too. Farmers need to master leadership skills such as financial management and how to foster good working relationships with lenders.
Back in grandpa’s day, if an operation had very high equity, but was low on working capital, that would have been seen as acceptable. The banker may have recommended that the farm leverage some equity from the land, viewing the farm as having the hard assets to back it up.
Today, if a farm doesn’t have enough working capital to make everything cash flow, bank regulators often aren’t allowing lenders to make loans to those clients.
And if the farm’s ground already is quite leveraged, then there may not be any wiggle room for collateral to collateralize your operating note. The bank might even say it’s time to find another bank because we can’t lend to you anymore.
Now is the time to be proactive about this. The first step is thinking differently about your farm’s finances and preparing to show your banker how you’re financially prepping your operation for any challenges.
Partner For Success
The proactive farmer has an accrual financial projection put together ahead of the meeting with the bank. These farmers know their numbers.
They go to the banker saying: “Here’s what I know isn’t quite right with my operation and here’s what I intend to do to fix it. Here’s the good outlook and the bad outlook. Here are my contingency plans.”
Think of your banker as an adviser to help you make your farm more competitive. Here are a few questions to start with:
- What are the top one or two things I could do to improve my operation’s position?
- What’s most important to you as you look at my farm’s financials?
- Looking at the current state of my farm’s financials, what should I focus on in the next few months?
Meetings with your banker aren’t anything to fret about. They’re an opportunity for both farmer and banker to get a better understanding of where the operation is at, and how money gets loaned out.
Winter Learning Opportunity
I want to share a unique learning opportunity happening this winter. Water Street EDGE is a two-day seminar featuring speakers David Kohl, Matt Roberts and others, including myself. The speakers will address some of the biggest issues on the minds of today’s farm leaders.
The seminar will be Jan. 23-24 in Champaign, Ill. If you register before Dec. 26, you can get a 50-percent discount on your registration fee. Check out the speakers and topics, learn more and register at www.waterstreet.org/edge.