Farmers face the daunting challenge of thriving amid market volatility, rising input costs and unpredictable incomes. These factors highlight the importance of financial management on your farm. As I work with farm families to optimize their operations, I’ve come across many common pitfalls that may be harming your income-producing potential.
Inadequate cash flow management
Unlike other industries, cash flow management can be particularly difficult for farmers due to the fluctuations in timing of expenses and income. It can be impractical to have consistency from year to year when high upfront input costs can send your expenses through the roof. While it may not be feasible to have a consistent amount of cash in the bank, consider what you do have the ability to control.
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For example: having a sum of cash set aside for tough years could be a good way to protect your operations from the inability to pay important bills. It may seem like an obvious first step, but using your historical financial information to determine how much cash is required to run operations in an average year may be a good place to start when evaluating how to best manage cash.
While improving record-keeping may be the priority, focusing on analyzing the farm’s future cash requirements can safeguard you from a major pitfall: the over-reliance on credit. If you are not aware of the cash requirements for the operations, you may find yourself forced to use credit to cover cash flow gaps which may be costing your bottom line with high interest.
Not managing debt effectively
While debt can be a tool to leverage income-producing assets, I’ve seen some farms accumulate too much debt. The obvious impact of over-leveraging can be the risk of interest rates further damaging the farm’s cash flow position, inability to make the required payments and ultimately the damage to future lending opportunities in the case of default.
If your farm is currently struggling with managing debt, consider prioritizing high-interest debt payments and make sure to spend adequate time refinancing when interest rates drop to ensure you are taking advantage of market savings where possible. It’s important to have ongoing discussions with your accountant or financial advisor to make sure your debt management strategy is appropriate for your specific operations.
Lack of diversification
Most farmers will have specific industry strengths that make it easy to invest the bulk of their time and money into one specific area of farming. This can significantly impact cash flow management, as most of your income may be reliant on a single revenue stream.
It may be time to start thinking outside the box. I’ve seen cattle farmers open storefronts to sell their beef alongside other locally sourced meats, I’ve seen potato farmers branch out into the liquor industry and grain farmers expand into apiculture. While some options may seem particularly cumbersome, consider how expanding into another revenue stream could compliment your existing operations. However, be aware of the risk of overexpansion. Expanding too quickly without adequate financial resources or market analysis could cause more harm than good.
Risk management
Risk management in all its forms — crop and livestock insurance, futures contracts and government programs being the primary avenues — may be an area your farm can improve. It can seem like an impossible balance between managing risk and avoiding overspending on expensive premiums, but it may be wise to consider whether you notice a specific trend.
Everyone has a risk tolerance level, and it may be useful to identify yours. Are you noticing consistent overspending on insurance out of fear of every worst-case scenario? Are you taking advantage of government programs that may be beneficial, such as AgriStability and AgriInvest? Are you staying up to date on available grants for specific investment opportunities that your farm may be undertaking?
Misaligned investment priorities
This pitfall seems to be significantly more predominant in operations that are managed by more than one individual. Allocating funds to areas that may not be providing a solid return on investment could be causing the farm to struggle with cash availability. An example would be one “unaligned” individual investing in non-essential equipment upgrades when the cash could have been better used to improve soil health for an increase in yields in future years.
That’s not to say equipment upgrades are non-essential; under certain circumstances it can be critical to upgrade equipment. The importance lies in ensuring all decision-makers are on the same page, requiring constant communication. If this is a pain point your farm is experiencing, it may be worth it to implement some policies to safeguard against unnecessary spending. An example could be to require two signatures on every cheque over a certain dollar amount, so significant purchases are reviewed by another individual.
Neglecting technology adoption
Farm technology is developing at a very fast pace. This pitfall has two areas to watch out for: underinvesting, and investing too quickly. I have met many farmers reluctant to invest in new technology and, on the flipside, many who have allocated resources to several new pieces of technology regardless of its viability. Both sides have significant potential negative impacts on the farm’s profitability.
While choosing not to invest in technology could drastically impact potential efficiencies, it could also play a role in the work force your farm attracts. It is also important to consider the long-term plan of your farm: are you contemplating handing the farm operations to the next generation at some point in the future? It may be wise to gradually invest in new technology to support the next generation, ensuring they won’t face the burden of making drastic, costly upgrades to modernize the operation once they take over.
Neglecting succession and estate planning
It can be easy to put succession planning on the back burner year after year. Unfortunately, one can never truly know when it may become “too late” for estate planning. It’s best to initiate these discussions early and frequently as you consider transitioning your farm. While it may be obvious to include farming kids in the discussion, also consider the importance of involving non-farming kids. “Fair” does not always mean “equal,” but the more conversation that takes place around these topics, the fewer surprises there will be for everyone involved — not to mention that the earlier you discuss these topics with your team of advisors, such as your lawyer and accountant, the more tax planning opportunities may arise, keeping more money in the jeans of future farmers.
The unique struggles farmers face often breed resilience and strong work ethics. While some struggle may be good for your mental toughness, consider how cash management, diversification, risk management and investments could reduce unnecessary struggles faced by your farm. A few visits to your accountant may provide a tailored solution based on your farm’s financial health, easing the pressure of making significant decisions on your own.
