A step-by-step guide to get control of your farm finances

Understand the 4E money strategy and the nine key drivers that affect financial wellness

Financial issues consistently cause the most stress for Canadians, but it doesn’t always have to be that way.

According to surveys completed by FP Canada in 2014, 2018 and 2020, one factor consistently causes the most stress for the most Canadians. As you can probably guess, that factor is money, outranking other top stress factors like personal health, work and relationships by wide margins.

Why it matters: The most important financial decisions are the countless ones we make every day, often without thinking. These small decisions have a compound effect over time to get us where we want to be, or not.

Given the skyrocketing cost of land, inputs and equipment, farmers often carry particularly high money-related stress. Financial experts speaking at Ag in Motion Discovery Plus last year agreed there’s one clear solution to reduce financial stress, and, no, it’s not “make more money” or “win a lottery.”

“There have been many studies done. Why are some people feeling more satisfaction about money than others? It’s really not about the amount of money we have. Instead, it’s about our feelings of power and control we believe we have over our money,” said financial educator and founder of Womencents, Vanessa Stockbrugger.

4E money strategy

The key, she said, is to develop a financial strategy. She recommends a “4E” money strategy.

The first E — the base upon which all else depends — stands for engagement. “We have to make our finances a priority. If we don’t make it a priority, no one else will,” she said.

Engagement means investing time and effort into understanding one’s current finances: knowing exactly how and when money comes in and goes out. She pointed out it’s not good enough for just one half of a marriage to engage with finances — understanding one’s family and business finances needs to be a priority for both parties.

The second E stands for education. “(You) don’t have to be experts but (you) do have to have a certain level of knowledge,” said Stockbrugger. That means figuring out how different lending and investing tools work, understanding basic financial ratios for both your farm and personal finances, and keeping up with new financial opportunities or investing vehicles.

The third E stands for execution: the action plan to get you where you want to be. Execution is typically the toughest stage. “This is where a lot of people can get stressed and hung up and almost freeze and not take action when it comes to personal financial planning because (they’re) really scared of making a mistake,” said Stockbrugger.

Execution doesn’t have to be daunting. In fact, the vast majority and, cumulatively, the most important financial decisions are the countless ones we make day to day, often without thinking.

“The small things we do, the decisions we make, have a compound effect over time to either get us where we want to be or not,” said Stockbrugger.

The fourth E stands for experience. Making decisions about one’s farm and family finances is extremely personal and influenced by your unique circumstances and background. “It’s very important that any solutions we implement in our lives, that (they) be with a good fit with what we believe and what we feel comfortable with,” she said.

Nine key drivers

If Stockbrugger has convinced you about the need for financial planning but you’re still not sure where to start, session speaker Trevor Hanley, an area manager for agriculture with Conexus Credit Union, offered some suggestions. While every individual and farm business’ financial priorities, tolerance for risk and money management strategies are unique, said Hanley, his company has identified nine key drivers that typically have a big impact on financial wellness:

  1. Spend so money is left at the end of the month;
  2. Maintain access to $2,000 in emergency funds;
  3. Manage not to overdraw your account over the past year;
  4. Maintain savings to cover three months of expenses;
  5. Save 10 per cent of your income;
  6. Transfer money into savings at least quarterly;
  7. Manage debt to achieve goals;
  8. Maintain diverse savings vehicles to meet short- and long-term goals; and
  9. Work toward saving for retirement.

All nine drivers relate to your cash flow (i.e. when the cash will be available compared with when you need it) and your working capital (i.e. the amount of accessible money you’ll have when all current obligations are paid). Many or all of the drivers can prove an excellent roadmap as you start building a financial plan.

Hanley said a healthy working capital is about 25 per cent of a farm business’ annual expenses. Maintaining that position allows a farmer to enjoy reduced stress, to “self-insure” against short-term struggles, to make decisions based on profitability rather than cash availability, to expand and grow, and to capture better financing or purchase options.

Warning signs of not having adequate working capital can include making questionable agronomic decisions to save money, having numerous creditors calling, sacrificing productive areas of the farm because there’s no money to invest, not meeting payment terms on loans and other payables, not pre-buying inputs, and being forced to sell at market rather than taking advantage of contracts.

To improve one’s working capital, farmers can either achieve improved profitability, reduce spending, refinance assets or, as a last resort, sell surplus or non-income-generating assets.

Financial planning has been proven to be one of the most profitable investments you can make in your farm.

“I believe it’s important and, in fact, crucial to be working on our business and not just in our business,” said Hanley. “Understanding some … key financial concepts and how they impact our enterprises can help in making the right decisions for the right reasons.”

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