Managing Farm Business Risk in 2020
Managing the family business, as well as the family and business relationships can feel like navigating through a storm. If this describes how you feel at times, you’re not alone. The stressors like weather, lack of sleep, breakdowns, employee issues, etc. pile on to the existing and often underlying business or family issues.
Over the past year or so, the game has changed a bit, the floor seems to keep shifting and managing risk on the farm through these interesting times is more challenging than it has been in the past, and for some producers perhaps their entire farming career. Farmers can take various risk management steps to protect their business from major risks.
Risk Management Strategies:
A farm financial assessment that is thorough, detailed and based on accurate and timely data provides the information required to identify financial risks.
Having a farm market value net worth statement and personal net worth statement that is updated annually is key to knowing where things are at.
Ensuring financial statements, corporate and personal income tax and day to day record keeping is current, and available for management decision making and creditor requirements, will reduce the risk of making uninformed decisions or credit decisions that don’t meet your needs.
Calculating your sources and uses of cash. Analyzing your short-term commitments, and measuring that against your options to service those commitments, will help you identify areas of strength, as well as areas that may need to be amended.
Have at least 50% of the projected operating expenses covered by your own working capital at the beginning of the productive season. Having a strong working capital position allows greater flexibility with commodity marketing, improves the ability to meet cash flow commitments on time and reduces interest costs and risk.
Knowing your monthly cash flow situation at least 12 to 18 months in advance provides you with the information you need to deal with timing issues well in advance of them occurring.
Knowing what your living expenses are and how they affect your bottom line is key to managing cash flow.
Knowing your cost of production is key to being able to identify opportunities to make appropriate changes, reduce costs and improve profit margins.
Creating a marketing plan that is based on acceptable, favourable and survival price targets and is designed to meet your cash flow needs will keep you on track and reduce the risk of making emotional decisions based on price or timing. Use your monthly cash flow and the cost of production calculations to design a marketing plan that is specific to your timing commitments and profitability goals.
Improve profitability, overall financial health, and relationships with creditors while reducing risk, by paying close attention to your credit portfolio. Use the right revolving credit options for maximum flexibility and minimum cost, while being mindful of the term debt portfolio details, future debt service relief and leverage positions. Knowing what your credit situation is, and what your options are, will help you make informed decisions and reduce financial risk.
Keep relationships strong with your creditors by establishing and maintaining clear and consistent communication. If you expect a change in your financial situation, due to poor crops, delayed harvest, delayed delivery, a change in your seeded acres, etc., talk to your primary creditors about it early, so they can help you set up the best credit solution for your situation.
Insurance and government programs are an excellent way to reduce financial and market risk. Crop insurance, hail insurance, revenue insurance, production cost insurance, AgrInvest and AgriStability are all options available to help you manage the risk of crop failure, rising costs, reduced commodity prices, marketing issues and other financial shortfalls.
Lack of financial knowledge can erode confidence and have a negative impact on management decisions and relationships, causing increased stress levels and challenges to your mental health and overall wellness. My clients have found that taking a pro-active approach and having a solid understanding of their overall financial situation enables them to make decisions and manage their business with confidence and peace of mind, while significantly improving their relationships with creditors and reducing stress for themselves and their families.