By Dr. David M. Kohl
Commentary, wisdom, and perspectives from globally renowned agricultural economist, Dr. David M. Kohl. Farm Credit Illinois (FCI) partners with Dr. Kohl to provide learning resources to farm families.
The end of harvest marks the beginning of personal, business, and family resolutions for the coming year. While many personal resolutions such as “no more junk food” rarely come to fruition, the exercise of creating resolutions can be very useful. With the economic reset in place for the agriculture industry, there are several potential resolutions that may be beneficial for next year.
Set Goals
The top priority for the first quarter of the new year should be setting goals. In conducting this exercise, include each of your business stakeholders and outline each of your goals in writing. Short-term goals are within one year while longer-term goals span three to five years. To develop a well-rounded set of goals, include business, family, and personal objectives ensuring that each is complimentary with another. A good set of goals is the foundation for any business plan, so make sure they’re specific, measurable, achievable, rewarding, and timely.
Prepare Financial Documents
Next in your resolutions process, organize and complete your financials. This includes an updated balance sheet, accrual adjusted income statements, and projected cash flows. On the balance sheet, examine any net worth change. Determine if an increase was the result of asset appreciation or actual changes in value (earned net worth). This can be calculated by subtracting living costs and taxes paid from your net profits including changes in debt principal.
Regarding income statements, the Schedule F tax form is not a good tool for measuring true profits because many farms attempt to minimize income to alleviate their tax burden. Adjust your income statement with changes to inventory, receivables, payables, prepaid expenses, supplies, and accrued expenses which are usually listed under current assets and liabilities.
Many will argue calculation of projected cash flow is impossible because of extremely volatile prices and cost production levels, as well as markets. This volatility is a reality, which is why one needs to develop a baseline cash flow. Then test scenario changes in price, cost, and production levels. This process gives you a useful tool to monitor performance throughout the year and determine if the New Year’s resolutions are holding.
Lender Check-In
Open communication with your lender is critical. A side-by- side working relationship with your lender can be extremely helpful in positioning your business for success. If you have negative margins or need to refinance operating debt due to lower production or prices, be prepared to build your financial case. This may include showing your historical profitability trends, strategies, and expenses over time.
Now is also the time to develop a strategy for assessing and eliminating unproductive assets. Increased efficiency should be another top goal.
On the positive side, consider smart growth. Producers with financial reserves may have the option to make some investments in productive assets such as needed equipment in the near-term to take advantage of reduced pricing. While not showing the decrease of equipment prices, the price of farm land has also begun to decline. In some areas, producers with working capital may be able to purchase land at lower rates and possibly even negotiate reasonable cash rents. For those producers with the advantage of financial reserves, the economic reset offers flexibility as well as optimal timing to smartly grow your business.
Invest in Yourself
Finally, take this time to invest in the professional development of your business by scheduling three to five varied educational programs for personnel. Some of the today’s top managers utilize an advisory team with scheduled meetings. Just as you would research and implement best management practices in the field, these practices are just as important in business management.
In making your resolutions, do not forget your own personal health. Good management requires a strong mind, body, and heart – exercise is good for all three! Overall wellness is imperative for success in today’s world of extreme volatility and pressures on the business, family, and personal lives. Investing in oneself has a high rate of return.
The process of developing goals and resolutions will help you not only benchmark success, but also achieve it. Take advantage of the winter season to strategize with your business partners, lender, and advisors.
Commentary, wisdom, and perspectives from globally renowned agricultural economist, Dr. David M. Kohl. Farm Credit Illinois (FCI) partners with Dr. Kohl to provide learning resources to farm families.
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Content for this blog post was provided by our farmer training sponsor, Farm Credit Illinois.
The Land Connection is grateful to Farm Credit Illinois for their continued support.
