How to Combat Ag’s Downward Trends
10 Steps for Leaner and Greener Financials
Weak commodity prices and an international trade war have inflicted pain on American agriculture – at a time when U.S. farmers, ranchers and agribusinesses can least afford it.
It may be hard to combat global economic trends, but you can shore up your operation’s finances. Follow these guidelines to help strengthen your business against ag’s latest headwinds.
- Follow the money. Are you keeping track of the money that flows in and out of your business every month? That’s critical, says Alan Grafton, director of K·Coe Isom’s AgKnowledge. “Accurate financials not only reveal what you’re spending or earning,” Grafton notes. “They also allow you to develop a marketing plan and make it easy to provide your lender with precise numbers.” Make sure you’re tracking all receipts, records and other financial information to remain organized and accurate. Staying current on your record-keeping will help you know your cash-flow needs and assist with your tax-planning and other financial obligations.
- Get leaner. Look ahead 12 months. Where can you cut expenses yet not sacrifice revenue? Examine your costs line by line. What items can you do without? “I have challenged my clients to cut all expenses by one percent,” says Peter Martin, a K·Coe Isom principal who specializes in finance and business growth. “It may seem small, but I’ve witnessed this exercise lead to six-figure savings.” It’s OK to remind an office worker to look for cheaper supplies or urge that forklift driver to go a little easier on equipment to save wear and tear. From small things, like buying cheaper coffee or turning off the lights when leaving a room, to far bigger cuts, such as postponing equipment purchases, find ways to reach your get-leaner goal.
- Question all input costs. Negotiate with your suppliers to make sure you’re getting the best deal. Make a few extra calls to see if you can save money through a different suppler. “When the bill comes in, make sure you’ve received the quantity you’re being charged for,” Grafton says. “Mistakes happen all the time.”
- Proactively market your production. If you aren’t using the tools available to you to help market your production, spend some time educating yourself in this area. This is too important not focus on. If this is an area where you feel deficient, talk with an expert about helping market what you’ve produced. “You can’t just hope the market will offer profitable prices when it comes time to buy or sell,” notes Grafton. Ag prices are too volatile to leave all those chips on the table. Avoid costly mistakes by knowing your cost of production and understanding marketing windows.
- Liquidate non-productive assets. Many businesses have assets that aren’t being used. These do you no good in a year when you’ll need all the working capital you can get. You can generate tens, even hundreds of thousands of dollars by selling excess inventory or unused equipment, Martin says.
- Leverage your labor force. All employees, not just your top people, must understand how tough times are right now. They need to recognize that your operation may not break even this year. Pull them together for a meeting that not only underscores the seriousness of this year’s challenges but stresses how each of them can make a difference. “Engage them with a message of inspiration and motivation, not fear,” advises Martin. “You don’t want to scare people into quitting because they think the ship is sinking. Let them know this is an opportunity to become the best-run ag business around and that you’re all in it together.” Their efforts to do everything leaner and better can help sustain the business – and their jobs — for the future.
- Find benefits under the new tax law. There could be new tax-rate advantages for that C corporation you formed years ago. In addition, changes in the Section 179 deduction and and expanded bonus depreciation could add thousands to your company’s bottom line.
- Take note of the global picture and prepare accordingly. What happens if the trade war ramifications continue? Or prices fall from your projected levels? What if your expenses increase? “Pay attention to what agricultural economists are saying and apply their projections to your own operation,” recommends Laura Sands, a K·Coe Isom principal. “Even with the trade war truce, the U.S. could struggle for years with the fallout of depressed prices and lost markets.” Think through various “what if” scenarios. Run your financials using very low commodity prices and understand what that does to your cash flow and balance sheet, so you can adjust now. Develop a survival plan. Look for alternatives, such as a new commodity to produce or market to access, “anything that can give you an edge,” Sands adds.
- Find new revenue streams. Your property can reap added income beyond commodity or biofuel production, says Robert Veldman, K·Coe Isom’s senior land management advisor. For example, if your land is located in a sunny or windy area, you might be able to host solar or wind projects. “Even if you don’t accommodate a renewable energy venture, you could sell access to a developer to lay pipelines or transmission lines across your property,” he adds. Another source of income could come from your mineral rights to oil and gas produced from your land. Your property might also procure payments from government agencies, nonprofits, private industry donors and developers seeking to preserve wetlands or wildlife habitat or needing to purchase mitigation credits to meet regulatory requirements. Property with wetlands and wildlife can also generate revenue by giving up development rights in return for payments for conservation easements.
- Stay in touch with your lender. Communicating with your lender is critical now. Provide him or her with good information and a game plan that shows how you’ll weather the storm and repay your obligations. “Provide key financials as well as an annual narrative that tells the story behind the numbers,” Martin recommends. Share your budget and expected monthly cash flow. Discuss recent and planned capital expenditures, major changes in operations, key employee turnover and deviations from your budget. Include the positives as well as the negatives.
Even following these guidelines, it’s important to remember your business is unique and complex – and so are its solutions.
For help in navigating this storm, reach out to K·Coe Isom’s agribusiness consultants. They’ll not only help you make smart decisions for optimizing input costs and spending money in the right way. They can also guide you in evaluating strategies, agreements and opportunities to improve your bottom line and fortify your business’s future.