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Understanding The Ups & Downs Of Farm Finances

Cows in field. Farm Finances.

Farming is one of the most complex forms of small business in America, where profits don’t rely only on supply and demand, but also on unpredictable influences from government policy, global markets, and erratic weather—things that are entirely out of the control of small farmers. These conditions can have a major impact on American farmers. According to a recent Time magazine on the plight of America’s small farmers, nationwide, farm debt stands at $416 billion dollars and counting—the highest it’s ever been. While the middle of the country has fared better than other parts, in the last fiscal year “Chapter 12 farm bankruptcies were up 12 percent in the Midwest,” and over 50 percent of farmers have a net loss each year.

But small farms are not only a crucial part of our country’s food chain but also our economy. With the right management practices to make farms resilient to change, as well as the utilization of resources available to help new and struggling farms, even in trying times it’s possible to keep your small farm afloat. Before we get into tips on how to best manage your farm’s finances, let’s take a look at some mistakes that can leave farmers susceptible to financial problems down the road.

Pitfalls to Avoid in Your Farm Business

Operating without a Business Plan

For beginning farmers, having a business plan will give you a clear road map to success and keep you on track while you develop your farm business. Tackling a plan will also require you to do the difficult thinking about what your vision for your farm will be, not to mention the particulars on how, day by day, you’ll get there. You’ll take a hard look at your own financial capacity and consider what additional financing will be needed to get you started, as well as what income your farm will need to generate to stay afloat. These are not easy questions, and new farmers should take full advantage of all resources available to them. Explore online guides like this one offered by the US Small Business Administration; sign up for AgPlan, a free website designed to help small farms develop their own business plans; and don’t hesitate to seek out specialized advice from local financial institutions.

Most farmers, however, are not new to the game, and many family farms in America have been around for generations. If your farm is one of them, you’ve likely internalized how your business functions, and don’t feel it’s necessary to run it according to a written business plan. But in changing economies, the benefits of a flexible business plan that is revisited often—not just once a year, but during any major challenges your farm faces—cannot be overstated.

A business plan contains many standard components, from a clear description of your farm’s goals to its routine operations. However, the key elements of a resilient plan for your established farm are the market and financial analyses, where you will think seriously about differences in markets, funding, and other financial considerations, as well as potential changes in what your farm produces to meet shifts in consumer demand. For example, if you want to explore organic grain production to meet the growing demand, a business plan that includes this new venture will help you manage your transition successfully. While most business plans will work with some modification, SCORE, a nonprofit that provides many useful services for small businesses, offers these specific templates for established businesses.

Impulsive Decision Making

Most decisions farmers make are based on years of experience, advice from trusted resources, and hours of consideration. But there are a few key decisions farmers make—ones which often have huge financial
repercussions—that don’t always get the care or attention they deserve.

When big expenditures are on the line, it’s easy for the fallout of quick decision making to wreak havoc on tight budgets, especially under the pressures of modern farming. Below are some potential problem areas that can have huge impacts on financial security.

Are these terms fair? Will this lease work for me its whole duration?

Big-Ticket Spending Decisions

Because farming is inherently community-based, farmers often rely on what deals and opportunities can be found locally for everything from equipment to land. You may find that an opportunity arises, even one from a trusted business or friend, that seems like a good choice for your farm. Before you jump on it, take time to consider whether it really is the best choice for your farm.

Long-Term Leases

Before signing a lease for land or equipment, be sure to ask yourself two questions: Are these terms fair? and Will this lease work for me for its whole duration? Reach out to your local financial institution, legal office, or extension agent to help understand terms and look for hidden fees or other catches. Consider whether or not the payments will work for you in leaner times of year. Lastly, think long term: Could potential changes to your farming plans or income in the next few years render the need for a specific piece of equipment or land obsolete or unaffordable?

Land and Equipment Purchases

Just as with leases, before making any major purchases, always consider if it will grow with you, and if the money you are putting up front would go farther or make a bigger impact if used for another expenditure.

Land purchase decisions (as well as land leases!) require a visit to the county extension office for soil testing, as well as water table and flood plain maps to ensure you won’t be underwater in the next storm. Written records of chemical treatments also prove helpful, as some crops will not grow in soil treated with certain herbicides. Also keep in mind that sometimes it can be more affordable or can provide better tax benefits or greater flexibility to lease land instead of take out a real estate loan to purchase it.

Additionally, be sure to always find the best price for quality equipment. Because of the high cost of farm equipment and repair, simply going for the lowest-priced option is not always advisable. Tax write-offs for new equipment depreciation and interest payments, lower repair costs, and the option for monthly payments sometimes means that new equipment makes more sense than buying used. Still, purchasing quality used equipment at an auction or liquidation sale can save you thousands or even hundreds of thousands of dollars over the years if you can afford it without excessive financing costs. Doing thorough research before making a decision will help you avoid costly mistakes. A great place to start is Successful Farming’s article, Buying and Selling Used Farm Equipment.

Bad Loan Terms

Getting the best terms for a loan can make a difference of tens or even hundreds of thousands of dollars in the long run. As points out, the difference of one percentage point on a 30-year $100,000 mortgage comes to over $20,000 over the life of the loan.

Financing a large purchase by using government grants and subsidized loans can sometimes save you significant money over a commercial loan. Below, you’ll find information on federal and state assistance programs, but always reach out to your local lender or extension office before making a large farm purchase to see if they have any suggestions for how to get the best loan terms.

Avoiding Change

Perhaps the least obvious “impulsive” behavior is the continuous operating of your farm business without considering how to improve it. Farming is a career of continuity—each season folds into the next in a seemingly endless chain. Making any major change requires careful thought and long transition periods, and it is often easiest to follow the most traveled path. Historically, however, every so often farmers must face periods of drastic change, from the dust bowl and Great Depression to the shift to large scale agriculture in the 1970s. Today, we are again facing times of great change for farmers. Challenge your routine decision-making and consider if your standard practices will continue to serve you well in a changing agricultural climate.

Mixing Personal and Business Accounts

Because small farms are often sole proprietorships or family partnerships, many farmers simply use their own bank accounts and credit for farm purchases. However, maintaining separate banking accounts for your personal and farm business finances can help you avoid letting your money matters get out of control. There are three major reasons why you should keep those accounts separate:

  • It’s easier to stay on top of your finances. Keeping personal and business finances separate will make everything easier when it comes to taxes, accounting, payroll, and budgeting. Not having to weed through your personal purchases to find business expenditures will save hours of time, and seeing the bottom lines separately can also help you have a better understanding of how much both your farm and your personal life actually cost to maintain.
  • It helps at tax time. Envisioning your farm as a separate entity will also help you make valuable business decisions, like easily utilizing tax deductions for business expenses. Additionally, should you be audited, the IRS will expect you to generate clean records for review.
  • It can help protect your personal assets. Keeping your accounts separate will help you avoid spending your personal wealth on business matters while protecting your credit score. Going a step beyond and establishing your farm as a corporation, a business entity for which the owners are not necessarily personally liable for financial fallout, can further protect your personal assets in times of hardship.

Poor Debt Management

With huge annual overhead expenses and sometimes large gaps in time between expenditures and income, it is difficult for many farmers to avoid some debt altogether. But high interest rates can make climbing out of long-term debt difficult. If you are having trouble with your current debt load, you are not alone. According to Progressive Farmer, the Farm Service Agency (FSA) “has seen its rate of delinquent borrowers rise from 16.97% in 2013 (the height of farm income) to 19.41% now.”

Because most loans are granted based on financial history, when farm income can fluctuate so much from year to year, it can be hard to predict whether or not you’ll be able meet the loan terms down the road. If you find yourself struggling, avoid taking on more high-interest loans from out-of-state lenders or relying on credit cards. Instead, seek help. Consult your county extension office or trusted local lender to explore your options and create a pathway to recovering from growing debt before it’s too late.

How to Make Your Farm Resilient

In the complex accounting of running a farm business in increasingly volatile financial markets, it’s not just a matter of avoiding pitfalls but actively taking steps to ensure the longevity of your farm. So, how exactly do you stay on top of your finances, balancing debt payments and income, when future income is so hard to predict? Below you’ll find the most important things a farmer can do to manage debts, preserve the farm, and find success despite economic challenges.

Account for Every Dollar

Farmers have extremely complicated budgets and leaving out even one line item can have drastic consequences. To get an accurate understanding of your expenditures, pull the data directly from your financial statements from the previous year and utilize professional farming resources like University of Missouri’s Cost and Return Estimates and Crop and Forage Budgets to fill in gaps. These figures can then be plugged into various financial statements to help you manage cash flow, understand your farm’s assets, and plan for future expenses.

Kinds of Financial Statements

There are three basic financial statements that businesses use, each with their own purpose and benefits, including balance sheets, cash flow statements, and income statements.

Balance Sheets

This financial statement gives you an accurate idea of the financial state of your farm at any point in time, or it’s financial balance (positive or negative). The Small Business Administration recommends that all businesses start with balance sheets when beginning to tackle their finances because they offer this important “snapshot” of your businesses finances. Balance sheets not only show your income and expenses, but also assets (like property) and liabilities. To get started, check out SCORE’s Balance Sheet Template.

Perhaps more useful in the day-to-day operations of your farm, cash flow statements are especially helpful when it comes time to pay your bills. They show the movement of cash in and out of your farm over a set time frame, usually monthly, quarterly, and annually. It’s important to keep in mind that your balance of income and expenses will fluctuate based on the time of year. In other words, there will be months when your income or expenses will be significantly higher or lower while your loan payments will remain the same. For more information on cash flow statements, visit Investopedia’s guide.

Sometimes called “profit and loss statements,” income statements also measure income and expenditures for your farm for a set period of time. But unlike cash flow statements, income statements also show financial gains and losses that are not related to liquid assets, such as depreciation of assets (like equipment). In this way, they focus on four key items: revenue, expenses, gains, and losses. Not quite as “big picture” as balance sheets, income statements still help you get a clearer idea of the overall value of your enterprise, while also helping you come tax time as you look to take advantage of deductions.

Accounting Software

Organizing your business finances may seem like a daunting task, which is why many farmers choose to hire an accountant. If you would like to have a more hands-on approach to your farm’s finances, however, but are feeling overwhelmed by the prospect, keep in mind that there are many tools that can help you keep track of your income and expenses. Here are some of the top programs available:

  • QuickBooks: The go-to program for most small businesses, a solid option for your farm accounting. Best for tracking cash sales and farm expenses.
  • Farm Biz: A simple tool, best for ranchers and ranchers who want an inexpensive accounting software customized for the agriculture industry. Budget friendly.
  • Easy Farm: User-friendly program best for farmers without an accounting or bookkeeping background who want to personally set up their software.
  • FarmBooks Accounting: Best for ranchers and farmers who want accounting software with good reporting features.

Stay on Top of Changes in Markets

While many changes that affect the success of your farm are hard to predict, there is much ongoing research available to help farmers understand what the future will look like, from weather, dietary, and technological trends to incentive programs and changes to farm policy. It’s important to stay informed about these developments so your farm is ready to face a changing world. One of the best ways to stay on top of changes in agriculture is to regularly read both online and print trade publications. Some of the best ones out there include:

Take Advantage of Local Resources

It’s important to remember that as a farmer, you are a valued member of our community and integral to our local economy. There are numerous local resources designed to help farmers succeed, from university extension offices and state-wide programs to local financial institutions and advisors.

Extension Offices

Extension offices are like the neighborhood outreach of universities to local farmers, and offer professional advice, education, and links to financial assistance. In Missouri, we’re served by the University of Missouri through several county offices.

Missouri Tax Credit & Grant Programs

While there are many well-known federal programs, state programs have the special purpose of bolstering their local economies, and often have better incentives and greater flexibility for farmers. Below are example programs available to Missouri farmers, but for a complete list visit the Missouri Department of Agriculture's Financial Assistance page.

Organic Certification Cost Share Program. Created to encourage the transition to organic agriculture, this program provides grants of up to 75% of initial or annual certification costs.

Local Financial Institutions

All farm businesses require general banking services which could include business checking accountslines of credit, and crop insurance. Additionally, banks can provide competitive rates for commercial and real estate loans, and local lending officers can work individually with farmers to get the right product, helping them best understand the terms. Lastly, banks can provide financial counseling services, including retirement planning.

However, sometimes commercial agricultural loans are not available or the right answer to a financial need. In these cases, banks can work with farmers to apply for numerous state and federal programs which utilize local financial institutions to bring their grants and loan programs to all corners of the state or country, often requiring farmers to apply through a local bank, rather than directly to the program. Here are a few available through BTC:

Missouri-Based and Federal Programs

For Missouri who are farmers just beginning their businesses, BTC Bank can help find a loan program to provide you with financial assistance, like the Missouri’s Beginning Farmer Loan Program. Additionally, BTC can help you apply for Missouri’s Linked Deposit Program and Family Farm Breeding Livestock Tax Credit Program.

Lastly, don’t forget about the most common FSA loan program, their Guaranteed Loan, designed for farmers who may not qualify for commercial loans. These loans, backed by the USDA, are available only through local banks and can be used for farm purchase, operating expenses, guaranteeing a land contract, or costs associated with conservation.

Deal With Financial Problems ASAP

Perhaps the most dangerous thing that small farmers can do is wait too long to address possible financial issues, putting their farm at risk of foreclosure or bankruptcy. For many farmers, this means not only losing their livelihood, but also their homes. The sooner you deal with any monetary setbacks, the sooner you can recover from them. When you build a good relationship with your local lender, they can help spot potential mistakes, avoid pitfalls, and help you make solid financial choices.

Partner With BTC Bank To Manage Farm Finances

As a community bank for over a century, BTC Bank understands the needs and concerns of Northwest Missouri and Southern Iowa’s local agriculture communities. We are agriculturally minded and dedicated to serving our community. Let BTC Bank help you build a successful, resilient farm enterprise. To learn more about farm financial management contact our agricultural lending team today.
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