March 29, 2017
By Kindra Gordon
You need to be able to talk to your lender about the business side of your farm or ranch, not just the production side, says Heather Gessner, South Dakota State University Extension business management field specialist.
To get ready for that talk, ask yourself these seven questions:
1. Do you operate like a business? You should be able to:
• present your balance sheet, expected cash flow and profit/loss statement to your banker
• answer questions about working capital availability, past numbers and future numbers
• show trends in return on investment, debt coverage and operating expense ratios
With many of these financial statements, you are putting yourself in a more informed place to make decisions, Gessner says. “If you know your breakeven, you may not always make money but you can make decisions to ensure less loss.”
2. Have you reviewed machinery costs? Gessner notes that finding ways to decrease machinery costs per acre can help increase revenue. She suggests evaluating custom rates or outsourcing practices. Or, consider joint ownership of larger machinery with a neighbor. “Every once in a while, producers need to think about giving up some independence if it helps curb costs,” she says.
3. Can land costs be lowered? Gessner suggests that producers inquire if rental agreements might be renegotiated for more favorable terms based on a history of good management practices or to come in line with changing industry prices. Additionally, she says long-term notes might be looked at for refinancing while interest rates remain low.
4. What is your family living expense? Gessner advocates tracking household living expenses in a checking account separate from the business and evaluating costs frequently. She advises involving everyone in the family to develop a realistic family budget that can be adhered to. Gessner says for those who have not previously tracked annual family living expenses, a rule of thumb to start budgeting at is $20,000 per adult and $10,000 per child.
5. Can production be improved to boost revenue? Gessner notes that increasing weaning percentage and/or increasing the numbers of pounds sold may provide an opportunity to boost income. But she points out that producers must first know what their current percentages and pounds are. She also advises that producers must consider how making one change might affect the rest of the operation.
6. Has the operation’s marketing plan been reviewed? Do you need to make a change from what you’ve always done? Consider opportunities to add value. Possibilities include backgrounding or health protocols or marketing via video or branded beef programs.
7. Could you provide custom services? To add revenue, Gessner says a producer might consider using his equipment to help a neighbor put up hay, or custom-feed calves or heifers for someone. For families who try to increase income by having one family member take a job off the farm, Gessner stresses that the costs must also be considered. “If town is 70 miles away, is it worth it? What does it cost you?” she questions. “With any changes that are made to the operation, the additional expenses must be evaluated and monitored to ensure that the change isn’t costing more than the revenue it’s generating.”
Continuously asking questions to evaluate the efficiency and profitability of a farm or ranch business is a necessity in today’s volatile ag market, Gessner concludes.
Gordon writes from Whitewood, S.D.
You May Also Like