If you grew up on a farm or visited your grandparents’ farm frequently, you can probably picture it right now.
In just a couple generations, farming has changed greatly, with far-reaching impacts for farm leaders and families. Farm finances are affected too – and the way that the farm’s leaders go about managing those finances.
How have farm finances and financial management changed over the past few generations? In the past, farming was a lifestyle. It’s still a lifestyle, but requires more intensive business and financial management for a successful operation.
Along with the many changes impacting their farms, farmers are going through a change in focus – from being craftsmen to thinking like business leaders. The types of skills that CEOs hone are becoming a competitive advantage for farmers.
Grandpa’s farm
Think about your grandpa and his farm – or if he didn’t farm, think about someone you know from that generation who farmed. In those days, if he worked harder, longer days than his neighbor and planted more seed – then he probably had higher yields and was more successful. He was able to purchase more land, which helped him grow the farm.
Today it’s not about more hours in the tractor, but about becoming more knowledgeable in the business areas and planning that are key to success. It’s about doing things like putting processes in place that help you execute plans for your business. It’s about doing contingency planning – so you have backup plans if something changes.
In the past, when farmers decided to work hard at production, that alone was often enough to give them an advantage. But now, it’s about working smarter, too. Farm leaders need to master skills like financial management and how to foster good working relationships with lenders
Working with the banker
In past decades, banks typically focused on a farmer’s equity. Having ownership of ground often meant more leverage with the bank. Since the 2008 financial crisis, banks have become more conservative – there’s more regulation they need to comply with.
This has led to banks requiring more information from their farmer clients around farm business and financials. They are interested in the level of working capital you have available – the financial cushion you’ve created that will help the farm withstand any unexpected ‘bumps in the road’. They can’t be as lenient as they may have been in the past, especially for operations that have no margin for error.
Lenders used to focus mainly on the farm’s equity, but are now emphasizing cash flow and working capital. You need to get a solid plan in place to show the banker, know how to talk with them about it, and be aware of the questions you should be asking them.
We’ll keep looking at how farm financials have changed over the past few generations in next week’s post – and I’ll share some ideas about what needs to be part of your plan that you bring to show your banker.
Read the new issue of the Smart Series publication, bringing business ideas for today’s farm leader. This issue features the story of a farm family who is working on a legacy plan to keep the farm in the family while maintaining family harmony, items to consider as you select an estate planning attorney for your legacy plan, and how to work toward increasing your operation’s efficiency. Get your free online issue here.
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.
About the Author(s)
You May Also Like