As I near retirement, I find myself reflecting on some of the things I’ve learned during the past 35 years working in farm management.
Markets cycle. Markets always have, and they always will. We will have some really profitable years and some really bad ones and every shade in between. Weathering the down cycle will depend on crop yields, efficiencies, financial strength and your ability to do a little bit better job of a few things than the rest of the competition.
Some of life is luck. “Luck” I would define as “random circumstances that happen over which you have no control.” If I get an inch of timely rain and across the road you get ten-hundredths, that is luck. Nothing I do changes the amount of rain I receive. People say you make your own luck, which is silly. You do not make random circumstances happen that you have no control over. You do, however, make your life experiences using whatever random circumstances happen to you. If because of the extra rain I got 5 bushels more wheat than you did, but sold my grain for 30 cents per bushel less, you may still make more money than I did. We don’t control the market, but we do control how we react to it. Some may be luckier in their reactions, and some may have a sounder marketing strategy.
Pay taxes! Regardless of your thoughts on the tax system or our government, taxes exist. Work within the system to legally limit your tax liabilities. My rule of thumb is your adjusted gross income should at least cover your family living and income tax draw each year. Generally, we avoid taxes by deferring them until a later date, but good tax management will certainly minimize your tax liability. If you want to avoid paying taxes altogether, you should avoid a profit, which would obviously be a bad idea. Cheat, but remember if you are really profitable, that means a whole lot of cheating, which means a strong chance of getting caught. Do you want to be the richest person in the entire prison? Has an ugly ring to it, doesn’t it? The third way is to die. At death my children get a stepped-up basis on our land. I don’t know about you, but the assets my wife and I have accumulated we want to spend in retirement enjoying life. Our kids will inherit what is left, but I won’t live as a pauper to avoid giving money to the IRS! If we buy machinery we need and can afford, we get a tax deduction. Buying machinery to get a deduction has it backward. Successful people generally pay a healthy amount of taxes. No one enjoys it, but it comes with the territory.
Live within your means. It’s a simple equation; you can’t spend more than you make. Don’t set your spending by what your neighbors do. Their finances are different from yours, and they may well not be able to afford their lifestyle either. A business needs profit to be large enough to pay family living and retire debt. The more debt we have, the more profit we need to generate to service that debt. Often businesses that do not survive have unrealistic expectations of what family living the business can support.
Learn to understand your business. A well-kept set of farm records not only provides you with information for taxes and your lender, but more importantly provides information for you to understand your business. Your numbers are always telling you what to do; you just need to understand what they are saying. If your records are speaking a different language than you are, you have a problem. The time spent managing your business is likely the highest paid salary you receive.
Maintain working capital. If you have a strong working capital position, you can weather many difficulties. Think of working capital as “at year-end after all grain/livestock are sold and payments are made, what do we have left?” It can be payments toward next year’s expenses, grain left to sell or cash on hand. What “surplus” do we have? A strong working capital position can bail you out of a shortfall situation from last year, or it can allow you to pay off a loan to make next year’s plan cash flow easier.
Maintain a strong balance sheet. Work toward being the “majority shareholder” in your business. The larger the share you own, the more say you have in running your business. The larger share your bankers own, the more say they have in running your business. Take your total farm liabilities and divide it by your total farm assets and you get the percent of your business the bankers own. If they are majority shareholders in your business, they will be more active in the management of your business than either you or they would like to be. Debt is not a bad thing, but debt you cannot service is always bad. How do you prepare for tough times? Get your balance sheet in order.
Cash flow is king. If the business cannot meet all required payment obligations and family-living draws, your banker cannot lend you money. It’s like a relative asking to borrow money but not intending to pay you back. As prices drop, often the only way to service debt and family living is to have a much better than average crop yield. This works well when nature agrees to help. The concept doesn’t work as well for the cow-calf producers who likely can predict within a small percentage the pounds of calves that will be sold each year. Cash flow is the password to get into the game of farming!
Communicate with your family, employees and lenders. Let your banker know early if you are going to be short. They have lots of experience and may be able to help you find alternatives. Family living draw is a tough area to discuss, but if both spouses are on the same page, it is always better. Communicating to employees the need for watching all farm expenses in today’s environment is very important.
Minimize risk. As farmers we tend to add risk to our business by storing crops too long waiting for better prices. Often we “double down on the bet” by hauling last year’s crop to town, putting it on storage and putting this year’s crops in the bins. We now have twice as much risk. Ask yourself, “Do I really think the price is going up, or do I just really want it to?” The more difficult the times, the more important it is to limit risk! Crop insurance is a way to limit risk, but marketing can also be a way.
Holkup is a North Dakota Farm Management instructor located at Bismarck State College.
For more information
To view various farm financial numbers and ratios, as well as crop and livestock enterprises, on a regional or statewide basis, producers may go to the website ndfarmmanagement.com. Various regional and state reports, along with visual presentations, are available to view or download at no cost. A listing of instructors and program locations is also included on the website.
Additional information on the North Dakota Farm Business Management Program may be secured by contacting Aaron Anderson, state supervisor for agricultural education, at 701-328-3179. The Farm Business Management program is sponsored by the North Dakota State Department of Career and Technical Education.