Farming is a high-risk, capital-intensive business that relies on the climate for its yields. It is common for farmers to see windfall gains in some years and losses in others, depending on the quality of the harvest. Navigating such cyclicality and staying profitable requires extensive financial planning.
A Canadian farmer constantly thinks of ways to raise more money to buy better seeds or equipment, invest in more farmland, or gain access to bigger markets for his yield. But effective financial planning needs more. And to come up with solutions that can improve your business efficiency, you need the guidance of a seasoned financial advisor.
How Can Financial Planning Help Farmers Improve Business Efficiency
Many farmers grow crops for which they received a contract, without working out the numbers. What you sow is what you reap, and financial planning helps you reap more by sowing the right seeds. It examines the demand for the crop, the cost of growing it, its yield, soil quality, and the gross margin of the crop to determine a profitable crop mix.
How can you use financial planning in your farming business?
Breakeven Analysis
In a high-expense, slim-profits business like farming, it is essential to ensure you earn more than you spend. For this, you need breakeven analysis, i.e., calculate the minimum price you can charge for your produce so that all your fixed and variable costs are covered, and you are still left with some money for the next harvest.
An expert financial advisor will review your past financial data and industry averages to develop a pricing and marketing strategy. The advisor will also look for cost leaks that are putting you behind the industry benchmark. Armed with insights based on actual data, you can outline a detailed financial plan to make your farming business profitable.
Budgeting
To achieve profitability, you must make optimal use of available resources. Budgeting can help you control costs, as it will alert you when you are spending too much.
The farming business is sensitive to natural factors and market dynamics. Hence, allocate an adequate amount to a contingency fund for unforeseen calamities or crop damage when preparing a budget. Also consider the costs of growing crops, logistics, packaging, marketing, and the wastage of goods that fail to meet quality requirements.
A financial advisor can not only help you create such budgets and contingency plans but also recommend areas for improvement or opportunities by comparing them to industry benchmarks.
Managing Cash Flow
Farming has significant expenses, and a wait period before revenue is earned from the harvest. In the meantime, there is a risk of lower yield, natural calamity, or an added cost. For instance, the crop could be damaged by pests, which may require more investment in fertilizer. A delay in the crop cycle due to climate change could add to the cost. All these added costs can increase the need for working capital.
You cannot delay the payment of workers and employees because the harvest was not sold. Hence, farmers must maintain a healthy cash flow and reduce excessive input costs.
Ensure you allocate a portion of gains as reserves to meet future working capital needs. Avoid taking too much, as it increases fixed costs in a dynamic farm business. Consider leasing equipment instead of purchasing it if you don’t have sufficient capital reserves.
Diversifying Sources of Income
The heavy dependency on climate and seasons makes revenue and profits volatile, forcing farming businesses to take on debt when yields are poor or market prices are unsatisfactory. An efficient way to sustain weak revenues from harvests is to diversify your sources of income.
A farm can do a lot more than sow crops. If your entire produce is not sold or you are not getting a reasonable price, you can make packaged foods, artisanal cheese, fruit preserves, jams, and other products using that yield. You can also engage in alternative crop farming or agritourism. Another effective use of vast farmland is producing renewable energy through solar panels or windmills. They can reduce your electricity cost and generate an extra source of income by selling the surplus energy back to the grid. The extra income can bring financial stability and act as a contingency fund.
Optimizing Tax Planning
Farming business enjoys numerous tax exemptions, deductions, and rebates from the CRA. A skilled financial advisor specializing in agriculture can help you choose the most suitable business structure and devise strategies to qualify for maximum tax benefits. Remember, tax planning is not a year-end activity but a consideration before every transaction and business decision.
Financial Forecasting
The first two to three years of farming will go by in setting the business into motion. Once you have financial statements for these years, you can identify trends in costs and revenue and evaluate the impact of different scenarios. You can create a new column in your profit and loss statement and forecast revenue, cost of goods sold, operating expenses, and financial expenses for the following year.
Compare the forecasted figures with actual numbers. Using actual numbers as the base will help you set realistic financial goals, and robust implementation will help you meet them. Initially, there would be a wide gap between actual and forecasted values, but over time, your forecasts will become more accurate, reducing the risk associated with uncertainty.
Creating a Sustainable Long-Term Financial Plan
Some seeds you sow today will be ready to reap after five to 10 years, such as succession, retirement, and business sustainability. Many businesses cease to exist after a major crisis, as they are unable to fund their losses and pay off their debts. The secret to building a sustainable business is to plan for the long term today. This plan should include actionable strategies for the best and worst-case scenarios, such as
- Risk management by building an emergency fund during cyclical upturn and having optimal insurance.
- Diversifying income sources to reduce reliance on one farm.
- Reviewing and updating financial plans to keep up with the dynamic agricultural markets and unpredictable environmental conditions.
- Building a brand and sustaining it through succession planning.
How Financial Planning Works for Farmers
It is a common misconception that hiring an accountant to prepare financial statements is financial planning. An accountant reports the actual numbers, but a financial advisor responds to those numbers and devises strategies to improve them.
A professional business advisor who is well-versed in farming business will study your work while you continue business as usual, analyze financial statements to forecast revenue and expenses, crunch the numbers, and accumulate key information to create a working model of your farm finances.
Detailed cost and revenue projections, along with a well-documented plan, build credibility with the bank and make it easier to secure loans or negotiate better lending terms. The advisor will also help you make informed business decisions, such as which crop to harvest, alternative sources of income to tap, areas to cut costs, and ways to reduce debt, thereby improving business efficiency.
Contact MW&CO in Woodstock to Help You Improve Your Farm’s Business Efficiency
Talk to a professional business consultant to help you analyze the problem statement and devise a working business model to grow your farm business and generate sustainable profits. At MW&CO, our accountants and business consultants offer services including financial forecasting, budget tracking, and business model creation. To learn more about how MW&CO can provide you with the best business consulting expertise, contact us online or by telephone at 519-539-6109 or toll-free at 1-877-539-6109.