Best farming advice for 2011
Mike Evanish: It’s always a good idea to track what the leaders of major companies are doing. Paid for their leadership and planning skills, they usually know what’s coming long before the rest of the public.
They’ve looked at the uncertainty involving tax rates, federal spending and debt, the value of the dollar, commodity prices, weather, labor costs and availability, to name a few. Guess what: They’ve decided that cash is king!
My advice for 2011 is for you is to operate your business in the same way. Your goal should be to accumulate a six-month reserve for living expenses and a three-month reserve for business operating expenses. This is a tall order, given that a farmer grossing $500,000 a year and taking a family draw out of the business of $50,000 would need a reserve of over $140,000!
So how do you get there? Here’s a short list of how to start:
• Look at every open account, including credit card balances. Pay off every one possible, starting with those charging the highest interest rate.
• Look at obtaining a credit card with a low interest rate. If cash flow allows for paying off the balance each month, obtain a credit card that pays “cash back” based on usage.
• Decide today that you’ll take every cash discount possible. This simple strategy can cut expenses several percent.
• Prepare a written budget for 2011. Then, regularly compare results with your original expectations.
• If your debt’s interest rates are variable, refinancing at a fixed rate would certainly mitigate future upside interest-rate risk.
• Decide today that paying some income tax is OK.
• Open a savings account and begin to “make payments to yourself.”
Dale Johnson: My one piece of advice to prepare for the future would be what I’ve been encouraging farmers to do for my 25 years at University of Maryland: Do your financial management and planning!
Complete a balance sheet at the beginning of the year to analyze your net worth. In January, project your cash flow for 2011 so you can estimate when you’ll have cash shortfalls. Determine now how to cover them.
Do your recordkeeping on a monthly basis to track income and expenses. Monitor your actual cash flow. Compare it to your projected cash flow to maintain your checkbook balance and pay bills.
At the end of the year, do an accrual or inventory adjusted income statement to analyze your true profit. You can get a bookkeeper or tax accountant to do all this work for you, but you still need to be involved in this process to understand your operation’s true financial condition.
George Mueller: The 12-hour days with a sack lunch in a warm, comfortable cab provide ample time to ponder your question — while I’m hauling manure at Willow Bend (call it multitasking).
I’ve pondered giving you my standard advice of keeping things simple and efficient, with good used equipment and lots of volume. But you asked for only one piece of advice.
Guest after guest on National Public Radio’s “Diane Rehm Show” and others have stressed [what we farmers have known all along]: Our government cannot continue to spend more than it takes in.
Guest after guest remarks that continued deficit spending is unsustainable and will turn our great nation into a “Banana Republic.” I think our “ship of state” is sailing right into hurricane waters unless it can change its course.
So my one piece of advice is “batten down the hatches” in 2011. By this I mean work on debt.
I tell my partners that we must keep our debt low because rough times are coming. [My goal!]
My partners are “hard of hearing.” They have plans for a new barn.
They may be right! Our government is recklessly printing money — what I call “quantitative easing.” The resulting inflation could help farmers pay off debts.
But a low-debt farm should sail more smoothly through the troubled waters ahead. That’s my advice for 2011.
Glenn Rogers: I’d put several ideas into place. Be ready to take advantage of the changes that’ll take place as we come out of the recession. But learn from your recession experience, and keep the “back door” available.
Now’s the time to plan out your income for the entire year and allocate expenses accordingly — into 2012.
• Look at diversification and particularly at ways to increase income by getting your product closer to the public. Wholesale margins will be thinner, so aim for the retail market when possible.
A word of caution, though: Plan out those profit margins first, before diving into the diversified product. Although it may look great, those comments that “it’s too good to be true” can be just that: too good and, thus, not true.
• Be ready for rapid changes in profit margins as the commodity and world markets change in 2011. History has a way of repeating itself, so we must learn from what it’s taught us.
• Keep a little more cash in reserve and be a bit more conservative.
• Seize opportunities when they arise. Don’t wait for the opportunity to fade and then try to hop on it during the market downturn.
• Plan at least a year in advance, and preferably two to three years in advance. Complete a budget that increases expenses by 10%, decreases income by 10% — and with an interest rate that changes by as much as 3%.
In light of what you think 2011 holds for Northeast agriculture, if you could give just one piece of advice that might help me prepare for it, what would it be?
“Cash is king [for major industry leaders]. Operate your business the same way.”
Mike Evanish, Pensylvania Farm Bureau
“Farmers who are good financial managers can better weather agriculture’s future economic cycles.” Dale Johnson, University of Maryland
“I tell [my partners] that no one is going to take our farm from us if we have no debt.”
George Mueller,
Clifton Springs, N.Y.
“Look at diversifying toward more retail. But don’t diversify to the detriment of your primary product.” Glenn Rogers,
University of Vermont
Got a question? Our experts await!
Our Profit Planners panel would like to hear it. Panelists include Michael Evanish, business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp.; Dale Johnson, Extension farm management specialist at University of Maryland; George Mueller, a dairy farmer from Clifton Springs, N.Y.; and Glenn Rogers, a University of Vermont Extension professor emeritus and ag consultant.
Send your questions to: Profit Planners, American Agriculturist, 5227B Baltimore Pike, Littlestown, PA 17340. Or e-mail them to jvogel@FarmProgress.com. All are submitted to our panel without identification.
This article published in the January, 2011 edition of AMERICAN AGRICULTURIST.
All rights reserved. Copyright Farm Progress Cos. 2011.