Impacts of financial decisions
Agribusinesses Can Manage Uncertain Times by Creating Financial Stability
We often hear that “uncertainty is the new normal.” With the Tax Cuts Jobs Act, trade deals, and tariffs, it’s difficult to disagree; however, before all of that, many agribusinesses worried about Obamacare requirements, increasing labor costs, the potential for a “national living wage,” and every new farm bill.
Uncertainty makes planning for the future feel difficult for any agribusiness. Some may even feel compelled to respond by becoming reactionary rather than proactive, which can potentially forfeit control of business outcomes. So how can your agribusiness navigate uncertainty without losing control?
Control what you can: lock in prices
One of the best ways to deal with uncertainty is to create as much stability as possible by controlling what you can. Financially, an agribusiness can do this by selling crops on contract and locking in prices with your customers or vendors where possible. When margins are thin, it is extremely important for an agribusiness to know where the break-even point is to ensure the contracted prices can support your operations.
The first step in your break-even analysis is to have a good grasp on your expenses, including your family spending. While these costs may not be something you can deduct for tax purposes or include in a farm financial statement, it is an important element to have under control. Below is an example of normal farm expenses that may be included in your statement:
|Chemicals and fertilizers||$ 200,000|
|Gasoline, fuel, and oil||68,000|
|Labor and related costs||100,000|
|Repairs and maintenance||94,000|
|Storage and warehousing||24,000|
|Taxes and licenses||26,000|
|Total expenses||$ 1,160,000|
Given these expenses, the farm would need to generate $1,160,000 of revenue to break even. Let’s assume this farm is growing wheat on 3,500 acres with an average yield of 75 bushels per acre. In order to generate the $1,160,000 of revenue, the farmer would need to sell the wheat to net $4.42 per bushel, calculated as:
3,500 acres x 75 bushels per acre = 262,500 bushels of wheat
$1,160,000/262,500 bushels of wheat = $4.42 per bushel
Armed with this knowledge, a farmer can make better-educated decisions on what the selling price should be, and if additional expenditures can be made.
But what if the uncertainty around trade deals and tariffs creates an environment where the commodity price is much lower than anticipated, or farm input costs increase significantly? What if the farm cannot generate the needed revenues? In this scenario, the agribusiness may need to consider other methods of generating income, such as growing other crop varieties, custom hire work, or wages from an off-farm job. Unless an agribusiness has a strong grasp on its financial information, however, these types of decisions would be difficult to make with confidence.
Develop a strong financial team
Most agribusiness owners do not enjoy working on the financial side of the farm. In fact, it is still common to ask an agribusiness owner how their year went and hear, “Well, there is still money in the checking account.”
If this sounds familiar to you, it is sensible to develop a strong financial team. To accomplish this, you can either hire your own internal team, or outsource the financial function to a trusted advisor (or a combination of both). There are pros and cons to each situation, but answering the following questions is a good place to start gathering information for making this decision:
- How much time is necessary for the financial side of the business?
- What is the cost of an employee versus an outsourced professional?
- What level of expertise is needed? Does your business need a CPA?
- What is the level of the talent pool you have access to?
Often, we find that it is most cost effective to outsource the farm’s higher-level finance functions. This way, your agribusiness can gain access to expertise without paying for a full-time person on staff. Every operation is different, so you should do your own analysis to determine the best scenario for you and your agribusiness.
The benefits of a strong financial team and a thorough knowledge of your farm financial information has other benefits as well. With this in place, you can begin to use budgeting, forecasting, or a what-if analysis that can be used to plan for the future and unexpected situations. Further, if your agribusiness has bank financing, a strong financial team will make any renewals, refinances, or additional bank loans much smoother and less stressful.
How we can help
Operating any business in uncertain times is difficult. Unlike risk, it is very difficult to quantify uncertainty. Having a strong financial team and strong knowledge of your financial information allows you to be nimble and make quick decisions in unstable times.
CLA’s agriculture professionals can help no matter the size or complexity of your financial team. We can make up your full outsourced financial team, or just a small part. We can even help you assess your current team’s needs and hire new members, if necessary. The most successful agribusinesses are operationally and financially strong, make their decisions armed with knowledge, and create as much certainty as possible in uncertain times.