In case anybody needs reminding, agriculture is a cyclical business.
It’s important to pad the balance sheet during good years to ensure a farm or business remains healthy during tougher times, as parts of the ag industry are experiencing right now.
In this “Mind Your Farm Business” episode, we focus on using a balance sheet as a tool to improve a farm’s financial health (ie. it’s ability to meet financial obligations, both in the long and short term.)
Moe Russell of Russell Consulting Group — our guest for episode 11 — works with farmers across the U.S. and Canada on financial planning and management.
Building on the financial ratios theme of the last MYFB episode, Russell explains how to calculate working capital, return on assets, return on equity and other measures that can be picked out of a balance sheet. While it’s easier to improve these ratios during periods with high returns, he explains how farms can improve their positions when margins are tight, as they currently are in grain production. This might include selling equipment or other assets, or refinancing real estate.
“Different lenders have different ratios, so my suggestion is sit down with your lender and find out what those ratios are,” he explains. “If your operation is not meeting their ratios, develop plans that you can bring them back to their expectations.”
Russell suggests completing an accrual balance sheet a minimum of once a year at fiscal year-end. He also goes into how to valuate assets (market versus cost basis) and how to calculate depreciation on equipment and facilities.
Improved equity and working capital from strong prices will help many grain farms weather the current slowdown in grain markets, he says.
“Over the long run the price of commodities will level out at or near the cost of production for the highest cost producers. Then those producers don’t survive, they exit the business and the cycle starts over again,” says Russell. “I think 2015, ’16 and ’17 will probably be the cycle low and then we’ll see better times after that.”
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