The turbulence in the general economy has far-reaching impacts on agricultural producers. The volatility of commodity prices has left many producers worried about the financial stability of their operation. In uncertain times, when financial risks seem to be at their peak, it becomes even more crucial to make wise decisions and adequately manage those risks. The following are some tips to help agricultural producers manage risks and remain financially sound in these turbulent times.
1. Have a Written Business Plan. An old adage says, “If you fail to plan, you plan to fail.” It is important to have a well-written business plan that is well understood by all members of the operation. The business plan should include long-term and short-term goals for the operation and specific plans that will help you achieve those goals. Given the unpredictability of agricultural markets, it is imperative to have several alternative plans, including strategies for worst-case scenarios. It is also wise to have an exit strategy and know when continued operation is no longer profitable or beneficial.
2. Maintain Good Financial Records. In difficult times it is even more important to know where you are and where you are going. A set a good financial records- including balance sheets, income statements, cash-flow statements, detailed budgets, etc.-will help you understand your operation’s financial position and put you in a better position to combat oncoming difficulties. If necessary, seek opportunities to become more educated and improve your record keeping, finance and accounting skills.
3. Practice Good Financial Management. Understanding your financial position and having goals does little good unless you use that knowledge to make sure you are moving in the right direction and reaching your goals. For an operation to be successful, good financial management (especially in turbulent times) includes reducing debt, maintaining or increasing liquidity, lowering your leverage ratio, maintaining cash and credit reserves, and increasing your equity and overall profitability.
4. Analyze your Enterprises. Take a close look at the different segments of your operation. Identify those enterprises with a history of lower profitability or unprofitability. Consider scaling back your efforts in those areas or eliminating them altogether and focusing on your most profitable enterprises.
5. Know your Lenders. Given the backdrop of recent upheaval in credit markets, it is critical to know and trust your lenders. Choose lenders that are familiar with your industry and are committed to and understand your business, not just those that have fewer requirements, lower rates, or easier loan attainment. Your lender can become a valuable source of advice and help as you face unfavorable market conditions.
6. Lower Unnecessary Expenditures. It is always a good idea to seek ways of lowering expenses while maintaining or increasing revenue and in difficult times it is even more imperative to do this. Minimizing family living withdrawals may be necessary and non-essential capital expenditures should be delayed. All capital purchases or improvements made should pay for themselves either through decreased expenses elsewhere or increased revenue.
7. Utilize Risk Management Tools. There are many risk management tools available to help you mitigate your production, marketing, and financial risks including government insurance programs, government support programs, hedging with futures markets, and others. Utilizing such tools can help you ensure the success of your operation throughout these challenging times.