Five questions to assess the financial health of your farm
Monday, August 12, 2024
Reference: MNP Agriculture
Uncover your farm’s financial health by answering these five essential questions. This article will lead you through evaluating your financial stability, employee satisfaction, innovative practices, and more.
Imagine a financially healthy, successful farming operation.
Is it comprised of leased or owned land? Does it stick to the same ol’ ideas and traditions? Does it struggle to keep staff?
Does it look like your farm?
Understanding the overall health of your farm is critical for the long-term success and growth. By self-assessing your operation, you can identify strengths and weaknesses, make informed decisions, and adapt to challenges.
Here’s how you can use five key questions to self-evaluate your farm.
1. If the land I lease comes up for sale, could I buy it?
Buying your leased land can be a significant step in maintaining the growth of your operation. After all, if someone else buys it, it’s likely you’ll no longer have access to it, which decreases the size of your operation. But consider the big picture. When it comes to achieving sustainable, long-term success, does the purchase make sense?
Evaluate your financial health and determine if buying the land is a wise investment. Sometimes renting may be more economical than owning.
Ask yourself:
Does it align with my long-term plans? Consider whether the land purchase fits into your strategic goals and crop rotation requirements.
Is the rate of return high enough? Evaluate how much you could potentially get back from the investment.
Can I financially manage the purchase? Assess your financial health, debt servicing ability, and overall capital structure to determine if buying the land would hurt your financial health.
Can I manage more debt? Reflect on your ability to handle increased debt without jeopardizing your farm’s stability.
2. Do my employees and/or shareholders enjoy working on my farm?
This question digs into the heart of your farm’s culture and operational efficiency. A happy team is more productive and less likely to look for opportunity elsewhere, which is vital in an industry facing a shortage of qualified workers.
An unengaged team can hinder many aspects of your operation — making it hard to achieve meaningful growth. It can also be discouraging for the younger generation. A motivated, valued workforce will encourage the next generation of farmers, as well as attract top talent to your farm.
Similarly, satisfied shareholders are more likely to support long-term growth and investment plans. By regularly assessing their contentment, you can identify areas of improvement and implement changes that foster a positive work environment.
Ask yourself:
Do I have a formal process to evaluate their satisfaction? Implement formal evaluation processes and HR systems.
How do I gather feedback? Ensure you have mechanisms to get honest feedback from your team.
What HR systems are in place? Develop systems to enhance employee engagement and address concerns.
3. Has my farm breached any bank covenants more than once in the past 10 years?
Farming can be a volatile endeavour, and bad years — they happen. When you experience a year of loss, it may result in breaching a covenant. Breaching once is quite common. But breaching year after year can be an indication you need to examine the financial well-being of your operation.
Monitor the following ratios over time and, if necessary, take corrective actions to avoid recurring breaches. Having a healthy farm doesn’t mean you may not ever breach your bank covenants — it means you understand why it happened and can attempt to fix the problem.
Focus on understanding these key ratios:
Debt to equity: This measures total debt against asset value. A healthy ratio can vary depending on which stage of your farm’s lifecycle you’re in. For instance, a growing farm may have a debt-to-equity ratio of $1 of debt to $1 of equity, while an established farm may have a ratio closer to $1 of debt to $3 of equity,
Working capital (current ratio): This assesses short-term obligations. A ratio of $1.50 of current assets to $1 of current liabilities may be considered healthy.
Debt serviceability (cash flow): This evaluates available cash flow against debt repayments. A ratio of $3 of cash flow to $1 of expected debt repayments may be considered healthy.
4. What is the average age of decision-makers on my farm?
Balanced decision-making involves perspectives from different people from different age groups. A healthy mix of experience, insight, and modernity can help drive your farm forward.
How you incorporate younger and older people into your organizational structure can bring an energizing mixture of modern ideas and wisdom. Mentorship and knowledge transfer are imperative for sustainable growth and continuity.
Consider this:
Incorporating younger and older generations into your decision-making process: Leverage the enthusiasm of youth and the knowledge of older generations.
Exploring business structures like joint ventures, partnerships, and corporations: Use structures that keep the older generation engaged, while allowing the younger generation to step up. A business advisor can help you determine the best business model for your farm.
5. Am I always testing new ideas?
Innovation and experimentation are key to continuous improvement. Generally, farmers are proficient at trying new techniques and different ways to improve their operation.
To maintain a healthy farm, you may want to consider new ideas to enhance productivity and efficiency. To do this, you and your team need to embrace change and be open to trying new methods. Farmers who innovate are better positioned to adapt to industry changes and enhance their operations.
Ask yourself:
Am I staying informed? Use trade shows, podcasts, and industry publications to stay up-to-date on the latest innovations and approaches within the agricultural sector.
Am I implementing new techniques and technologies? Experiment with new methods to improve your farm’s productivity and efficiency.
How does your farm stack up?
Based on the five questions above, how would you rate your farm’s financial health?
A self-assessment can be a powerful tool to gauge the health of your operation. Don’t hesitate to ask yourself the right questions and take actionable steps toward improvement. By regularly assessing your financial well-being and making the necessary adjustments, you can engage your team, embrace innovation, and understand how to best navigate the challenges and opportunities that lie ahead.
We can offer a fresh perspective
It’s important to regularly revisit this self-assessment to maintain the well-being of your farm. However, it can be just as imperative to discuss these ideas with an advisor to gain an unbiased point of view. Our Agriculture team brings the expertise and insights needed to help your farm thrive financially.Reach out to us today and let's grow your farm's financial health together.
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