Navigate the risks of rapid farm expansion

Stunted growth can be problematic for a farm operation, but so are the challenges that can come with expansion that happens too fast, too soon.

Consolidation of farms and major leaps forward in scale and investment can be exciting. But rapid growth can leave a business exposed to risks:

Financing: “You need a strong business plan,” says BDO Canada’s Mark Verwey. “You really need to calculate your ratios before and after expansion, especially your debt service ratio.”

That’s a ratio that financial institutions will focus on to identify if a business has sufficient means to meet its debt obligations. It’s calculated by dividing net operating income by debt to service, which includes the principal and interest. Financial institutions, he says, typically seek a ratio of 1.25 or more.

Cash flow: Expansion brings new principal payments and interest, and Verwey urges you to consider whether you’ll be able to cover those additional requirements. He suggests running scenarios before taking on new debt obligations. Include good years, average ones and worst-case scenarios. “Profitability isn’t guaranteed in farming, but what is guaranteed is your new obligations as you take on new debt,” he says.

Ability to accurately strategize for the near and long term: Verwey stresses that this becomes more important as a farm grows because as its margins shrink, so does room for error.

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