This list of five financial tips could also be called New Year’s resolutions, but since most resolutions are not followed, I think the ideas should be presented as tips. Use them if you can.
- Know your costs. You cannot control what you cannot measure. Start with accurate books. An accurate set of books is one that is reconciled to the bank statements (including loan statements) and accounts for all transactions. It accurately codes expenses, especially the big co-op bills that may pay for many types of expenses, including personal use items such as fuel or tires that need to be separated out.
- Family Living Expenses: For three years in a row now, out of pocket family living costs for the farmers we work with have hovered just under $100,000 on average. As we see profitability decline, many operations will need to pull back on family living. These costs tend to be sneaky, but if you need to, keep track of all expenditures for a month or two to determine what could be lowered or eliminated. You need to make sure your family understands why you are setting the budget and backs the effort. Having one spouse on a budget and the other continuing old habits will only cause conflict and won’t solve a spending problem.
- Evaluate Debt Load: The average debt load for farms included in the Nebraska Farm Business averages reached just over $1 million at the close of 2014. In 2004, the average debt was just around $450,000. When we had higher commodity prices, the debt load wasn’t a serious issue, but with lower prices, it needs to be examined. Debt is not necessarily a bad thing and is certainly a helpful way to grow and manage a farm business, but the more debt you carry, the more risk you carry. As income drops, the ability to repay drops. If you believe we are in a long-term down cycle, it’s important to get debt under control. A high debt load going into a downturn means the operation has less flexibility to take advantage of opportunities that may present themselves with assets that are “on sale.”
- Examine the cost of inputs: Almost 35% of the total cost to produce an acre of corn is comprised of four categories (seed, fertilizer, chemicals and crop insurance). These inputs are obviously important to the bottom line of net return. Re-evaluating which inputs to buy and how many additives to include will be imperative this year. Carefully weigh the cost of the input versus the expected return. Work with agronomy specialists to examine the cost of one unit of “x” (fertilizer for instance) vs. the expected income from that application. Note that this is change in income, not expected yield.
- Cash Rents: Landlords want to increase the rent because taxes are increasing. Tenants want to decrease the cost because commodity prices have decreased. There is no right answer in this battle, but the reality is that the free market doesn’t seem ready to fully back off. Contact me with questions about rental rates, I can visit with anyone about this. I’m suggesting a lower base with a bonus for higher crop prices, if they do go up. I would be glad to help anyone with the details of such a lease arrangement.
I would suggest that most will have to use a combination of all five areas to balance the books for 2016. Tina Barrett with the Nebraska Farm Business Association Inc., provided some of the information used in this week’s column.
Reminder: Call 402-563-4901 to register to attend the Cover Crop/To Till Seminar on January 29th.
For more information or assistance, please contact Allan Vyhnalek, Extension Educator, Nebraska Extension in Platte County. Phone: 402-563-4901 or e-mail email@example.com