The dairy sector, as well, has above-average debt loads; for every $1 million of debt, a rate increase of 1% means paying an additional $10,000 each year in just interest.

Vervoort adam
National Manager of Agriculture / BMO Bank of Montreal

Higher farm debt will likely weigh more heavily on farm finances than in the past and will require a heavier focus on the business and financial side of a dairy operation. This starts with putting together a business plan.

The business plan

A business plan serves as the foundation of any operation. When looking to build this out, it’s important for the plan to outline the strategies to grow the operation as well as what you’ll do if (and when) you succeed.

It should be viewed as a living document. External pressures that cannot be identified up-front will often emerge; as these surface, the plan should be updated and changed accordingly. It’s also important to ensure the plan captures a holistic view of the journey – including what you need to know at the beginning all the way to what is needed to sell or pass the operation on to family members.

When developing a plan, ensure that it covers the following five areas: management, markets, capital investment, cash flow and profitability. These criteria are used to evaluate the business’s ability to generate cash, identify any potential threats to cash flow in daily operations and in the industry environment, repayment capability and assess any risks.


The business plan is also a crucial piece to any meetings with a banking partner. It will serve as the ground floor to conversations about the farming operation, along with what can be done to help it grow and prosper.

When having that meeting with a banking partner, four key items are considered when an application is assessed; each is used to assess liquidity, security and historical performance of the operation. The first two are personal credit bureau score and net worth. With the credit bureau, the most important thing is that personal bankruptcy was not declared in the past six years. Ideally, the personal credit score is sitting at 700 or over.

To help get that score to where it needs to be, ensure you and any partners close any unnecessary credit cards or lines of credit, always pay your bills on time and do not go over any allowable credit limits.

The next two are less focused on the individual or individuals and instead focused on the operation and market. A bank will look at the outlook for the industry and the market as well as financial statements. For the former, it’s important to be prepared for a deep assessment of your business, including industry information, seasonal fluctuations, amount and type of credit requested, terms and conditions of credit, and available security.

On financial statements, a bank will look for trends – this tends to be over a couple of years in agriculture – as well as a strong bottom line and projections.

The business plan plays a foundational role in this entire process. It is also important to have a handle on cash flow; this will go a long way to helping ensure the financial health of a dairy farm (or any operation).

Managing cash flow to better run an operation

Good cash flow is the key to a healthy and successful farming operation. Successful managers tend to gain success from understanding their cost of production, cash flow requirements and appropriate risk management strategies. Dairy producers tend to see swings in cash flow – typical of other livestock operations with significant cash outflows in the spring to finance crop inputs – and repayment of credit lines related to these inputs as crops are fed and cash flow generated. The important thing to keep in mind is: You’ll always want to have cash available for the business, whether in the form of cash on hand or an operating line with sufficient capacity to handle periods of limited cash flow.

Poor cash flow can mean late or missed loan payments, overdue bills and increased operating debt. Make sure you draw up a cash flow statement, which can help with getting a picture of cash on hand, revenue and monthly expenditures. The cash flow statement will highlight any potential shortfalls (or surpluses) in advance so they don’t come as a surprise or so money can be re-allocated. Ultimately, it will help improve the overall liquidity in the business.

Your lender should understand the dairy industry has a history of stability. Although there may be challenges from one year to another, the overall direction of the industry remains positive.

A good banking partner can act like an extra farmhand. With a strong business plan and regular meetings, external advisers can help ensure the long-term business health of an operation.  end mark

ILLUSTRATION: Illustration by Cory Lewis.

Adam Vervoort is the head of agriculture financing at BMO Bank of Montreal.

Adam Vervoort