At the end of spring, farmers tune up their equipment to maximize their yields, cut down on fuel consumption and reduce mechanical errors. Although maintaining equipment takes time, it’s a worthwhile investment that can maximize your overall production. But if you want to maximize profitability for your farm, it’s equally as important to tune up your farm’s financial operations.

Wroten jerry
Jerry Wroten
Agricultural and Commercial Banking Relationship Manager / Zions Bank / Southwest Idaho

As you seek to improve profitability, consider the following six strategies.

1. Review and update your business plan

Your business plan serves as a clear roadmap for success, but it’s critical to revisit your plan because the economy and market conditions can change quickly. For example, if you pivot and decide to produce organic grains to meet new consumer demand, your business plan should discuss this new venture. A business plan will help keep you on track for the rest of the year – and if you apply for financing, an updated business plan may be required.

If you don’t have a plan or it’s missing key elements, now is the time to consider your overall vision for your farm, your financial capacity and the income needed to operate. Your plan should provide an overview of your agricultural operation, including the types of crops or livestock raised, the farm's size and the markets it serves. Summarize your background and abilities, and include any alliances or joint ventures with other farms or companies.

2. Evaluate your working capital and reallocate funding if needed

Your working capital should be comprised of liquid funds that can meet short-term obligations. Having financial reserves allows you to quickly address financial stress and leverage unexpected opportunities, such as purchasing land or other assets at a great price.

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The amount of working capital you need depends on the size of your enterprise and your risk tolerance, and should account for volatility in the current economy. Large farms will need more working capital, but it’s recommended to keep between 25% to 30% of your gross sales for working capital. If you’re experiencing pressure on your margins and greater economic uncertainty, you might want to increase your buffer to 35% or greater.

If you need to increase working capital, try to avoid high-interest, short-term loans. Many farmers benefit from taking out lines of credit or ag equipment financing, which helps free up cash and helps them respond more quickly to changing market conditions. Keep in mind that financing requests are subject to credit approval – so being creditworthy makes it more likely you will be approved.

3. Analyze the financial efficiency of your farm and consider adjustments

Your financial efficiency shows how your management decisions have impacted your farm’s ability to make profit. Start by evaluating the asset turnover rate, which shows how your farm uses its assets to create income. This is calculated by dividing the value of your farm’s gross cash income by the value of your assets. If your turnover rate is 45% or higher, it shows your farm is well positioned. A rate of 35% or less indicates you may need to cut your expenses and increase production so you won’t be as vulnerable to market fluctuations.

It can also be helpful to calculate how your gross farm income is spent by analyzing your operating expenses, depreciation expense and interest expense. When you understand what it takes to generate revenue, you can recognize limiting factors or changes you can make to improve your farm’s profitability.

4. Identify ways to increase revenue for your farm

An analysis of your financial efficiency can guide you in making choices that will increase overall revenue for your farm.

Here are a few suggestions you may want to consider:

  • Diversify your crops and livestock, which helps your farm be more productive and reduces potential market risk.
  • Explore new markets for products, such as direct-to-consumer sales or value-added products.
  • Sell your goods to local grocery stores and community markets, which can help decrease your transportation costs and increase profit margins.
  • Purchase more efficient farm equipment, such as tractors, harvesters or grain separators, if it will reduce your overall equipment costs in the long run and support increased profits. If you can achieve a significant difference in reduced fuel and maintenance costs, those savings can outpace upfront expenditures over time.

5. Identify ways to lower overhead costs

Common overhead costs are salaries, insurance, accounting fees, marketing and more. In many cases, reducing overhead requires taking a deep dive into the amounts you’re investing for a specific crop or piece of land. If there are areas that might respond to cost-cutting, it’s important to manage those expenses and focus on areas with the highest return on investment.

It can also be helpful to refinance or consolidate your debt, so you can lower your annual payments. When debt from multiple loans is consolidated, you might be able to obtain a lower interest rate and a more manageable payment schedule.

6. Immediately deal with financial issues

Sometimes, farmers and ranchers wait far too long to address financial issues – which increases their risk of financial hardship that could include higher interest rates, restrictive loan covenants or even foreclosure and bankruptcy.

To help mitigate these risks, it’s critical to have a strong relationship with a banker who consistently engages with you and provides feedback on your operations. A skilled lender can help you spot mistakes, mitigate risk and make thoughtful financial choices.

Tuning up your financial operations, much like tuning up your farm equipment, takes time and deliberate effort. But just like well-maintained equipment results in better crop yields, a well-adjusted financial strategy can create greater profits for your farm now and in the years to come.