5 Tips To Secure Your Farm’s Financial Future

A solid financial plan is critical in running an ag business. For GenNext Growers, this is especially true and the time to start planning is now. To someone in their 20s, 65 may seem a lifetime away, but as the old saying goes, “The days are long and the years are short.”

Conley Thornhill

Conley Thornhill

According to Conley Thornhill, senior vice president of the Thornhill Wealth Management Group/UBS Financial Services Inc., financial planning for agriculture is much the same for any type of higher risk business entity. “For our agriculture clients, we prefer to have a higher level of ready cash or access to cash,” he says. “This allows our clients to react quickly to address adverse situations in the field. Also, having a ready source of cash allows a producer to act quickly should any opportunity arise to purchase equipment or additional acreage.

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1. Build A Team And A Plan

According to Johan Dam, a chief relationship manager/senior vice president of Farm Credit of Central Florida, it is not always wise to approach financial planning as a do-it-yourself job. “Align yourself with a good team of advisors,” he says. “A good attorney, accountant, lender, and product marketer are especially important. These folks are experts in their respective areas and will make sure that you have considered all of the options and risks associated with your decisions.

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Johan Dam

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“A good marketer/broker for your product also is key. You can be the best grower in the world, but if you can’t sell your product (at a profit), then you are just spinning your wheels.”
This financial team can help growers build a formal business plan and budget. “The business plan should spell out the direction of your company, outlining your vision, goals, products, markets, timeframes, and financial strategies/resources,” says Dam. “Once these things are created make sure to monitor performance relative to the plan/budget, make adjustments where necessary, and evaluate areas where there are material variances to see what can be done to bring things back in line.”

2. Expect The Unexpected

“Work with a financial planner to create a roadmap to success,” says Thornhill. “Plan as well for the unexpected situations — disability protections, for example.”
The time to prepare for the bad years are during the good times. That includes building a war chest of funds for when unexpected turn of events occur or a down market season or Mother Nature steps in with a weather-related disaster.
“There is a saying that goes, ‘Failing to plan, is planning to fail,’” says Dam. “During my career, I have seen many companies that had such great prospects fail to plan for a time when their earnings would not be there. They ultimately failed because they did not have the needed capital to survive a downturn in the economy.”

3. Save Today

Starting an investment program early makes a huge difference in building a secure financial future. “While it is very important to invest in your business to ensure its future success, this should not be at the complete neglect of saving something for the future personally,” says Dam. “Start small and build over time. Something as simple as $20 per week earning an average rate of 8% would be $306,079 after 40 years (at theoretical retirement). Obviously, the bigger the savings, the bigger the end result.”
From January 1970 through the end of 2012, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (source: Standardandpoors.com). This illustrates the long-term performance of the markets, despite the ups and downs that make the news.
Thornhill adds, “Establish college plans for your children as soon as possible. A high-quality education will cost more, not less in the future.”

4. Mitigate Risks

“Reduce risks when it is feasible and possible,” says Dam. “While I don’t want this to sound like an insurance push, the use of property and casualty to protect fixed assets, crop insurance to mitigate the loss of a crop, or disability to provide income in the event of injury all serve to provide a hedge against major loss at a reasonable price.”
Dam adds that contract growing and the use of futures contracts for commodities also could reduce price risk and ensure less variability/risk in earnings fluctuation.

5. Purchase Assets

Growers should add assets that build their operation’s profitability and contributes to their business plan’s mission. Assets can include items such as land, equipment, and new digital technology. “Make sure the assets you purchase are not dead weight that needs to be carried by your other businesses,” says Dam. “This will reduce your financial flexibility and may even result in a loss of value, especially when the asset purchased is of a depreciating nature.”

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