How to Manage Financial Risk on the Farm

Posted June 26, 2018 by Administrator in Agribusiness, Risk Management | 0 comments

Managing a farm is a risky venture. Farmers can encounter production problems, environmental hazards, and financial risks. In fact, recent years underscored just how dramatically farming finances can fluctuate. From 2011 to 2014, farm income averaged $105 billion annually. By the close of 2015, this number plummeted to $56 billion. In an environment where profits can decrease by almost half in a short span of time, farmers need a solid plan in place to survive economic difficulties. The following suggestions can help farmers stay afloat during periods of financial uncertainty.

  1. Always pay attention to the little things. In prosperous times, it’s easy not to worry about the small stuff. A few extra dollars here, not getting the best deal there—it’s not concerning when cash flow is positive and ledger margins are in the black. However, when crunch times strike without warning, these behaviors will make a difficult situation worse. Making every dollar every day count can be the difference between surviving an economic downswing and folding under the pressure.
  2. Develop a reliable accounting system. Farmers can’t hope to build a successful agribusiness if they don’t track their finances with an appropriate system. Investing in enterprise accounting software can help farmers manage accounts payable, accounts receivable, billing, payroll, and more.
  3. Don’t rely on the value of the land. When the value of goods and services goes down so too does the value of land. Not only that, but land is not a liquid asset. Farmers can’t easily convert land into cash, and a rapid sale can result in a loss of profits. In addition, banks are less than impressed by real estate as a means of repaying loans. Instead, farmers should focus their efforts on products and services that generate cash so they can pay down debt.
  4. Make decisions. When the economy begins to turn, family businesses such as farms often feel the squeeze before major organizations operating on huge margins do. Many farmers feel crippled by the fear of making a wrong financial decision. However, inaction can prove much more lethal to a family farm than action can. For example, lenders will grow frustrated and less willing to work with farms that skirt their inquiries than those that at least respond. A willingness to navigate an uncertain future is much better than remaining frozen during an economic storm.

Managing finances on tight margins isn’t easy, but Cline Wood can help. As a top provider of agribusiness insurance, we go beyond providing coverage. We work with agribusinesses to understand their risks and implement strategies to manage them during difficult times. Contact us today to learn how we can help your agribusiness.

This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.

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