Farmers and farming businesses deal with a significant amount of uncertainty every day, and the impact of farm financial risk can be astronomical.
Farmers are sometimes forced to make business decisions based on unknown and incomplete information.
Continuously having to speculate about the weather, the volatility of market prices, rises in input costs, and the direction of interest rates, farmers are forced to make uninformed decisions that can potentially result in losses and adverse outcomes, otherwise known as risk.
Financial risk can prevent the business from repaying loan obligations and funding operational activities.
Farmers and businesses can never eliminate risk but only manage to minimise its impact.
Some of the risk mitigation strategies could include:
1. Know where you stand
Ensure that you have a good understanding of your current business financial position.
2. Keep it Digital
Use digital accounting and record-keeping programmes that access live data for real-time decision-making.
Keeping updated and reliable financial data and budgets will enable you to identify and respond to unexpected events, preventing significant deficits in cash flow.
3. Consult your advisors
Consult with your advisors and banks and review your current farm lending and debt structure.
Seek cheaper or alternative finance options to reduce the interest cost and lock in interest rates on core debt to eliminate the risks and costs of rising interest rates.
4. Loan Repayments
Review and change, if necessary, the timing of loan repayments to suit your cash flow. Pay down expensive unsecured short-term debt with higher interest costs first.
5. Marketing & Sales
Review your farm marketing strategy and obtain independent market info and advice to ensure that you are forward selling and selling your products at a favourable time.
Turn to Insurance policies and ensure that your business and productions for the year are insured appropriately.
This can protect your business and assets against adverse situations caused by catastrophic weather events, hail, devastating fires, and accidents.
7. Cash is king
Create and maintain a cash reserve fund.
Maintaining liquid and credit reserves can also protect you against financial risk's adverse effects.
If needed, a liquid stash of cash or other liquid assets can be easily used to weather financial difficulty.
Look to improve profit margin in crop and livestock productions and lock in cash expenses and market prices where you can and when those margins exist.
Be cautious of over-investing in expensive new machinery and consider buying second-hand or leasing.
This can reduce the financial risks associated with large finance loans and owner-related costs.
It is helpful to analyse and compare cost and risk in owning versus renting before deciding whether to buy or lease.
Diversify the income streams by offering contracting work with farms' machinery and labour.
Consider a spouse or family member to earn income streams by working off-farm.
Your local RSM office can assist you with minimising the impact of farm financial risk. Contact the team today!