8 Rules Every Young Farmer Should Follow
A panel of business and financial planning experts shared the following advice with young farmers at a Farming for the Future Conference in Ames, Iowa. Here are eight rules every young farmer should follow.
1 Live below your means
Way below. Build up equity. Don’t buy equipment you don’t need just to avoid paying taxes. Do you need all that rented land? Revise your living expenses. Downsize.
“Understanding the relationship between your farm business and your personal living expenses is essential to your survival,” says Carl Horne, Farm Credit Services of America. “The draws that your living expenses create (or the draws your farm has on your nonfarm income) typically have a larger impact than you estimate.”
One of the more stressful management exercises for family farms is the process of laying out all of the financial pushes and pulls on the operation, says Horne. For many, the relationship between farm and nonfarm income and expenses is a mystery. Yet, understanding where your nonfarm income subsidizes the farm or where the farm assets are used to provide for family living expenses is vital.
Do the hard work of budgeting the entirety of your cash flow. This includes personal living expenses. This essential financial management exercise is one that not many producers do, as it typically uncovers the natural – and very real – tension that exists between the goals of the business and its financial constraints. You need these two areas to work in concert.
2 get along with your family
There’s nothing worse for a farm than family members who don’t speak to each other. Communicate about finances with your spouse and business partners (as well as lenders, tax accountants, and financial advisers) before there is a problem.
A simple, sharable business and financial plan will keep your family and close business partners up to speed on your goals.
“It’s hard for them to be supportive when they’re not informed,” says Horne.
3 Know your breakeven
Get factual data about your costs. Design a marketing plan with price and date targets, and stick to it. Lock in margins whenever possible.
“You can’t manage what you don’t measure,” says Horne. “If you don’t know your breakeven, then your marketing plan is hinged on a guess.”
4 Cut costs
Revise your scale of variable and fixed costs. Visit with your agronomist, lender, tax adviser, and crop insurance agent. Be very careful with new capital expenditures. Renegotiate land rent. Seek volume discounts in seeds and chemicals. Offload unproductive assets. Extend repayment schedules on equipment and real estate loans, if possible.
“You’ll hear what your peers and neighbors are doing to cut costs,” says Horne. “Listen to that, but create your own plan.”
5 Diversify your income
If you do have an off-farm job, this is not the time to lose it. Consider alternative sources of revenue with your assets, such as custom work, snow removal, or truck driving.
“Look for ways to leverage your talents and capabilities to keep yourself fully employed and to diversify your income risk,” says Horne. “Stabilizing your income stream has the added benefit of destressing you and your family.”
6 write a business plan
Create a formal statement of your business goals. Include the reasons they are attainable and your plans for reaching them. (A budget is not the same thing as a business plan.) Know and respect your customers and your competition. Prepare for the worst. If you partner with your brother and something happens to him, could your farm business survive?
Do a SWOT analysis to measure your strengths, weaknesses, opportunities, and threats.
7 Don’t try to do it all
Focus on your top strengths and skills; hire out the rest or partner with someone who has skills you lack. Don’t forget what makes you unique. Take time to assess potential business partners and service providers to make sure they are the right fit.
“Make a list of what you like to do in your business and what you are good at doing,” says Horne. “Your focus should concentrate on where those two categories intersect. Hire out the rest.”
Economic turbulence brings opportunity.
“Use your idle time to plan,” advises Horne. “The best way to get better at planning is to do it often. Plus, running this drill will help you stay sharp.”