Farm Financials. Is it Time to Rebalance your Balance Sheet?
How is your individual balance sheet structured? Is it appropriate for our current times and the size and age of your operation? It’s possible that your balance sheet may need to be “rebalanced” so you are positioned to meet your goals. Consider the following strategies to make sure your business has enough working capital to get through the next few years.
1. Move current debt (possibly from your operating loan) to an intermediate term loan amortized at five or seven years. This is a popular strategy for clients who paid cash for capital purchases, like equipment or tile, in recent years and now need to replenish that cash and rebuild working capital. If in the next few years you are able to capture better prices or you can get your costs reduced to profitable levels, paying off debt early is another consideration.
2. Move current debt or intermediate term debt to a longer term, using real estate as collateral and the equity you’ve built in long term assets. Although, this does not remove your debt, it could improve your cash flow while also rebuilding working capital. Again, this is a strategy to give you more time to get your cost structure in line with decreased crop prices. If you select this strategy, be sure to consider how it impacts your overall land costs if you select this strategy.
3. Consolidate debt. In our present (historically low) interest rate environment, it might be a good strategy to consider consolidating multiple loans into one and stretching them out to improve cash flow and current debt requirements while also locking in a good fixed interest rate. Having fewer loans can also simplify your repayment schedule. Always consider matching payment dates to your income stream (When do you typically deliver your grain?).
4. Refinance home improvements. Have you made improvements including significant remodeling to your home? Consider rebuilding working capital you used from the farm operation with a home loan that may have attractive interest rates and repayment may come from nonfarm income generated by you or your spouse.
5. Sell nonproductive assets. Are there assets on your balance sheet that are no longer needed and, if sold, the proceeds could be used to build working capital and/or pay down debt? Start with reviewing your detailed balance sheet. Make a priority listing of assets that are no longer necessary or don’t fit into your future plans. Consult your tax advisor on the impact this may have on your income tax management.
Your ag lender is great resource. Set up a time with them to review your balance sheet structure and projection, including a per acre projection (margin manager) and discuss whether or not you have enough working capital to position yourself for any possible volatility that may occur in the near future.