Navigating Tighter Margins in 2024
The beginning of the year is a time for making resolutions and goals for the future. For most grain farmers, it’s time to analyze financial results from the previous year and make decisions about operating loans, your farm operating line of credit and capital purchases for 2024. With grain prices decreasing from the levels seen in the past couple of years, many grain farm operations are facing tighter margins for 2023 and are projecting a similar scenario for 2024. Coupled with higher interest rates than we have experienced in many years, this situation will put a strain on cash flows.
Here are strategic tips to manage through the tighter margins ahead for your grain farm:
Working Capital
Effective management of working capital on grain farms will be key over the next couple of years as we scale down expenses to align with current revenue projections. When deciding on capital purchases for 2024, consider the impact on working capital. Financing purchases may be more prudent to minimize the impact on farm cash flow and spread the cost over a few years. Agriculture equipment loans typically have lower rates than farm operating lines of credit or other financing. During periods of declining margins, it’s not the time to risk running short of cash. When planning ahead for the year, identify what purchases need to be made and the best form of farm financing for them. Speak with your lender and create a plan to minimize risk directed towards your working capital.
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Consider Depreciation in Capital Purchase Financing
When deciding how to finance a piece of equipment for your grain farm, consider how you plan to handle depreciation. Matching the loan term to depreciation term is generally preferred to avoid potential tax problems in the future. When timed appropriately, depreciation can be in your favor and your agricultural financing experts can help you navigate this. Keep your lender in the loop on all purchases made and keep track of their depreciation schedule.
Operating Loans
Dedicate some time to developing a cash flow projection and profit and loss statement before making operating loan decisions for your farm this year. This will assist in correctly sizing your line of credit, providing both you and your lender an understanding of what to expect for the year. It will also offer targets to manage toward and aid in the development of a grain marketing plan for your farm. Spending time on upfront planning is a crucial step toward a successful year and can help you avoid any undue stress from cash flow shortfalls, especially as we head into a more challenging management period.
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As we prepare for 2024, consider these strategic steps for your grain farms success: analyze the previous year, make a plan to effectively manage your working capital, plan ahead to use depreciation to your benefit, and take your time making operating loan decisions. It’s imperative for your grain farm's success to analyze your previous results, set goals for the upcoming year and plan ahead for operational decisions. Sticking to a plan and working with your financial advisors will help set your grain farm up for success in 2024, even while navigating tighter margins.
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