Farming is a very novel business. It feeds the entire world. It takes more than just love for your hand to do farm business. However, managing your farm business is one of the most difficult tasks in this business.
Moreover, farming is a very unpredictable business. It is subject to lots of factors like rainfall, climate change, pest attacks, government regulation, market demand, and so on. So many factors make your managing finances all the more important.
If you are good at managing finances, you would also be able to establish a good relationship with banks and other lending institutions. It would become easy for you to raise money in case you want to expand your business.
In this article, we will give you some tips to manage your farm finances effectively.
Do not forget taxes
As already stated, government regulation can influence this business. Taxes are one of the most common government regulation. You should be versed in the tax rates in your country.
Governments lower the tax on some crops that can benefit the economy and society at large. On the other hand, it also increases the tax on products that can damage society. This can be inferred from the fact that the tax rate in tobacco production is very high.
You should try to cultivate those crops that would have low taxes. A good tax measure can help an innovative farmer.
There are many mistakes that you should avoid. Experts believe that you should not build an entity structure that is either too complicated or too simple. A right one would help you to avoid most of the taxes.
You should not contribute too much to your retirement plan, nor should you contribute too little. In simple terms, you should understand where you are spending your money and where you are saving.
Understanding the relationship between agriculture and finance
There are a lot many lending institutions that can help you finance your agriculture business. Even if your bank refuses to give you a loan you can approach the respective government agency that can help you in this process.
Not all investors are banks. There are lots of startups that have started providing loans to farmers in distress. Many individual investors in the US and across the world are also ready to invest in your business. All you need is a good farm business plan.
If you have low levels of debt and your farmland has a high value, businesses like Rabobank are ready to lend you some money. There are so many options to finance your business only if you are interested in exploring all the options.
Get an accountant
You are not going to get a loan from the bank if your finances are not well maintained. And how do you maintain your finance? By hiring an accountant.
These people are well versed with all the tools and techniques. They can help you understand your spending.
Remember one dollar saved will prove to be one dollar in profit. Take care of every penny you have. Minutely check your spending habit and if there is any room to cut down your expenses, you should do it.
If you don’t have enough money, then you should try to educate yourself in this field. However, the money spent here is well spent.
Know about the prevailing interest rates
Interest rates are coming down these days and so is the income of the farmer. This downward trend has been seen since 2013.
Banks have also become cautious in lending money. They are charging 15-20%, which is proof of their fear. You are living in an era of razor-thin margin and these lower interest rates further increase your burden.
This is where having an accountant can help because he will help you to take care of every penny.
Building a good and quality working capital can also help you in taking a loan from the bank. If you have quality working capital, then banks will be more willing to lend you money. One rule of thumb is that banks prefer cash more than commodities and inventory.
Bankruptcy and refinancing
If you are thinking to refinance your business then there are some rules to follow. Your lending institution will also follow some rules. The first rule is the Rule of 90. According to this rule, the sum of your loan term and loan-to-value should not exceed 90. The second thing to consider is that your debt service limits should be 85%.
Moreover, lenders would want you to finance 25% of the operating cost. This would help them to know that you are serious about your business. They are not going to finance more than 75% of the equipment cost.
How can you increase revenue and reduce costs?
If you want to run your farm business profitably, the golden rule is that you should try to increase your revenue and reduce your operating cost. But this is not as simple as it seems. You must clearly understand where and on what you are spending how much money.
Having a detailed business plan can help you. You must clearly describe what you want to achieve and set a clear deadline for the same. Make a detailed plan of how you are going to achieve your goal.
Once done monitor your progress.
Keep track of every penny you spent. You should understand your spending habits and make changes if necessary. You should know your operating costs.
The Bottom Line
These were some simple tips that can help you to manage your finances better. If you can manage your finance, then it will make your business more profitable.
Remember that you are feeding the entire world. Farming is a very noble business. It would be more profitable if you do your farming with love and care. Never forget the traditional concept of farming. It was never about money, it is a responsibility to feed this world.
Understand these simple things and it would help you to manage your farm finance better.