Banking on the Future

By Rick Purnell

You must gain control over your money, or the lack of it will forever control you. That’s the mantra of financial planning guru and broadcaster Dave Ramsey. Agricultural financing experts say his advice holds true, even as new financial management tools and technology are rolled out. Some tools may be a boon to producers, but new widgets are worthless without a business plan.

“Our members need structured financial management,” says Jackie Martinie, senior vice president and chief credit officer, Farm Credit Illinois in Mahomet. “Just like everything else in life, you need a plan before moving forward. A detailed business plan includes an annual budget so growers can fully understand cost of production. You can budget the enterprise overall and budget down to each farm or field if you want. The budgeting process is all about understanding the cost so you make the best decisions around inputs, cash rents and associated costs.”

Martinie relates that a budget should include detailed cash flow estimates. For most producers, a monthly cash flow is a must and contains all cash inflows and outflows like all financing activities and family living expenses. Accrual records are extremely important because they help producers make better-educated decisions compared to cash basis tax information. She says such records also paint a more accurate picture for basing the best lending decisions.

Risk management and marketing plans must be included in the business plan as well. Martinie says that a sound marketing strategy will help producers keep emotions out of decisions, stick to their plans and increase odds of making a profit.

Start at the Right Table

“I can’t stress enough how important it is we all communicate, communicate, communicate.” - Ed Elfmann, senior vice president of agriculture and rural banking policy with the American Bankers Association (ABA) in Washington, D.C.There was a time when meetings to launch annual plans and loan discussions between lenders, farmers and family members was initiated at the kitchen table.

Ed Elfmann, senior vice president of agriculture and rural banking policy with the American Bankers Association (ABA) in Washington, D.C., says it is time to move that to a roundtable.

“I can’t stress enough how important it is we all communicate, communicate, communicate,” Elfmann says. “All of us involved must understand where you are now and where you’re trying to go. Your accountant, lender, lawyer, seed representative, spouse, children and anyone else who may have lending obligations need to be part of your circle of advisers. We all need to be on the same page. This is a highly important practice to grow a successful business.”

Elfmann notes that excellent resources exist to help improve existing business plans or start new ones, in addition to the experts at a producer’s roundtable. They include:

  • FINBIN: farm financial and production benchmarking information
  • Illinois farmdoc: multiple online tools and articles, budget examples, crop budgets and whole farm operational scenarios
  • ABA Agricultural Banking: tips under “Press” heading

“In addition to farm expenses, know your living expenses,” Elfmann says. “Not knowing what you actually spend in the household can throw off income statements and related documents. It’s easy to say a pickup is part of the farm expense, but in reality, it’s a living expense.”

Engage Professionals

Kurt Downs, Rabo AgriFinance senior relationship manager in Sterling, affirms experts are needed. “As operations get larger and more complicated, having a good accountant who is familiar with farming and the uniqueness that farm accounting requires is invaluable,” he says. “We encourage our clients to engage their accountants as consultants so they help prepare interim and year-end financial statements, as well as offer financial advice and tax preparation.

“In turn, this helps farmers and ranchers ensure they get a realistic view of how their operation is performing and make better management decisions,” he adds.

Relationship banking, while not new, is important. Downs says work with lenders to strengthen relationships and to be prepared as business situations change throughout each year.

Find New Data Uses

“As operations get larger and more complicated, having a good accountant who is familiar with farming and the uniqueness that farm accounting requires is invaluable.” - Kurt Downs, Rabo AgriFinance senior relationship manager Sterling, Ill.Rabo AgriFinance recently announced a partnership with Conservis to develop a tool that encompasses all stages of the growing season and translates farm production data into meaningful financial results. Currently, the Conservis platform collects and manages data from planning and budgeting, planting, input applications and costs, and post-harvest quality and inventory monitoring until the crop is sold, all using devices that currently exist.

“Our clients already have multiple data collection points on tractors, grain handling equipment and software,” Downs says. “With this partnership, we can bring all of this together into a format from which producers can make good management decisions using realistic analytical data.”

Downs says the information also is invaluable to lenders. Producers own their data and must give Rabo AgriFinance permission to view it. Permission can be revoked at any time.

“The more accurate data we can get, the more comfortable we are with it. Lending decisions are easier. It also helps us get financing in place more quickly, whether a customer is buying new equipment or land or putting up another facility,” he explains. “It really helps when we’re setting up a new relationship with a borrower. We have to request a significant amount of information to start a relationship. If we can access the Conservis information, a few keystrokes will quickly get a lot of the material set up, saving us and the borrower a lot of time.”

Financial Toolbox Basics Still Required

“You can budget the enterprise overall and budget down to each farm or field if you want. The budgeting process is all about understanding the cost so you make the best decisions around inputs, cash rents and associated costs.” - Jackie Martinie, senior vice president and chief credit officer, Farm Credit Illinois in Mahomet, Ill.Just because checks can now be deposited via smartphones, however, doesn’t mean agricultural players can let financial decorum slack. Strong relationships, sound plans and incorporating tools to get the best data possible remain cornerstones of any financial toolbox.

Martinie, Elfmann and Downs concur this won’t change soon. “Remember, if you put together a good business plan, know your cash flow and make it through bad times, you’ll have a long-term strategy and a long-term plan when you get to good times,” Elfmann says. “All this planning helps you save some money. You’re now in position to build and expand your business.”

As Martinie puts it, “It’s structured financial management.”