Two neighbouring farms with the same enterprise, size and weather will typically report different financial outcomes, one performing better than the other.
The only variable is the difference in management decisions.
If sustained, similar financial results for the farms will have short- and long-term implications.
Short-term effects could include whether the farm can obtain money for reinvestment for business or personal use.
Long-term implications relate more to the sustainability of the farm, not only for the current owner but also to support transition to the next generation.
Read Also
Crop insurance’s ability to help producers has its limitations
Farmers enrolled in crop insurance can do just as well financially when they have a horrible crop or no crop at all, compared to when they have a below average crop
Based on discussions within the industry, it is apparent that an increasing number of farms might not have the financial viability and capacity to support transition.
Why is this happening?
The reasons can include general industry developments, as well as specific situations for individual farms. Some factors are within a farmer’s control; others are not.
A common problem across the industry is the lack of planning. Setting a strategy refers to developing a plan that documents where farmers envision their business in the future and the management and investment decisions that must be made to turn the vision into reality.
An excuse for not doing this type of planning is that it is generally thought to have little value because general industry developments cannot be predicted or controlled.
However, if farmers don’t have long-term plans, what basis do they use to support management and investment decisions that have the potential to significantly affect future outcomes?
Do they simply hope that things will work out?
Let’s be clear: hope is not a strategy.
Faced with a history of relatively small profit margins and increasing fixed and operating costs, farmers must start to think more strategically about their future.
Farms are often too large and carry too much debt to base management and investment decisions on extrapolation of past performance. What worked in the past may not work in the future.
The salient question is: will the decisions you make get you to where you need to be in the future?
It is difficult to watch a farm family genuinely interested in passing the farm to the next generation learn that the farm does not have the financial strength to support the transition.
Farmers face the challenge of aligning their management and investment decisions with the strategy so that they have a reasonable chance of achieving their financial goals. It is often helpful to start with the final goal in mind.
Try this simple approach:
- Determine what your balance sheet needs to be at your target retirement date. To retire, you will need financial resources to support a desired standard of living. Associated estate distribution plans and possibly the transition of ownership to the next generation should also be considered.
- Compare your current balance sheet to the future stated balance sheet.
- Project the average balance sheet growth of the last five years forward until you reach the target retirement date. If the two numbers match, great. If not, determine what needs to be done strategically to increase the likelihood that the numbers will match.
Terry Betker is a partner with Meyers Norris Penny LLP, working out of the Winnipeg office. He is director of practice development in agriculture, government and industry. He can be reached at 204-782-8200.
