Farm Horizons, August 2012

The mid-year review

By Myron Oftedahl, Farm Business Management Instructor, South Central College

The summer is half gone, the crop is progressing nicely (I hope that it is anyway), the kids are soon back to school, but do you have any idea where you are financially with your farm business? Yes, you probably know what your checkbook balance is, but do you know if your farm business is profitable? Are you meeting your cash flow projections? Are you meeting your goals?

This time of the year is a good time to review the cash flow projection that you did during the winter. You remember the one, the one that your loan officer was insisting that you do. Dig it out and then run a printout for the year from Jan. 1 to June 30 and compare to the projection. How do your income and expenses match up? Is there an item or two that are really different from what you were projecting? Is it a positive or a negative change? Do you know why it happened?

Let’s assume that you projected that repairs would be $9,000 for the first half of the year. Your actual repair cost was $16,300. Why? Was there a major repair that you weren’t expecting? Did you do a repair earlier than you were planning? Did something get entered wrong? How will this affect your year-long projection? Will it affect the ability to pay the loans for the year? Will you be profitable at year end?

If it is an income item that is deviating from your projection, why is it different? Did delivery dates change? Did you sell more or less bushels than planned? Was the grain out of condition, so that you had more dockage? Was the price different than you projected? How will this affect the projection?

What is your next step? Once you have determined what deviations there are from the projection and you understand their impact, you need to communicate this to your lender. Lenders can become very unhappy if you wait until the operating note is due and then you tell them that you had some difficulties during the year and that you need some time to repay the balance of the note.

A negative impact can be managed if you both agree to the revised plan. A positive impact can also be managed. It may give you an opportunity to replace or add a piece of equipment. It may be to add to the cash reserves for an expansion or just having a cushion for the year that just doesn’t cooperate. It is OK to have a cash reserve, the recommendation for a working family is three-to-six months worth of expenses. So you, as a farm family, should have three-to-six months worth of family living expenses; and I always recommend to my livestock operations to have a reserve of one month’s worth of bills at a minimum as a goal.

Now is a good time to review your transfer plan or estate plan. Has anything changed that needs to be addressed? A marriage, divorce, birth, or death are all things that could affect a plan. Is your health care directive in place? Are there any changes that need to be done? Do you have a Power of Attorney document between you and your spouse? Take a look at these documents and review them. Does anyone besides you and your spouse know where they are?

If you can review all of this information, then you should have a good understanding of your operation.

Have a profitable year.

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