Posted on March, 1, 2024 at 09:54 am
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 and capital purchases for 2024.
With grain prices decreasing from the levels seen in the past couple of years, many 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 a few thoughts on managing through the tighter margins ahead:
Working capital
Effective management of working capital 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 cash flow and spread the cost over a few years. Equipment loans typically have lower rates than operating financing. During periods of declining margins, it’s not the time to risk running short of cash.
Consider depreciation in capital purchase financing
When deciding how to finance a piece of equipment, 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.
Operating loans
Dedicate some time to developing a cash flow projection and profit and loss statement before making operating loan decisions for the 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.
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.
Source: The Land