Agriculture requires more than land and favorable weather; it requires business acumen, including managing farm finances, taxes, operating loans, capital acquisitions, and labor costs. Understanding managing your farm finances, and regulations and also building strong relationships with bankers and accountants is crucial.
5 Useful Tips For Managing Your Farm Finances
Here are five useful tips which you can use to managing your farm finances.
1. Exploring the field of taxes
The 2017 Tax Cut and Jobs Act transformed farm taxation, offering enhanced depreciation rules, tax deferral for farmland exchanges, and a 21% flat corporate tax rate. A pass-through deduction at the shareholder/partner level supports C-corporation operators. The research and development tax credit is beneficial for innovative farmers. Avoid overly complex entity structures and align contributions with income for maximum tax benefits.
2. Understanding the agri-financial context
The agricultural sector’s financial landscape is shaped by various players, including financial institutions, private equity, and individual investors. Farm Credit Services of America and Farm Credit Mid America make up about half of the agricultural loan market, supporting 50 associations. MetLife, pension funds, and foreign sovereign wealth funds also contribute to the financial landscape. Despite low interest rates, farm income has been declining since 2013. Banks report loan watch lists, indicating cautiousness in lending and repayment.
3. A Decline in Working Capital
The agricultural sector witnesses a continual decline in working capital, signaling reduced liquidity. Between 2009 and 2012, working capital in the U.S. farm sector plummeted by 64%. This necessitates increased reliance on borrowed funds for asset investment and machinery replacement. Working capital now represents a mere 13% of gross revenues, a stark contrast to the 45% recorded at its zenith.
4. Strategies for Cost Cutting and Revenue Growth
To ensure farm financial viability, it’s crucial to increase revenues and manage expenses judiciously. This involves identifying cost drains, converting gross revenues to profit, reassessing land utilization, reevaluating family living expenses, examining machinery inventory, adopting no-till farming practices, participating in the sharing economy, and streamlining purchases through direct acquisition or buying co-ops and managing your farm finances.
5. The Bright Side of Economic Downturns
Economic downturns can be challenging, but those who survive emerge stronger. Farming’s cyclical nature requires careful balance sheet analysis, debt restructuring, and avoiding unnecessary debt. Tight financial situations also require cautious supply stockpiling.
Bottomline
Refinancing strict adherence to rules, such as the Rule of 90 and a debt service limit. Lenders advocate for personal funds for operating costs and equipment financing. Understanding lease implications and navigating state and federal laws is crucial in bankruptcy situations. Seeking professional advice is managing your farm finances essential for long-term financial management.
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