Decision making with negative margins, part 2: Returning to positive margins

The last article focused on building a business case for your lender when negative margins occur, which will be likely for some grain producers in 2015. Let’s examine five-steps for returning to positive margins in your agriculture business, in no particular order. Some of these steps can be used to build efficiency in profitable businesses as well.

First, let’s examine how to strategically cut expenses. Carefully scrutinize all expenses; however, focus on reducing the four or five largest expenses which can make the largest impact on the bottom line. For grain producers, these would include crop input costs such as fertilizer, spray, seed, and fuel. The good news is that fuel prices should be declining in 2015 with the decline in oil prices. Concerning fertilizer expense, soil testing and method and timing of application may be considered, allocating limited resources to obtain the biggest bang for the buck. If one has a livestock enterprise, examine feed cost. The possibility of reduced feed cost in 2015 could be on the horizon. Proactive maintenance on machinery and equipment could be another element to help control expenses.

Next, focus on revenue, which could include production, price, or a combination of both. Knowing one’s cost of production and developing and executing a marketing plan consistent with one’s goals and objectives will be high on the turnaround list.

In the 1980s, some producers resorted to off farm earnings to supplement the farm. Today with larger farm businesses, these extra dollars may not have as big an impact as in the 1980s when farms were smaller and employment was more plentiful particularly in rural areas. In evaluating this option, care must be taken in the analysis to determine whether the extra income amount, cost of employment off the farm, and other aspects such as time management are really worthwhile.

A major area of scrutiny may be family living cost. The difference between the high one-third of living costs and the low one-third is $50,000-80,000 according to some farm record analysis.  Reducing excessive family living withdrawals from the business can really improve the margin. In some cases producers will allocate a certain amount for living, and then budget accordingly and stay within the budget. Do not commingle living and business expenses.

Finally, refinancing debt on longer terms can provide liquidity and free up cash flow. However, one will need equity and a willing lender to accommodate this strategy. While this list is not exhaustive it does provide a step-by-step process to a positive margin, both for the short and long run. Planning, executing, and monitoring will be the actions for success.

TAGS: Soybeans Corn
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