Developing a Farm Financial plan

Most farmers prefer to focus more on production rather than planning. Looking at the change in technology, change in demand, change in climate, and increasing global competition continues to strain the traditional approach of farming. Farmers we need to start planning for our farms/cattlepost and improve our farming.

A farm financial management plan is a plan of action developed to direct farm and family activities and available resources toward achievement of prioritized management team goals. Financial management is the process of obtaining, using, and controlling the use of capital.

Capital comes in two forms: equity capital and debt capital. Equity capital is the money of the owners, partners, and other investors to the farm (money that is contributed by people to be used in the farm). Debt capital is a liability or other financial obligation on which interest and other fees have to be paid (money that is borrowed from external sources to finance the farm business).

Other ways of raising capital in the farm are leasing and contracting. They allow a farmer to obtain the use of capital assets without using equity or debt capital, but they are financial obligations.

Debt in the farm finances

Taking on debt increases risk but can also improve farm income, wealth, and progress toward other goals. Principal and interest payments are calculated by multiplying the loan principal by an amortization factor. The amortization factor is based on the loan’s interest rate, the number of payments per year, and the number of years of the loan.

Since different loans can have different interest rates, fees, and other terms, the effective actual percentage rate (APR) can be calculated and used to compare the cost of alternative sources of credit.

Cash flow management

Cash flow management is critical for both financially strapped and profitable farms. The four major sections of a cash flow statement are sources of cash, uses of cash, flow of funds summary, and loan balances. A projected cash flow statement is used for planning for the future and adjusting plans according to actual results.

Cash flow budgets are projected in a series of steps, starting with estimating the physical quantities and timing of production and inputs and selecting appropriate prices and costs.

Financial Control

Financial control involves establishing standards, measuring performance, and taking corrective actions, as needed, to ensure that plans translate into desired results. Preliminary, concurrent, and feedback controls are used in financial control.

Actual cash flows can be compared to a projected cash flow budget to develop a cash flow deviation report. This report can be used to identify those categories deviating from the plan by more preset levels and thus needing management attention. It is a key tool which is developed to assist the farmer and the management group in achieving its goals and objectives.

How is farm financial management plan achieved?

It can be accomplished through workshops, seminars, and individual on-farm consultations involving farm business management, strategic and tactical planning, record keeping, financial analysis, and computer applications for farm managers (www.modisar.com).

Many factors involved are internal factors to the farm business such as the production process and labour usage. Some are external factors such as interest rates and trade regulations. All of these factors need to be addressed through a financial management process of Planning, Organizing, Directing and Controlling.

The following are some of the questions that a farm manager needs to ask themselves when planning:

  • Is this an efficient production system?
  • Can I produce my livestock below the average cost of production?
  • Is there a marketing plan based on adequate market analysis and the breakeven price for each of my livestock produced?
  • Is there an accurately prepared business plan based on economic considerations?
  • Is my livestock agribusiness large enough to provide the required family living withdrawal? If not, is there sufficient off-farm income?
  • Have the risks involved in the business been adequately analyzed and compensated for?
  • Is there an adequate system for obtaining management information and monitoring business performance?

Developing a farm financial programme

  • Develop your farm business plans and processes. Your focus on this planning should include these three areas of finance, production and marketing.
  • One should consider carefully the interaction and relationship between cash flows, loan repayment obligations and the farm`s financial performance in designing an acceptable financial program.
  • The expenditures and cash flows associated with the acquisition and use of resources need careful coordination. You need to note times in the marketing cycle that corresponds
  • Each lending program sets a particular pattern of future cash flows. Most frequent a sound long –term financing program is jeopardized by the addition of short –term or non-real estate loans that are not anticipated or that require payment faster than cash can be generated.
  • In setting up a loan program a borrower would prefer
    • Maturity Structure of debt that matches the length of the payoff periods for the asset being financed
    • A repayment pattern over time that matches the assets’ earning pattern
  • Lender must have enough credit reserves to provide additional loans to meet borrowers’ financial obligations in a period of need.
  • It should be flexible enough to restructure excessive indebt nesses for orderly pay offs.
  • The financing program should be designed to restore a more acceptable debt structure when adverse condition have passed.

References