Successful farming is as dependent on money management as land management. You have to plan for the future and mitigate risk to survive a bad year. You have to handle taxes, capital expenditures, and labor costs every year. It is easy to find tips on what you should do, though they may not apply to you based on what you grow or where you live. Here are three financial management mistakes new farm owners make. We’ll explain why they are mistakes and how to avoid making them yourself.
Focusing on Low-Value Income Streams
A common mistake new farmers make is focusing on low-end market streams. For example, many try to increase the yield of their low-value crops rather than shifting to products with a higher margin.
One high-value income stream could be to sell canned fruits and pies to the public instead of selling agricultural products to food processors. Another is selling to the public at farmer’s markets instead of waiting for someone to stop by your roadside stand. You should also consider alternative options that could have possible high margins, but you may not be aware of, such as renting out your barn for weddings and photoshoots. Be willing to reassess your profitability plan and cut your losses, so you can focus on what will generate revenue.
Managing the Farm but Not the Money
Too many farmers think that they will earn a profit as long as they raise enough produce and sell it at the right price. However, it is what you keep, not what you make, that matters most. If you don’t manage your cash flow, you may end up taking out loans throughout the year that reduce what you end up with after you receive payment at harvest time.
There are some cases, however, where financing might be the only option. If you need money to buy equipment, looking at agricultural loans would be a wise choice. But you should avoid getting in debt to pay living expenses or buy things you merely hope will improve your overall operations.
Another problem is failing to pursue debts you’re owed. You should never be afraid to press for payment. One thing you should also consider is financing your accounts receivable if you need instant financing. You’ll get 50% to 90% of the invoice amount immediately through invoice factoring, and the best part is that someone else will take on the task of collecting payment. This is also cheaper than taking out a high-interest loan to pay for seeds or make payroll.
Not Investing in the Right Equipment
A surprisingly common mistake is focusing on cheap solutions instead of spending money to free up time and eventually make money. For example, you could buy a seeder instead of spreading seeds by hand. Not only are you wasting seeds and time, but you could spend that time doing more productive work.
Know what equipment will dramatically improve your productivity or increase how much product you get to market. Pay for a walk-in cooler so that you have less food spoilage instead of trying to make do with a variety of consumer refrigerators. Buying equipment that eliminates the need to hire additional people will also ensure you won’t be shorthanded at key times.
Farming is a tough business, and only the ones who come prepared have a chance at success. You can’t afford to make major financial mistakes like those we’ve outlined if you want to ensure the future of your farm.