Article by Jared Koester, Loan Officer, Sterling Lending Branch
As we inch closer to the end of the 2019 production year, producers across the country are beginning to plan and prepare for their upcoming renewal and next year’s crop plan. Here are 3 things to keep in mind as we begin to look forward to 2020.
1 – Annual financial statements allow you to evaluate your overall financial health. A common misconception is that an annual financial statement only needs to be completed for the lending partner’s benefit. The truth is, when completed accurately, it can serve as one of the most valuable tools in measuring your operations performance for the year. A balance sheet will show your overall financial health, along with helping you determine the best way to structure capital purchases, recognize how the earned net worth gain (or loss) for the year impacts the big picture, and show year over year trends for net worth and the working capital position. A best practice is to complete a financial statement on a yearly basis, at a minimum.
2 – Projections give insight into the year ahead. A common practice is to complete a projected cash flow that outlines expected cash income and expenses over a specified period of time. A cash flow is becoming more and more important in today’s rapidly changing agricultural environment. It can help to provide insight into determining peak operating loan and cash needs, estimate the expected financial results for the year, and give an idea if the projected expenses for the upcoming year are appropriate for your operation. A projection is also a great tool when you begin calculating your breakevens.
3 – Understanding your breakeven allows you to make better plans. Understanding your breakeven is essential when determining crop rotation, marketing plans, and farmland lease agreements. Often times, it is easy to underestimate or ignore costs associated with overhead, family living, equipment repair and depreciation, and interest, which can lead to a false sense of profitability. It is important to be honest with yourself when figuring these numbers into your breakeven calculator.
If you have any questions, please don’t hesitate to contact me or your loan officer.