Capital management is one of the most critical aspects for the success of any business—including farming, ranching, and hobby farming. Everything you worked so hard for, including the efforts to produce an operational farm, can be at risk if your operational profit and capital are not managed properly.
This article will provide tips on financing for farmers—which could help them manage and maximize their business capital and operational profits to ensure the longevity and viability of their farms and business. But first, let’s define what capital management is and discuss asset and debt management.
What is Capital Management?
Capital management means managing both assets and debts. It is a financial strategy that aims to ensure the maximum efficiency of a business’s cash flow. To put it simpler, capital management means managing your business’s money—or in your case, your farm’s cash flow.
Managing your capital involves balancing assets and debts while sustaining a steady cash flow and profit. Everything your company makes should be enough to maintain the company’s operating expenses and maintain the balance between assets and debts.
Managing Your Assets
Asset turnover is one of the factors that impact your farm and measures how much annual revenue is produced by every asset your business owns. A company purchases assets to add value to the company. It can either be spontaneous purchases, paying taxes, or anything your company needs to boost profitability.
However, not every purchase can turn into an asset. If you purchase something that your farm doesn’t need or something that does not add value or increase your company’s profitability—that wouldn’t be considered an asset. An asset should enable the company or farm to make more money or balance out your company’s debt.
For example, you can manage your capital by expanding your farm. Buying more land could be an asset, especially if you can increase your company’s cash flow by increasing crop or food production.
Types of Assets
To completely understand what and why you should own assets, you must define and differentiate each type of asset.
Essential Assets
These assets are needed to continue the business. However, some essential assets do not produce a lot of annual revenue.
Personal Assets
Personal assets are types of assets that do not affect the business—which means disposing or selling of these assets will not affect future business profitability.
Non-productive Assets
These types of assets owned by a farm rarely contribute to the business’s cash flow. Although these assets are still used to continue the business at some point, compared to essential assets, they rarely add any value or affect annual revenue.
Productive Assets
These assets are the ones that keep the business afloat. These are types of assets that are purchased to support farm operations, owner’s equity, repayment of debts, and the purchasing of new assets for the business. All the expenses are covered and taken from the revenue produced by these assets. With that said, managing the assets that actually make for a steady cash flow like these productive assets is essential for any viable business.
Analyzing your assets should be a yearly process; classifying each one will allow you to discover which assets are more valuable than the others and help you analyze which assets are essential and which ones can be disposed of.
Managing Your Debts
Any farm business that continuously grows also has growing debts. Capital management is all about balancing assets and debts, so to maintain the balance, you also need to manage debts. Borrowing money and acquiring debt for additional financing for farmers is common in any farm business for purchasing additional assets and to fund assets that can no longer supply enough cash or generate revenue for a business.
Although debts can fund assets up to some point, note that growing debt also means growing interests—and the key is to balance out assets and debts for successful capital management.
To manage your farm’s debt effectively, you have to learn how much debt is appropriate for the size of your business. Other factors like communications with your lender are essential in debt management. You want to determine whether your interest rate is reasonable and if the lender could be a reliable source for future credit. In addition, not all lenders are committed to agriculture, so before taking a loan from private lenders, you need to ensure that they are adequate to lend enough money for your growing farm and if they are committed to helping you grow your business without having problems throughout.
Analyzing these factors is the best way to choose the proper lender for your business, which will ultimately help you manage your business’s capital and create a viable farm business that generates enough money for personal and business operation purposes.
Capital Management Tips for Farmers
Now that you know what capital management is and how assets and debts come into play when it comes to managing your farm—here are a couple of valuable tips that could help you further manage your finances and capital.
Cash is your most valuable asset
Out of all your assets, the most valuable ones are the ones that generate the most cash. So when it comes to analyzing your assets at the end of the year and deciding which ones are no longer valuable to your farm. You can consider selling those assets to repay debt or adding new and more valuable assets.
Analyze your farm’s financial position and performance
Analyzing your farm’s financial position will enable you to discover if you are getting the maximum return for your investments. And as mentioned before, the assets that don’t maximize cash flow can be sold and replaced with more valuable assets.
Consider financing for farmers
If worse comes to worst and you can no longer create a steady cash flow due to an imbalance of debt and assets, you can consider financing from lenders that offer low-interest rates that could help you re-establish your business and prevent bankruptcy. You can consolidate your debts and buy new assets that could help you maximize the return and create a more viable operation that benefits your farm in the long run.