Business Basics for Beginning Farmers

What does success mean for you? One of the great things about owning or starting your own business is that you determine your business goals and how you want to achieve them. Often agricultural businesses have goals beyond profitability, but if you're not at least breaking even, your business is not going to be sustainable over the long term. So, what are the business basics that help you remain profitable so you stay on track toward achieving your business goals?

1. Build your network. There are three basic areas of business skills — production, marketing and financial. It’s rare for someone to excel in all three of these areas, so as you get started, it’s important to assess your skills, recognize blind spots and partner or hire where you’re lacking.

2. Record keeping and financial management are essential. Good records allow you to manage your business, create budgets and compare performance to projections.

3. Review financials regularly. There are three main financial statements: balance sheet, income statement and cash flow statement. These should be reviewed regularly as they provide snapshots of the business's financial health, profitability over time, and actual cash position.

4. Cash flow budgeting is critical. Cash flow budgeting allows you to foresee potential lean periods and ensure adequate funds to cover expenses month-to-month. Many farms have seasonal cash flow that can lead to problems if not budgeted accordingly. Read strategies for managing liquidity from this previous blog article.

5. Gross margin must cover overhead/fixed costs to be profitable. Gross margin is revenue minus variable costs. To manage gross margin, a producer should carefully manage costs like labor, inventory, shrink and marketing. They should analyze pricing to improve margins. And align production with demand to limit waste.

6. Set realistic expectations. When starting out, it’s easy to dream big. But sometimes those big dreams may not be attainable right away. Use business planning tools and advisory services to set realistic goals and evaluate and adjust your strategies to achieve those goals along the way.

7. Engage in continual learning. Education and training can help build confidence in areas you may not be as knowledgeable. For example, Farm Credit East offers GenerationNext seminars to help the next generation of managers advance their management skills and business knowledge. Additionally, growing practices and technology are constantly evolving, so staying up to date is imperative. Most industry trade groups, farm bureaus and local extensions offer conferences, trainings and workshops for continual learning.

8. Explore financing options. Equity financing, like personal investment, is usually needed to start a business. Off-farm income can help early stage borrowing. Debt financing from lenders supports ongoing operations and growth. Lenders like Farm Credit, FSA, and state programs for beginning farmers evaluate the 5 Cs of credit – character, capacity, capital, collateral and conditions — when making financing decisions.

Farm Credit East also offers FarmStart investments. FarmStart is a unique financing program that aims to bridge the gap for beginning farmers to obtain some operating funds as they start their new agricultural enterprise. The program invests up to $75,000 in new and beginning agricultural enterprises that show promise of success. FarmStart recipients have five years to repay the investment or roll it into conventional financing. Learn more about FarmStart.

For a deeper dive into business basics for beginning farmers, review this one-hour webinar recording that goes into detail about:

• Financial Statements: What they are, how to read them and why they are useful
• Budgets and Cash Flow: How to put together a budget and why it’s important to your enterprise
• Credit and Financing: How to approach a lender, sources of financing and how credit decisions are made

Watch the Webinar Recording