The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
A group of smaller producers asked my advice and wisdom regarding operating a smaller type of business in this period of volatile economic times. Did you realize that over 80% of U.S. agriculture producers generate less than $250,000 annually in revenue? Some are young farmers and ranchers just starting out, while others are traditional family businesses, or those phasing out of business.
Sources of revenue
When a business is smaller, the operator often must depend on other revenue streams for cash flow generation and to meet family living needs. This could range from W-2 income to side “gigs,” such as trucking, custom work or freelancing. While worker shortages are the mantra of the day, job shortages may be on the horizon. Maintain your skill base, keep track of your accounts and payment status, and maintain quality of work. This will be critical to maintain income in a down economic cycle or recession.
Family living budgets
I cannot stress the importance of family living budgets enough, particularly for smaller agricultural businesses. A good set of personal living budgets with separate personal and business accounts is a must. If any line item, such as “other” or “miscellaneous” makes up more than 10% of the budget, drill down to determine the makeup of the expense. If you are a young farmer and rancher, sacrifice on the personal side within reason will often determine the rate of growth in the business.
Prudent management of financial liquidity needs to be a high priority. Attempt to maintain at least six months of living costs in cash or a near cash account. The average American has less than two weeks of living costs in savings. Increases in credit card debt balances are dangerous with higher interest rates that are increasing as the Federal Reserve raises interest rates.
Business and financial records
Sound, transparent business and financial records are a common denominator of successful businesses that can weather any economic cycle, regardless of the size of business. These records are invaluable in determining breakeven cost of production. If you operate a business with multiple enterprises, cash enterprise budgets can be your best friend, helping to allocate resources to profitable ventures or minimize losses.
Education and networking
Seeking educational opportunities and networks through business and personal contacts is highly recommended. This often provides venues for new ideas, confirmation of business production practices, and overall emotional support. Yes, one size doesn't fit all and there is still room for smaller types of businesses in agriculture.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.
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