Agricultural Trends

July 7, 2023

Steps for Managing Risk and Opportunities

By: Dr. David M. Kohl

Wow! The calendar year is quickly moving forward and we have reached the “halftime” point in 2023. What are some of the steps or quick reminders that need to be focused on in the second half of the year?

Monitor financials 

Developing and monitoring financials is not a once-per-year tax strategy-driven process. A quarterly cash flow that is monitored using variance analysis comparing projected results versus actual results, is a good tool for volatile economic times. The impact of doubling interest rates on variable interest loan structures and inflated costs need to be incorporated into your analysis and the decision-making process. 

Evaluate capital expenditures 

Give considerable thought to investment decisions and capital purchases. If you need a tractor or other equipment, first determine if it is available. Then, consider whether it is a need or a want. Next, what are the repair and upkeep costs? Do not forget the timing and impact on planting, harvest and quality of output. 

Remember one piece of wisdom: assets purchased in good times are often paid for in less than stellar economic times. 

Build and protect working capital 

The tightening of credit in this economic cycle will demand a working capital strategy. The aforementioned capital expenditure needs versus wants will play a critical role. Working capital is the first line of defense in a downturn and is the shock absorber for volatility. Ensure you have enough financial liquidity to cover your debt repayment, living expenses, and economic depreciation and take advantage of cash discounts and opportunities that require quick access to cash for an acquisition. 

Lock in profits and costs 

One must know the cost of production and break-even point to lock in profits and costs. Mitigating risk through insurance, marketing and risk management programs and quickly assessing how changing economic dynamics impact the bottom line will be critical.  

Track true family living costs 

Each family supported by the business needs to have a separate family living budget. Next, do not comingle or lump family living costs into farm expenses. According to the farm financial record summaries in various states, approximately 30% of family living costs are comingled with business expenses, skewing the true picture of living costs. A point of wisdom to keep in mind is that family living costs are largely controllable. 

Finally, take a deep breath, step back, and find ways to improve management skills across the spectrum including production, working capital, risk, human resources, financial and business management. Find times that work for renewal and a focus on management. 

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 10 million miles throughout his professional career and has conducted more than 7,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published five books and over 2,500 articles on financial and business-related topics in journals, extension and other popular publications.