Farm Death Sentence
- Grant Wiese
- 1 day ago
- 4 min read
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Advice From Others
I am posting to help farmers learn. Hopefully, my experiences working with a few dozen farmers at all times gives me different perspectives on how to approach the same problems. Every farm varies, and every farm may need unique answers to the same question.
Therefore, the advice I give to one person may not be the correct advice or the best suggestion for most individuals.
I still share these ideas because:
A) This may be exactly the answer you need.
B) If it doesn’t apply to you, I want you to start brainstorming how you can take parts of the lesson and apply it to your situation. A.K.A think outside the box.
With this comes some hate. "How dare I make equipment suggestions to farmers when it is big corporate dealerships sticking it to them?!" "Why are you talking about goals and what to do when you make money when there is no money to make?!" "You have already told me this before, come up with a new message and stop repeating yourself!"
I don’t like getting these (who would) and rarely reply. My gut reaction is to say something sarcastic, but I hold my tongue. This week, Aaron Rodgers (quarterback of the Pittsburg Steelers) had some great advice (via a twitter video) for me that is worth sharing with all of you. It was something along the lines of, “I don’t pay attention to comments from those who I wouldn’t take advice from.”
This is a good reminder for all of us. There is A LOT of small town coffee shop talk about the farm. Opinions on reports, commodity prices, finances, everything. Stick to the experts and advisors you trust to get your information and make decisions, especially when there is a direct impact to your finances. Any other advice is just noise that probably wants you to fail at worst, or doesn’t have your best interest at heart at best.
Farm Death Sentence
I once met with a farmer to update their year end balance sheet. It was a tough year for them, and there were losses, but the losses were shallow. We decided on what adjustments to make for the upcoming year (minimal), hoping to improve cash flow, and went on our way.
Fast forward one year. The losses are massive and unexplainable based on the information they provided. The operation is very illiquid and out of options to continue farming unless they sell a farm. I had to ask them what they were going to do.
The solution: Sell the farm they bought on contract 2 years earlier.
The problem: They never told me about the farm they bought on contract, so it was never on their balance sheet.
This may seem like a no-brainer to you. Of course land bought should be on the balance sheet, but stick with me.
Nearly 50% of producers who have equipment on lease don’t make me aware of the lease contract payments they have to make every single year. Lease contracts NEED TO BE SHOWING ON YOUR BALANCE SHEET!
An 8R tractor lease can have payments BIGGER than a land payment. We could be missing a $500k lease contract ($60k in payments) and definitely are not making accurate financial decisions when your lender isn’t aware of this large of a payment.
Think: I make a financial plan for you to service $200k/yr in debt but you actually have $260k/yr to pay.
No. Leases are not a loan and you can surrender the asset at the end of the lease.
Yes. Leases have a contractual agreement to make an annual payment which can be enforced and are very similar to loan documents.
A piece of leased equipment NEEDS to be shown on your balance sheet both as an asset and a liability, very similar to a loan. I show the lease by taking the final residual payment + all rental contracts remaining for the life of the lease.
For example:
$250,000 residual + 5 annual payments of $62,000/yr (with first payment due at close)
Your balance sheet would show a total lease balance of $498,000 (4 x $62,000 contracts remaining=$248,000 + $250,000 residual= $498,000.
Of the $498,000 total balance, $62,000 is your next contract payment that needs to be shown as Current Portion Term Debt to be paid in the next year while $436,000 is shown as Non-Current Portion Term Debt. The $62,000 will negatively impact your working capital. This is the accurate way to show your position.
It is your obligation to provide accurate financials to your lender, and that includes leases or rent-to-own contracts. With inaccurate financials you get bad financial advice, like the land buying example I started with. I couldn’t give quality financial recommendations to that farmer because they didn’t disclose their actual position.
Bad recommendations on the wrong financials are a quick way to have massive losses during a time of tight margins. Massive losses can put businesses out of business. This one mistake could be your farm death sentence.
Need help with your operation's financials?
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Have a great week!
Grant
