Tight Margins Mean Examining Every Expense

Tight Margins Mean Examining Every Expense

A working cash flow is a tool that can help you manage your costs throughout the year.

Tina Barrett doesn't believe producers will ever see production costs for irrigated corn slide back to the levels of 2005--about $400 per acre. In 2012, production costs for irrigated corn soared to an average of $732.52 per acre per operation for farmers enrolled in Nebraska Farm Business, Inc.

However, if income goes back to 2005 levels--$373.24—and expenses stay at the 2012 levels, the average loss becomes $359.28 per acre, says Barrett, director of NFBI. (The annual income and expenses cited here are averages from farms in the NFBI.)

"Will lending institutions be willing or able to stick with operations that are losing that kind of money for multiple years?" she asks.  

Tight Margins Mean Examining Every Expense

Barrett says that it's going to be important to think about the necessity of each expense, both farm and non-farm. "It may be only $100, but a few of those $100 expenses may be the different between covering your costs and creating a loss," she says.

In times of tightening margins, Barrett says it's important to begin to manage all costs instead of letting costs manage you. The end of the year is too late to starting doing this.

She recommends starting now to consider the effects that each cost will have on your net income. Some costs may fall into that "have to do it anyway" column. Other costs may fall into the "I want it" category."

It's okay to consider a capital purchase, like a tractor, to make your job easier. You should ask yourself, however, if buying used vs. new makes sense under the circumstances.

Average family living expenses have skyrocketed, too, from 2005. The average family living costs rose from $45,469 in 2005 to $100,040 in 2012. And that costs don't include the nearly $35,000 increase in annual income taxes paid since 2005.

A working cash flow is a tool that can help you manage your costs throughout the year. "I'm not talking about a cash flow that you threw together for your lender and then forgot," Barrett cautions. "Any cash flow is only as good as the as the assumptions that day and it doesn't take long for those assumptions to be proven wrong," she says. "A working cash flow should be updated to include actual costs as they become available and updated projections as the year goes on. This should also carry projected cost of production estimates which reflect any contracts you've made to get a breakeven cost for future sales."

She says that computer programs can help you build a spreadsheet to manage your cash flow, but if you feel you don't have the knowledge or the discipline to make yourself do it, consider hiring a consultant. Most producers don't think anything about having a crop scout or marketing advisor. A financial consultant can be just as important if it's not your area of expertise.

"By managing costs ahead of time, you can make educated decisions about whether a cost is really a good financial decision for your operation before it's too late," Barrett says. 

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