Problems You Want To Have in Your Farm or Ranch Business
Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University
For this edition, let's “do a 180” and discuss some of the problems you want to have as a business. In other words, what are some of the good problems that show you are doing something correctly.
You pay a lot of taxes
An experienced lender once bestowed the following wisdom at a producer meeting, “Very few businesses go broke paying income taxes.” Being faced with higher taxes is a great problem to have. With the COVID-19 pandemic, we will see an economic divide in bottom line results for 2020. Some producers will have solid production combined with timely marketing and government support payments that have amounted to considerable taxable income.
Retain a good tax advisor and find the sweet spot of paying taxes and taking deductions. Do not forget you can max out your retirement contributions as a form of diversifying your investments. Yes, you can also reduce taxable income by purchasing capital assets such as machinery, equipment and facilities. Prior to making a decision, take some time to examine your priorities and balance your needs with wants.
Your lender wants to loan you money
This is a good problem to have. If you have strong profits and cash flow, your lender may raise your borrowing capacity. However, be careful not to max out your credit limit in case of adversity. Next, build your working capital war chest for adversity and opportunities. Maintain working capital to expenses above 25% or a strong current ratio of 2:1. If you are profitable, do not expand too fast and outgrow your business acumen or your market capacity.
Everyone wants to work for you
Do you have a reputation as a great place to work? As farms and ranches consolidate, this will definitely be a desirable attribute. The question then becomes, do you have the human resource system in place to attract and retain the right people, including family members? One advantage that a farm business has is that you have people who can think and problem solve, rather than get stuck on one task or be in the proverbial mental silo. The key is to develop a good working culture to unleash the creativity and passion of your employees. A few mistakes will be made along the way, but in the long-run the overall income will be beneficial.
In future articles, we will continue our discussions of good problems to have as a business.
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