Farm Financing: Measuring Profitability and Success

Impacts of Results/Outcomes

Performance Target The Performance Target for this project is that 30 farmers without access to conventional credit will successfully complete enterprise plans; many of those 30 will complete applications for loans totaling an estimated $300,000 ($3,000 to $35,000 each). The farmers will use the enterprise plans and financing, if applicable, for projects to increase profitability and economic viability. An estimated two-thirds of farms will increase net farm income by 10% over two years; in dollar amounts, such an increase would represent approximately $150,000 in enhanced revenue by the end of the project (an average per-farm increase of $7,500 X 20 farms = $150,000). All participating farms will provide evidence through unaudited financial statements, tax forms, and follow-up interviews. A total of 23 (versus a projected 30) farmers completed enterprise planning and submitted sufficient information to be included in the analysis; 21 completed all requirements. Two submitted all but one document and are included in the results. Seven farmers completed materials for the first year and all faced serious difficulties or ceased operation. An additional three farms did not complete the registration process. This is a shortfall of 24% from the projected 30 farmers.   The farms received financing averaging $28,000, for a total of $254,000. This is 85% of the total expected loaned amount, $300,000, and in part reflects the decreased emphasis on financing, made after the performance target was approved.   Twelve (12) farms, or 55%, saw an increase in net farm income of more than 10%, for an average increase of 142%, or $21,754. The average increase in net income across all farms was 52%, for a total of $155,000 (average per-farm increase of $7,056 x 22 farms). The change in net farm income ranged from -260% to 416%. The net negative changes account for the smaller total when all reporting farms are included (See Attachment A).  

Observations: Overall   Reflecting on the entire data set, the following questions were asked of the program coordinators and farm advisors and our findings follow. This synthesis informed the choice of case studies as well as the curriculum for Making It Happen.  

What did we learn about how enterprise planning and financing can positively impact operations?  

CONFIDENCE: Improved management skills. Increased confidence relative to understanding financials, and how product/production relates to financials. Use of planning tools by more farms. Improved understanding of cash, financing, and how loans work.  

OUTCOMES: Increases in net income, financing, and heightened awareness of how business advising and consulting can help.  

IMPROVED SKILLS: Management tools for future use. Understanding of financial position. Use of financial tools, and indicators such as employment costs related to gross income. Creation of positive work habits.  

ADVISING: Receipt of feedback, confirmation of direction or decisions, provision of counterpoints to thinking, and opportunity to vent. Valued relationship with advisor.  

What three things are most important to a farm’s success in the program, i.e., meeting their goals and being on the right track?  

The cyclical relationship among setting clear goals (intention), reviewing goals, and making adjustments.  

INTENTION    

• Setting of clear and realistic goals
• Achievement of balance between farm goals and life goals
• Thoughtfulness about scale of production and ability to obtain goals
• Use of tools to avoid burnout

    REVIEW    

• Review of projections to ensure they are on track
• Effective bookkeeping to review projections and compare to actuals
• Agreement on direction of business at yearly review
• Use of financial information as planning tool
• Understanding of farm’s financial position and its implications
• Cash flow budgeting
• Commitment to meetings, record keeping, and organization

    ADJUSTMENT    

• Identification of profitable products and services
• Willingness to cut out poorly performing enterprises
• Adherence to the plan (while being smart and strategic about it)
• Ability to adjust expectations
• Seeking ways to improve efficiencies
• Making capital improvements
• Willingness to make changes and mistakes

What challenges occurred most often?  

LABOR    

• Addition of employees (i.e. needing labor but unable to afford it)
• Management: keeping employees, hiring employees, having enough labor

UNEXPECTED (RISK MANAGEMENT)    

• Preparation for/management of the unexpected
• Injury
• Family matters
• Weather
• Recession

 MARKETS (as a subset of Risk Management)    

• Market access
• External market changes, and adaptation re: need to transition to different/new markets
• Ability to “read” a market, i.e., to understand what customers want (vs. what they say they want)
• Time management
• Maintenance of market relations

 PLANNING CYCLE (ADJUSTMENTS)    

• Need to change plans and goals
• Disagreement about business direction
• Prioritizing time for strategic planning and decision making
• Committing time during season for financial management and review
• Continuing financial losses

 SKILLS (CAPACITY)    

• Liking planning
• Failure to make changes that planning indicates
• Ability to learn
• Career fit
• Maintenance of cash flow
• Comfort with line of credit
• General time management
• Administrative time management

How are the positive impacts of financing and enterprise planning different?  

ENTERPRISE PLANNING    

• Is a tool for understanding financial position and planning
• Informs future needs
• Allows internal analysis of production questions to get answers
• Gives confidence that farmer can afford financing
• Helps farmer look back, learn, and plan forward
• Helps farmer decide how to grow
• Enables understanding of profitability of different enterprises

 FINANCING    

• When appropriate and well-timed, can help meet goals — at all, or quicker
• Can have positive impact, but needs to be based on plan and principles within business
• Addresses needs for growth when it supports increased production
• Can achieve other goals, such as securing a line of credit (which does not expand business but helps with management), or obtaining a land loan (which increases security and builds net worth)
• Helps move to next level of efficiency by adding capacity to reach profitability
• Puts resource in farmer’s hand in the near term, potentially jump-starting action on plans that may have been postponed

Observations: Pre- and Post Survey  

The farmers’ self-assessments of their business management skills improved over the two years they worked with their respective program coordinators, as shown in the chart for Question 11 “Pre- and post-comparison of self assessed business management skills” on page 32 of Compilation of Pre- and Post-Survey Data, December (Attachment I). The number of farms in the “strong” categories increased between the beginning and end of the project, while the number of farms in the “weak” categories decreased. This change was due to changes in farms’ self-assessment from weak to moderate or moderate to strong; not due to (self) reassessments from weak to strong, or to those who self-assessed as moderate at both the beginning and end of the project.  

Farms with net changes in farm income of 10% or more were more likely, by self-assessment on Question 11 (Q11), to experience a positive change in their skill level and, at the end of the project, identify as having strong business management skills. However, it is important not to overstate this finding because of the number of factors outside of the farms’ control, such as weather or family dynamics.  

The importance of business management skills, or confidence in financial management, was reinforced by the project coordinators (see above). Farmers who were able to use their program coordinators as advisors rather than as instructors tended to see results more quickly. An example of the latter is a farmer who, after receiving help in setting up a financial tracking system, and after sufficient records are recorded, begins to use the financial information to make informed decisions about the farm. This stands in contrast to the former, e.g., a farmer who already had historical financial information to discuss and begin analyzing with an advisor.  

A related finding was that at the beginning of the project, 45% and 36% of participants identified planning and managing, respectively, as how access to business management education and advisement will enhance business viability (Attachment I: Q10, pp. 24-26). At the end, the two most mentioned enhancements from business management and advisement were records/budgets and managing, at 41% and 32%. One interpretation of this change points to a better understanding, developed over the two-years of the project, of how record keeping and tracking finances is important for managing an operation and is distinct from planning.  

A common finding from surveys of young and beginning farmers is that access to land and capital are frequently the highest barriers to getting started and becoming established. Participating MPS farmers had access to land so had overcome that barrier. In the pre-survey, 73% of participants identified access to money or capital as a factor limiting or constraining their ability to develop their business (Attachment I, Q9, pp. 19-23). However, in the post-survey, this dropped to the third most-mentioned barrier at 23%, behind labor and infrastructure. This change may indicate increased confidence in financial management or receipt of capital, and most likely some combination of these two factors along with a more nuanced understanding of the role of capital in relation to other factors constraining a farm business.  

100% of participants’ defined success as including more money, profits, or owner pay (see Attachment I, Q7 on p. 9). In addition to the previously noted changes in net income, 59% experienced a change in payment to partners or owners. Of the 16 that provided detailed answers, there was a 91% increase in payment for an average of almost $15,000 (see Attachment I, Q32-33, p. 58).  

Information derived from this work, especially when combined with the Making It Happen curriculum (see Publications & Outreach), would be appropriate for secondary audiences, including business assistance advisors, researchers, and lenders or investors interested in working with farmers. It could help business advisors understand the importance of their role and be used for training purposes for those looking to strengthen their financial management skills. It would, we hope, inspire other researchers to do related and follow-on work. Portions of the MPS work could further help lenders and investors understand the sector and the range of tools important to farm success.

Farmer Adoption

Although most participants found the project helpful, three did not, for various reasons, including disagreement with the project coordinator about the direction of a business and receiving less support than expected. The accompanying four case studies and the comparison of the pre- and post-survey results (Attachment I, especially responses to Q10, Q15, Q41-43 on pp. 24-29, 36-41 and pp. 64-66) are the best examples, in their own words, of what farmers adopted and their responses to their participation. A few representative quotes follow. “We worked full-time all winter making plans [and] budgets, procuring equipment, etc. (while also growing and selling winter produce) — this preparation set us up well for the first season.” Access to business management education and advisement has “given me better targets to shoot for, and a better understanding of financial planning tools.” “We did take on a loan in the past year [to put up a heated propagation greenhouse]. We felt confident doing this because of our increased confidence in our financial standing.” “It’s been a huge relief to be able to ask questions and feel like I am on the right track.”