Thinking about buying a farm?
Fresh air, hard work, being your own boss…
But WAIT… here’s the thing.
Unless you run a farm already, chances are you have NO CLUE what you’re doing on the business side of things.
Between spreadsheets and cash flow management… farming isn’t easy.
And if you don’t take the BUSINESS aspect seriously…
…it can cost you everything you’ve worked for.
Let’s cover a few things first:
- Why farms fail on the business end
- Getting stuck in the equipment cycle
- Cash flow blunders every farm owner should avoid
- Creating a cushion for your farm business
Why Farms Fail On The Business End
Let’s look at some facts for a second.
According to USDA data, between 2017 and 2022, the United States lost 141,733 farms.
A 7% decrease over the past five years. Yikes!
What’s causing this loss of farms?
Unless you’ve been hiding under a rock… It’s not bad weather or subpar harvests. The unfortunate reality is that farmers are failing because of poor management.
New farm owners come in excited to run their own land, but lack the financial know-how to run a successful business.
Running a successful farm business means tracking inventory, expenses, revenue forecasts, and smart equipment purchasing. Most beginners come in ready to learn about the former and tune out on the latter.
They open up shop only to realize their ground tilling, sowing, and harvesting is actually LOSING money.
Getting Stuck In The Equipment Cycle
This right here is where it gets costly…
Farm equipment prices have increased drastically over the past few years.
A 287% increase in the price of a 200-horsepower tractor since 1990.
(O-M-G)
Way to hedge against inflation.
New farm owners fall into this trap all the time. They take out massive loans to purchase brand new equipment that “will last them awhile.”
But what they don’t realize is that spending tens of thousands of dollars on new equipment when used gear can work just as well.
The smarter seasoned farmers operate by browsing through used equipment listings.
Searching through New Holland equipment for sale allows local farmers to find reliable equipment at the DEALS of the past.
Machinery costs jumped 25% from $136 per acre in 2021 to $171 per acre in 2024.
If you don’t think a 25% increase in equipment costs can break your farm’s budget, you’re overlooking a lot of hidden expenses.
(Maintenance, storage, insurance…)
Every piece of equipment you purchase should be thoroughly thought through.
Cash Flow Blunders Every Farm Owner Should Avoid
What kills most new farms?
Cash flow.
Yeah… you read that right.
Think about how farming works:
You plant your crops or sell your product and wait for customers to pay you. Then you spend that money on your bills and payroll.
Voila.
Simple.
But here’s the kicker. Most farm expenses aren’t seasonal. You still have to pay taxes and equipment maintenance in the winter.
When you first start, you buy your seeds, fertilizer, diesel, etc., and wait. Then you watch MONTHS go by before you reap the rewards of your harvest.
If you’re not careful, this can cause you to:
- Overdraw on your line of credit
- Have minimal money for incidentals
- Stress you out
The solution? Don’t wait for the floods to come and wash your crops away.
Build a month-by-month cash flow forecast. That way, you know exactly how much money you’ll need to pay your bills AND have fun.
Here are a few more cash flow mistakes to avoid:
- Being overly optimistic with yield predictions
- Not budgeting for equipment repairs
- Forgetting about insurance, taxes, and loan payments
- Not budgeting for hired labor
These things may seem small and insignificant when you’re starting. But when you add them together? That’s all it takes to bankrupt your farm.
Creating A Cushion For Your Farm Business
Here’s a little something that most new farms fail to consider…
How much does it REALLY cost to run your farm?
Every little thing.
From the rise in land cost to insurance premiums and labor…
It all adds up.
That’s why it’s critical you keep RECORDS of your spending.
Consider investing in a great accounting software program.
Another option is finding a farm-focused accountant who understands your unique business cycles.
Knowing your exact costs will help when you go to apply for loans or utilize government farming programs.
Most lenders want to see your financial history before authorizing your operating loan.
Build Yourself A Safety Net
Here’s the thing that all the old pros know…
Bad years happen.
Like REALLY bad years.
What happens if…
- The market crashes
- Crazy weather destroys half your crops
- Your tractor breaks down
Those are just a few scenarios that could completely wipe you out if you don’t have money saved.
Enter working capital.
Working capital is the cash your farm operation has available to meet short-term debts and expenses.
Typically, farmers and ranchers keep their working capital between 25-35% of their annual gross income.
You build that safety net by foregoing some profits during your good years.
Here are a few ideas:
- Put away a set % of every harvest check
- Have separate accounts for expenses vs. your cushion
- Review your equipment needs annually
- Look into crop insurance and government relief programs
Your farm budget shouldn’t JUST break down costs. It should plan for the worst.
Ask For Help
First-time farm owners don’t have to go at this alone.
If you’re buying a farm through a land-grant university, they offer free business services through its extension offices.
The USDA also has programs specifically geared towards beginner farmers.
Please PLEASE take them up on their offer.
Another underrated tip is to join local farm associations.
Don’t Go At It Alone
There’s a reason why most farmers keep to themselves.
But if you want to learn from those who’ve been where you are…
Do it.
You’ll find most farmers are more than willing to share their knowledge and help you grow your business.
Farming is tough, and the business side of it is no walk in the park either. But there are resources out there to help you learn what you need to before you’re in over your head.
Wrap-Up
Farmers. You’re a special breed.
Not everyone can say they get to work outside all day.
But with that being said, running a farm isn’t all sunshine and rainbows.
If you don’t take your farm business seriously and plan for the future…
You’re doomed to repeat the statistics mentioned above.
Here’s your cheat sheet on what to do:
- Monitor your expenses/income
- Search for used equipment before buying new
- Create cash flow forecasts
- Save for a rainy day
- Reach out for help!
