For months, economists and the media have warned us that efforts to curb inflation could lead to a recession. According to the traditional definition of a recession — two consecutive quarters of a slowing economy — we have not achieved this dubious milestone.
Yet, the reality is the U.S. economy will face a recession again, even if one doesn’t manifest in 2023. Americans have endured recession approximately every five years since World War II, with the average recession lasting around 11 months (the Great Recession of 2008 lasted about 18 months). In other words, recessions are an inevitable feature of the U.S. economy, and we will all endure multiple cycles of contraction within our lifetimes.
Although the agriculture sector tends to be more resilient during recessions due to the inherent need for ag commodities, many factors can affect performance. However, if a recession occurs, it does not need to be a dealbreaker for your ag business. With proper preparation, you can ride out economic downturns much more comfortably than if you had not made allowances.
Step 1: Understand Your Current Financial Picture
Understanding your current business landscape is essential to making informed decisions about the future. These steps will help you make your next moves.
Cash flow. How much cash do you have on hand, and how much is projected to come in within the next six months, year, and beyond? In ag, it’s especially important to understand the timing of your cash inflows and outflows. For example, some larger handlers in the walnut and almond industries may plan on delaying payments. Your business might experience longer or more frequent stretches between cash infusions and can prepare for those delays accordingly.
Take full advantage of your accounting tools. Now is the time to make your current accounting software, like QuickBooks, work for you. There are a number of useful apps and add-on programs available, but we advise clients to work with what they already have before incorporating new accounting tools. Consult with a GC advisor to determine which data points will help you make decisions and meet your goals; then, organize your software to reflect the information.
For example, you can aggregate data by crop type, crop location, and crop year to pull a customized snapshot for comparison and projection purposes. You can organize your profit and loss reports to deliver cleaner data by separating production, general and administrative expenses to have better visibility of your expenses and where you can cut back. You can also organize your profit and loss reports by fixed and variable costs to help determine what costs you will have to cover, no matter your income or production level. Organizing your profit and loss reports this way can help you calculate a break-even income amount that is needed to cover your expenses.
Step 2: Project Where You Need To Be, Then Budget
Once the year-over-year information is aggregated and organized, you can begin to make projections to populate your budget. You may not have the full financial picture of your business. By reporting and budgeting in more detail — such as by crop, location, and production type —you may discover you are losing money in an area you thought was profitable.
Build your budget. Once you understand important factors, such as your fixed and variable costs, and costs per acre for farming, including labor costs, you can begin making reasonable budget projections.
Many of our clients rely on QuickBooks to track their budgets. QuickBooks Online now has a spreadsheet sync feature to update any of your external spreadsheets with QuickBooks data (feel free to reach out if you want to explore using this feature). Once you have a budget in place, we highly recommend regularly updating QuickBooks so you have an accurate picture of how your budget is holding up against expectations at any given moment.
Create safeguards. Our ag clients typically have their ears to the ground and hear about price fluctuations or delayed payments before they happen. We advise clients to build in budget safeguards. How will the budget change if almond payments arrive in February or March rather than January? What if fewer workers are available and the cost of labor goes up? Projecting those variables and having a plan to deal with them can save a lot of headaches down the line.
Step 3: Make Your Business Competitive For Credit
Banks tighten their belts when the economy worsens, similar to most businesses. Ag businesses must make themselves competitive enough to qualify for loans that can sustain them through rough patches. Keeping excellent records and sticking to a solid budget shows your lender you are on top of your business, but there are a few other steps you can take to increase your marketability to lenders.
Understand your current debt covenants. If you already have a lending relationship with a bank, be sure to check your debt covenants to see if you are in danger of any violations. A lender will be more likely to increase funds if you are in good standing.
Know your EBITDA. Thanks to favorable depreciation rules, many ag businesses aren’t especially profitable for tax purposes. Instead, your banker will want to know your earnings before interest, taxes, depreciation, and amortization (EBITDA). We can help you calculate your EBITDA if you want to better understand the numbers your bankers are concerned with.
Highlight any competitive advantages. Be sure to point out any competitive advantages which will make your operation stand out among the throng of ag businesses clamoring for loans. Have you shown a track record of successfully navigating downturns? Or, have you installed a new drip system that cuts down on water costs or purchased equipment that reduces the need for more labor? Banks will be interested.
Step 4: Plan For The Worst, Hope For The Best
Making decisions, even during tough times, becomes much easier when you accurately understand where your business is and where it is expected to go. Clients are often surprised by the resultant decisions that come after gathering some of this information; some realize their direct-to-consumer efforts aren’t penciling out or that it might be time to switch their concentration of crops.
Get In Touch
Investing in software or methods of revamping your reporting and budgeting process now can help you make intelligent decisions during leaner periods. Since 1973, Grimbleby Coleman has weathered recession cycles and helped both small family ranches and large ag operations survive and thrive. Schedule an appointment to find out how we can help your business.