Usually, you can see the potential for a wreck well before it happens - whether you are driving your car or managing your farm finances. On the farm, keep an eye out for these signs of a potential financial wreck:

The checkbook doesn’t stretch enough to pay the bills.
If you can’t pay your bills and ongoing expenses, you’ve got trouble. This includes living expenses as well as ongoing farm expenses. And while it seems obvious, it’s easy to ignore and think that things are going to get better on their own.

Carrying open accounts past 60 days.
Carrying open accounts with vendors can be a smart way to manage cash flow, but if you have to stretch your payables too far, that’s a sign that something’s wrong with your cash flow.  Carrying open accounts for too long can make you an undesirable customer to important input suppliers, setting you up for future problems.

Forgoing necessary inputs.
This seems like a no-brainer, but too many farmers skimp on feed, water, fertilizer, and other necessary inputs because they don’t have the cash to pay for them. As a result, crops and livestock don’t perform as well as they should, so income goes down, and then, next year, you’ve got even less money to pay for the necessary inputs. And the cycle repeats itself, getting a little worse each time.

Selling inventories.
To create short-term cash, you might be tempted to sell input inventories that you will have to replace later. The same thing is true when it comes to selling CSA shares in the fall to generate fall cash-flow - you’ll likely find yourself in the same situation next year unless you make some changes to your operation. This is almost always a losing proposition.

Accepting lower-than-market prices.
If you have to sell your products at lower-than-market prices to generate short-term cash, that’s a sign that things aren’t going well. You should be selling products to make money, not just to plug cash-flow holes.


Avoiding the Wreck

If you identify hazards early enough, you can take actions to avoid them. But it’s important to act fast.

Talk to your lender immediately.
No, really, don’t wait! Most borrowers hide financial problems from their lenders until it’s too late, but hiding problems from partners – whether they’re business partners or personal partners – is never a good idea. Remember, in most cases, the bank simply does not want your farm – they will work with you to figure out how to avoid having a bad loan on their books. And it’s easier to make adjustments when the crisis point is further away, rather than waiting until you’ve washed up on the rocks.

Change the amortization on your loans.
Cash flow isn’t everything, but it is an important thing. Changing the term of a loan can be a win-win for you and the bank, since they don’t end up with a bad loan on their books and you can reduce your monthly payments. And, of course, if things get better, you can always increase your payments back to their original level.

Consider a line of credit.
A short-term infusion of cash with a payback plan is usually a much better option than having a dozen vendors banging on your door and ringing your phone wondering when they are going to get paid.


Increase Success

This is perhaps the most important way to avoid a wreck!

In agriculture, profitability has three components: scale, costs, and utilization.

You need to produce enough product to cover your overhead expenses. It costs the same amount of money and time to have a website or write a newsletter whether you sell $1,000 worth of carrots a week or $50,000. And many variable costs have a certain baseline to them - trucking and handling charges are often based on the pallet or the truckload, regardless of how much product is on the pallet or in the truck. The number of pallets is a variable cost, but each pallet costs the same whether it's carrying $300 or $3,000 worth of product.

You need to drive down your cash expenses as much as possible. Don't skimp on the water and fertilizer that make your crops grow, but don't pay more for them than you have to - unless paying more for them provides value in another way. (I try to buy my tools locally, and pay more for them than I would at the big box store, because my local hardware store provides tons of help and advice with smaller purchases; I buy seeds from a high-quality vendor rather than getting the sweepings from the seed room floor from a cheaper source.)

You need to maximize utilization of your assets - all of your assets. If you are in the crop production business, every acre needs to be working for you, whether it's growing a cash crop or next year's fertility. If you have employees, you need to maximize their productivity. If you are selling meat, you need to maximize your use of the entire carcass, getting the best price on every part of the animal. In the delivery business, your trucks need to run as many days a week as possible, and as full as possible whenever they are running.

Most often, the changes that growers need to make in order to avoid a wreck come from improved management, rather than significant investments. Focus on investments that increase your ability to monitor the critical elements of your operation – most of these can be had at very little cost.


Don’t Wait for the Warning Signs

Of course, if everything in your operation is going great, you probably won’t have anything to worry about. But just like your car can seem to be running just fine right up until your tire blows out, farm financial troubles have a way of sneaking up on you. The best way to avoid a financial wreck is to look out far in advance. And the best way to do that is to institute a regular pattern of financial planning and monitoring.

• Weekly - Are there bills to pay? Do I have money in my bank account? What’s my credit card balance?
• Monthly - Are there any outstanding receivables? Does the bank think I have as much money as I think I have? How is my financial plan working out?
• Quarterly - What do I owe the government for payroll and other applicable taxes?
• Yearly - What do I owe the government now? How have my assets, liabilities, and equity changed in the last year? Did I make progress last year?

Every year, farm businesses should complete a balance sheet, income statement, and statement of cash flows, and evaluate the resulting financial ratios. These reports provide invaluable feedback on business progress from year to year, as well as predicting issues that are coming down the pike.

In addition, creating an ongoing financial history of your farm with these statements will not only demonstrate business growth, it will also demonstrate to a lender/investor that you take your business seriously; one of the primary complaints I have heard from lenders is that they are being asked to finance lifestyle choices under the guise of a business investment.

I like farming toys as much as the next farmer, and when you ask me, “What should my next investment be for my farm?” I’m as tempted as anybody to provide a listing of various configurations of metal and grease that, if properly applied, would be the perfect tool to address the situation.

But more often than not, I’d be wrong.

​More often than not, you’d be better off investing your time and energy into…

Improving the information you have about your farm - How much does it cost you to grow a pound of carrots? What are your fixed costs per acre of field production? How long does it take your crew - average, high, and low - to harvest a hundred bunches of kale? What’s your average per-acre (or per-square foot) yield on carrots? What’s your current ratio, and how does that compare to last year? How much did you spend to grow the vegetables that went into your CSA share?

Improving the information you have about your craft - What don’t you know about growing vegetables, feeding chickens, or raising cows? If you don’t know the basics of your craft, figure out where you can go to learn it - and keep in mind that this might not be your normal round of conferences! State and regional producer associations often have workshops about improving the fundamentals by people who are focused on fundamentals over philosophy. Take a class. Attend field days.

Creating systems - You already have ways that you get things done. What can you do to make them better? If there are places where things consistently go wrong, spend time digging in there and figuring out what you need to make things right - more often than not, it’s going to be a minor investment or a change in procedures.

Cleaning and clarifying workspaces - It’s such a small thing, but working with even slightly chaotic workspaces and storage areas takes a huge toll on productivity and worker perspective. Clean, bright work areas with obvious storage spaces for tools can ease workloads - and perceived workloads - tremendously. If you’ve ever had a worker spend two hours during a rare dry spell looking for the right piece of metal to make the transplanter work (that was me), or torn your hair out with frustration while a crew tried to find a harvest knife for the last worker, you’ve seen the incredible toll this can take on a farm’s bottom line.

Close open loops - Farms tend to be filled with almost-finished projects. Wrap them up and get rid of the extra parts, drop them off the to-do list, and get them out of your head. You’ll free up mental energy to focus on the work that makes a difference, and the physical space that keeps your workers (and you) from having to work around, under, and over that undone thing and the junk that’s hanging around to get it done.

What can you do with the time you would have spent researching new toys? What if you spent the money you were going to spend on something new on refining what you’ve got?

When is the right time to learn Taekwondo?

Before three guys jump you in a dark alley.

When is the right time to invest in the hardware and operational systems for an irrigation system?

Before the drought sets in.

When is the right time to establish boundaries with your children?

Before they get to high school.

When is the right time to forge a good working relationship with your employees?

Before pea and strawberry harvest really kicks in.

When is the right time to upgrade your food safety practices?

Before the government or your customers demand them (and certainly before an outbreak is traced back to your operation!).

When is the right time to talk to the bank about a line of credit?

When you have so much money that you don’t need to borrow any.

Of course, it tends to be when you’re standing there staring at three guys with scowls and big sticks that we think to ourselves, “I wish…”

So much of farming and farm life is about preparation and anticipation - it’s actually something we’re pretty good at, as farmers. When’s the right time to plant lettuce seeds? About ten weeks before you want to pick it. The trick is transferring this understanding to the other important areas of the farm: the business, the infrastructure, and the family life.

This is why I encourage my clients, right from day one, to:

• Keep detailed financial records and create the three annual financial reports - a balance sheet, an income statement, and a monthly statement of cash flows;
  
  
• Keep detailed production records, even if you aren’t certified organic;
  
  
• Schedule time with children and spouses, even when, if time was measured in nickels, you wouldn’t have two to rub together;
  
  
• Write a business plan, even if you aren’t taking it to the  bank or investors;
  
  
• Put time into training employees - especially supervisors! - even if you are bringing people on during the spring rush.
  
  
• Invest in an irrigation system - including water capacity - that can keep your farm running during a generational drought (and make irrigation pretty easy the rest of the time!).
  

(It’s also interesting to note that practice is not just about managing the big scary things - it also has a way of making your business, and your life, better as you go through it.)

What are you doing to anticipate and avert potential crises on your farm?

When a company buys your product to sell it to somebody else, they charge more to their customers than they pay you - that's how they cover their own expenses, and how they make money in return for their management expertise, risk, and investment.

The additional amount they charge can be expressed in two different ways: as a markup, or as a margin. A markup describes the additional percentage a reseller makes on the product, whereas a margin describes the percentage of the selling price that a reseller makes over and above the price they paid for it.

Understanding margins can help you estimate the price a store or wholesale distributor is paying for their product. Margins are also part of the language of the trade, so understanding margins puts you on a more professional footing when you talk with buyers.

Margins are useful because they describe the "gross profit margin" that a reseller actually gets. The margin has to cover all of the reseller’s expenses related to selling produce. For example, natural food stores in my area use a 42% margin as their basis for calculating retail produce prices. That 42% of their selling cost has to cover all of the store's direct expenses related to selling produce: the labor, bags, and display items, as well as the overhead costs of running the store: electricity, rent, bookkeeping, cash registers, and everything else.

In other words, if the store is charging $1.00 for a bunch of parsley, they’ve got $0.42 to cover all of the costs of selling that parsley, because they spent $0.58 to purchase it for sale in their store.

And, even though they use a 42% margin to calculate their prices, they expect to realize only a 35% margin on their produce sales overall, since they lose a certain amount to "shrink," due to spoilage, trimming, blemishes, customer handling, and so forth.

Different outlets have different cost structures, so they use different margins.

A wholesale distributor I've worked with uses a standard margin of 23%. They have lower expenses per unit sold than a retail store does, so they don't need to charge as high of a margin.

In fact, different product lines in a grocery store also have different cost structures, so the margin on canned goods is going to be different than it is on fresh produce, since canned goods don't have the same risk of spoilage and don't have the same labor requirements as fresh produce.

And that's where margins matter to market farmers. When you have higher selling costs, you need a higher margin. When you sell produce at farmers market, your costs - labor, stall fees, shrink - are higher than your cost to sell to a retail store. If you sell at a retail store and at a farmers market, your prices in each of those markets should reflect your costs in each of those markets. It costs the same amount of money to grow a bunch of kale for your farmers market stand as it does to grow a bunch of kale for a retail store, but it costs a lot more to sell that bunch of kale at a farmers market.

We'll continue this topic next week when we get into margin math, so stay tuned!

Order begets order. And, sadly, order takes energy to maintain, because without energy, things tend towards chaos.

And chaos, wherever it exists - in the field, in the shop, in the office - can be overwhelming. You can't get on top of everything all at once, so you don't get on top of anything. And because the chaos surrounds any small bit of order you do carve out... well, chaos is always nipping at order's edges, and small bits of order have more edges than large bits of order, and things tend to fall apart.

Unfortunately, chaos doesn't just exist without energy. It sucks energy out of the everything that has to interact with it. Weedy fields take more energy to harvest, more water to irrigate, and more inputs to fertilize. Chaotic shops make it hard to find tools when you need them, to maintain equipment so that it doesn't break down, and to fix stuff quickly when it breaks. Disorganized papers and messy desks make it hard to access needed information and track important commitments (like bills).

And they all create resistance. Clean, orderly spaces and systems invite us in and invite others to participate; messy spaces do just the opposite.

My recipe for dealing with chaos? Carve out some order. Get one space, however small, that feels good - that invites you to participate - and ignore the rest for the moment. Weedy fields? Get one bed cleaned up, really well, and commit to keeping it clean. Chaotic shop? Clear off one workbench. Throw the tools and hardware spread across it into a bucket - it's no worse then having them spread across the workbench. Disorganized office? Clear out one file drawer (put it all in a box, if you have to), buy some file folders, and start using them. Get a little success. Let it feel good. And work your way out from there.

Every winter, I look forward to farming conferences, where I get to see old friends, get new ideas, make new connections, and find inspiration for the coming year. I can’t imagine farming without that regular coming together of our smaller and extended communities.

And I’ve never been to a farming conference where I didn’t take away enough information to pay back the time and money I spent to get there. Even for the most expensive conferences, the investment pays back quickly, and the new knowledge becomes a permanent asset that provides returns year after year.

Unfortunately, it’s pretty easy to go a conference and let the knowledge slip right on by. Game-changing suggestions, enriching connections, and even bigger opportunities can easily  slip right by, especially when you have to return from an event and get right into the greenhouse or the field. By approaching a conference like an investment, you can make the most of the opportunities and information that come your way.

Just like anything having to do with farming, you dramatically increase your likelihood of great results by taking a little time to prepare.

Set Goals - Once you’ve decided to go to a conference, decide what questions you hope to get answered. I find that it’s easier to get concrete results if you identify specific questions, rather than just an area of interest: “How should I organize my packing shed to maximize workflow and ergonomics?” rather than, “I want to know more about packing shed organization.”

Plan Your Time - Take time to review the workshops, and plan your attendance. Often, organizers post the conference program, with expanded workshop descriptions and updated schedules, in the days or weeks before an event. Figure out where you are likely to get your questions answered, and what presenters you might want to connect with after their workshop is over.

The exhibit hall can provide a rich source of information, as well. Take time to review the exhibitor listings to decide who you want to visit, and what you hope to get out of each conversation.

Prepare Your Kit - Finally, pack your business cards, a pen, and some paper. When that one key idea or one life-changing contact comes along, you don’t want to be stuck without the tools you need to make the most of it.

The show isn’t all about work, but a few key actions can dramatically increase the value you get out of the event.

Engage the Material - You can increase your retention by actively engaging with each workshop you attend, rather than passively receiving information. Interpret key points for how they apply to your specific situation, rather than just writing them down - rather than just writing, “Point shovel points down to move more soil into the row,” add a note: “- would help with weedy broccoli!”

At the end of each talk, I like to take a moment to distill the entire talk down to one key point: “I can build organic matter on my farm by allowing cover crops to get through flowering,” or, “I really need to put together an income statement and balance sheet for my farm, effective January 1.”

Identify Actions -  I take prolific notes (it works for me, your mileage may vary), so it can be hard to identify the concrete actions that a speaker helped me realize I need to take. Even where I don’t write down a ton of information, I like to write a dash (-) to the left of each action item; when I scan my notes after the conference, I can quickly identify items to put on my task list, and show that I’ve done it by turning the - into a +.

Ask Questions - Please, ask questions! Speakers dread having a disengaged audience, and there are few things more unnerving than leaving the requested ten minutes for questions at the end of a talk and facing a silent audience. Remember the questions you wrote down in preparation? Now is the time to get them answered. Questions don’t have to be limited to the material just presented,

Make Connections - Be approachable when you aren’t in a session. Don’t immerse yourself in your phone or the conference materials. Likewise, approach people. Everybody’s there to make connections, and a room full of strangers can be a lonely place. Walk right up, introduce yourself, and ask about the other person.

Make the Most of Connections - Use your business cards liberally - handing out a card is a great invitation to get one from somebody else. Take a moment to write down a note on the back of the card so that you remember the context, or something that you would like to follow up with. The value of a conference connection isn’t always apparent, and I’ve benefitted from connections with connections over the years.

Process Connections in Real Time - at the end of each day, empty the business cards from your wallet, quickly sort them into three piles: the first for those that you absolutely plan to follow up with, the second for those that you want to put into your address book, and the third for, “who is this person?” Throw the third pile away, and keep the other two accessible for when you get home.

For the cards in the first group, write a note on the back about your intended action - “send info on L245 for sale,” or “ask for contact for greenhouse company.”

You’ll get the most from the conference if you follow up in real time, while the information and connections are still fresh. Reviewing your notes, information, and connections shortly after the event is a great way to increase retention and internalize important messages - and makes certain you don’t get caught up in the work that’s waiting when you get back before you have a chance to fully realize the value of being at the event. By changing the context and the format of the information, your brain uses different pathways to log the same information, improving your ability to remember and access it later.

Identify Actions - Shortly after you get home, pull out those notes. Review the actions you identified, decide if they are still meaningful, and put them into your task management system.

Follow Up with Connections - For the cards that you made notes on about following up, make that happen. Waiting until weeks after the conference allow you to slip from their minds, and any urgency they feel to respond to you can easily go by the wayside. Add everybody else to your address book, and consider reaching out to them on Facebook or through a quick email.

***

A good conference can be a great place to get inspired, chase some intellectual rabbit trails, and meet a ton of new people - but that’s not worth the price of admission all by itself. Those of us in the world of farming have chosen a life where knowledge and connections can turn into real actions to improve the planet, provide real food, and build community, as well as to provide a return to our businesses. A little bit of additional effort - before, during, and after the event - can provide a real boost to the outcomes a conference creates on your farm and in your life.

Unfortunately, most of the discussion around scaling up has to do with growing more acres, rather than doing better on the acres we’ve already got. Farming fewer acres leaves us room to grow our own fertility, and to increase our weed control through the judicious use of cover crops and careful tillage – and doing better at growing at your current scale is a prerequisite for increasing the number of acres under production.

Not to mention, increasing yields has amazing compounding effects, especially when it comes to harvest. Totes fill up faster when you have more spinach per square foot or more beans per plant. Plus, crops get back to the packing house and into the cooler more quickly – not only do you have more vegetables faster, you get a higher quality product, too.

Time and time again, I work with farmers who are failing to get top yields because they are missing two key elements of horticulture: weed control and irrigation.

Weed control pays dividends by doing more than just reducing competition. In fields with great weed control, crops like spinach and cilantro have fewer yellow cotyledons and dead leaves, resulting in faster harvests. And if you have plans to mechanize your harvest in any way, good weed control is an absolute must.

Likewise with water – fresh vegetables are made of H2O, and lots of it. The old rule of thumb of an inch of water a week is just that – a rule of thumb. Watering needs vary according to heat, humidity, and stage of growth. Optimum yields may require much more than an inch of water per week – some growers I know apply three or more inches of water during critical growth phases.

Before investing in anything else, take a moment to look into these two critical systems on your farm this fall. Too often, huge improvements can be made without resorting to huge investments – the real issue is the allocation of time and energy into these areas. Doing more with what you have will always be a surer avenue to success – financial, personal, and ecological – than scrambling to do more with more.

When customers complain, it can feel like a blow to the gut. You’ve put your heart and soul into growing and delivering your crops, and after that kind of effort, rejection really hurts.

But complaints result from one of two things: either you’ve got a problem with your product, or you’ve got a problem with your customers.

If customers complain about the quality of the product they get from you, you need to determine why they’ve gotten low quality produce from you. Did you pack rotten vegetables in their boxes? Do you lack the cooling capacity or procedures to get product cold fast, reducing respiration and increasing shelf life? Do you understand the commercial requirements for the product you are selling? Do you need to up your disease-control and insect-control game, or make changes to your soil management practices? Do you have what you need to maintain the cold chain – or at least a semblance of a cold chain – from the time your product leaves the farm to the time the customer takes control of it?

Or does the problem lie on their end? Did your farmers market customer leave their salad mix in a hot car for hours before it found its way to their refrigerator? Does your wholesale buyer adequately manage their stock rotation? At Rock Spring Farm, I offered a no-questions-asked refund or replacement the first time a customer complained about quality issues; but if customer-specific quality issues arose again, I turned into a detective to figure out the source of the problem.

If customers complain about prices, either you aren’t providing the value they expect, or you’ve got the wrong customers. Value – what a bundle of goods and services is worth to a customer – has little or no relationship to your particular cost of production; it’s a function of customer perception. You need customers who value local, organic, family-farmed vegetables (if that’s what you’re offering), and you need to provide them with a quantity and quality that matches what they expect. No small feat!

The price you need for your products is based on your cost of production and marketing. But the price you get for your product comes down to value.

And value is subjective. In my first year at Rock Spring Farm, I couldn’t get $1.00 per pound for our tomatoes at the Decorah, Iowa, farmers market – but I could sell exactly the same tomatoes for  $2.50 a pound in Rochester, Minnesota! The same tomato, sold in the same way, had much more value for my Rochester customers. Guess where I sold my tomatoes?

I also found that I could sell my salad mix at a higher price than my competitors in Rochester. Why? Because it looked better in the bag and lasted longer in the refrigerator than the other salad greens at the market. We consistently nailed the production on salad greens, and followed it up with great post-harvest handling. Same market, same crop, but with a significantly higher value.

If you aren’t getting the price you need for your products, you’ve got four choices:

1. Reduce your cost of production, marketing, and distribution, so that you can charge a lower price for your current value proposition;
2. Decrease your value proposition;
3. Increase your value proposition; or
4. Find new customers.

To make money farming, you absolutely must match your value proposition to your customers.

In marketing, it pays to match the range of products and services you offer to the breadth of the market you offer them to.

Think about a triangle, with the point at the top. The point represents a narrow range of products and services, while the base of the triangle represents a very broad market – that’s how a company like Grimmway (the giant carrot producer) sells carrots: they’ve got a very narrow product offering (carrots), and they market them to everybody possible.

If you broaden out the product and service offerings (the point of the triangle) while keeping the market (the base of the triangle) the same, you end up with a square – a broad range of products marketing to a very broad marketplace. An extreme example would be growing everything from radicchio to Burbank Russet baking potatoes, and selling the whole lot to everyone from urban foodies to Iowa corn growers.

When you market with a square, it’s just plain hard to stand out from the crowd. Because the definition of value and quality varies with different segments of the market, it’s almost impossible to provide a wide range of products that is perceived as high value to a broad marketplace – so you end up competing on the basis of price, instead.

And that’s not sustainable.

Now, invert that triangle so that you’ve got a very broad range of products and services, but you’re marketing to a very narrow market. Most farmers in the organic and local food movements are already doing this to some extent by marketing to customers with an elevated commitment to those values. But too many small growers continue to try to be everything to everybody who might be interested in the product categories they have to offer.

You need diversity, but too much diversity at both the top and the bottom of the triangle becomes too difficult to manage effectively. Think about how to narrow the bottom of that inverted triangle: instead of marketing CSA shares to an entire city, what about marketing to a select neighborhood, or to a select self-identified community? Instead of marketing through a CSA, wholesale, and farmers market, what about picking one segment, and doing it really well?