Tyler Sweet
After several years of elevated commodity prices and farm profits, big concerns have been raised for 2014 and 2015 when commodity prices are expected to fall. The 2014 outlook is particularly gloomy with a 25 percent drop in farm income predicted by the USDA. Declines in income forecasts often raise concerns of industry debt levels. Although current debt to asset ratios appear reasonable, lower farm profits could deteriorate balance sheets and put a significant amount of pressure on those in the farm industry.
As the farm industry transitions into a period of lower potential profits, it is extremely important to keep an eye on debt levels and to create a good budget. A budget with debt level forecasts can be very helpful in keeping a healthy balance sheet, even as profits decline. It can often be difficult to accurately budget for some line items in a farm setting. Despite this, even a simple budget can be helpful in planning for capital expenditures, compensation, and other discretionary items. These discretionary type items can significantly impact debt levels and lead to financial strains if not kept under control. This is why it is so vital to plan and budget as we transition into the next phase of this economic cycle as commodity volatility requires effective budgeting.
Farm budgets can be extremely elaborate, breaking down receipts and disbursements by crop and acreage. They can also be very basic and simple. Whatever the form, it should be useful and understandable. It should also be reviewed periodically and compared to actual numbers. If you would like to discuss your current budget or need assistance creating a budget, please contact us at Nichols Accounting.
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