July 10, 2020 |Budgeting and Saving
Small Changes Can Yield Big Savings
In farming and ranching, the future is never certain. You can’t control consumer demand, international trade, commodity prices, weather or diseases. What you can do, however, is try to control your operating costs and improve profitability.
Here are some common ways to trim expenses when you’re planning for a lean year.
Pay off debt.
Reduce your debt and defer spending to avoid a cash-flow problem. If you update your cash-flow statements and balance sheet monthly, you’ll be able to see when you need to cut expenses or take other steps to improve your financial situation. Cash flow should pay for short-term operating expenses, and profit should pay for longer-term capital purchases.
Evaluate operating practices.
Assess your operating practices and be flexible; what works in a normal year may not work every year. In an extremely dry year, for instance, it might make financial sense to allocate most of your irrigation water to the crops with the greatest yield potential. Another example – change your crop rotation by switching a high-input crop or a crop with lower production costs. However, this is not the time make radical changes that you’re not familiar with.
Invest in improvements.
When you’re trying to minimize spending, it might seem contradictory to invest in improvements. But sometimes you need to spend money in order to reduce expenses or generate more income. For example, a dairy that buys most of its feed might be able cut feed costs by buying or renting land to grow its own.
Reduce rent costs.
If rent is eating too much of your working capital, try negotiating lower cash rent in tough years. Alternatively, ask your landlord for a flexible lease that allows the rent to rise or fall with commodity prices. Another strategy is to offer to pay part of the rent with a fixed share of yields.
Buy used equipment or repair the old.
In tough times, repairing or buying used is your best bet. However, you need to weigh the savings against time lost if you have a breakdown. Repairing a machine now may allow you to delay replacing it until a future date when it could cost less. If you purchase used equipment, research prices online so you’re prepared to negotiate with local dealers. You may find better prices by shopping further from home, although you won’t get the same level of local repair service. Before you trade, consider reliability, capacity-to-acreage ratio, obsolescence and tax issues. If you upgrade, make sure you can justify the cost with higher yields, increased efficiency or less labor.
Increase on-farm storage capacity.
On-farm storage offers planting and marketing flexibility. With your own storage facilities, you can retain your crop until the price increases. A few years ago, when the cotton market was down and corn prices were up, farmers who had their own storage solutions were able to divert acres from cotton to corn.
Spend wisely on inputs.
Look for ways to shave dollars off farm input costs.
When purchasing seed, order early for potential savings. If you buy from fewer dealers, ask for a quantity discount, especially if you bundle your seed and chemical purchases together. Consider a less expensive brand than usual, but only if you’ve tested it before and it performed well.
Research ways to boost your fertilizer efficiency. Evaluate guarantees when purchasing chemicals and be wary of promotions. Keep in mind that the more expensive herbicides aren’t always the most effective. It might be worthwhile researching generic chemical alternatives. Additionally, weigh the pros and cons of doing your own spraying versus hiring a custom applicator.
Frequently Asked Questions
Farmers may deduct expenses that are “ordinary and necessary” for the continued operation of the business. Some deductions may be taken immediately, while others are spread out over several years. Deductible expenses unique to farmers often include the cost of seeds, fertilizer, lime, and trees or vines. Farmers may also qualify for additional tax deductions related to soil and water conservation improvements.