BROADCASTER ARCHIVES

The Character Factor in Farm Business Management
By Amber Bennett

This article was first printed in the Jan/Feb 2010 issue of the Organic Broadcaster, published by the Midwest Organic and Sustainable Education Service.

Students participating in agricultural finance courses as well as new agricultural lenders quickly learn one of the basic concepts of lending called the ‘Five C’s of Credit’. The ‘Five C’s’ encourage a lender to review an applicant’s loan request based upon five core areas: character, capital, capacity, collateral, and conditions. Analyzing these areas helps ensure that a sound credit decision is made and that the loan will be repaid in a timely manner.
At one time a verbal promise and a handshake between lender and borrower were all that were needed to make and honor a loan commitment. Indeed, times have changed. As the agricultural industry has become more capital-intensive and diverse, the character factor now extends to several areas of farm business management. Let’s examine the first of the ‘Five C’s’- character, as it relates to successful farm business management.

1. Production- How does your unit rank in production levels as compared to similar units? Think of milk per cow, bushels or tons per acre, production level per unit. Are you using the right mix of inputs to achieve the optimum level of outputs for sustained profitability?


2. Financial- A record keeping system used solely for income tax preparation is not a proactive system for forward-thinking producers. A farm manager who uses a solid recordkeeping system and who frequently uses financial data to assess performance and to make prudent financial decisions is a key to success.


3. Marketing- Do you proactively seek out education and marketing tools to lock in profit margins? Do you develop a marketing plan each year and review and update it regularly throughout the year? Do you lock in a portion of your costs and well as your revenues for effective margin management? Many farm businesses use outside expertise to assist them with marketing decisions. These services typically pay for themselves many times over by increasing profit margins.


4. Risk Mitigation- One of the most common forms of risk protection is insurance. While it’s not the only way to reduce risk, it’s very important to review the features and benefits of applicable insurance programs to determine what best fits your business needs, including property and casualty insurance, crop insurance, life and disability insurance, liability insurance, and others. Each farm business is unique in composition due to enterprise type, business activities, individuals involved, and future plans. Where do your risks reside and what steps are you taking to manage these risks?


5. Legal- If your farm business resides in an entity such as an LLC, partnership, or a corporation, do you have legal counsel assisting you in filing and maintaining entity documents? Are there aspects of your business that require legal attention in the areas of human resources, environmental issues, government regulations, or business transition planning? Again, outside expertise is often necessary to adequately address these areas.


6. Operational- Who is the ‘key manager’ of your farm business? Who are the other important players who help manage all of the above-mentioned areas? Do you have the right people performing the right activities? Are all members and employees of the farm business aware of and committed to the same business objectives?


7. Communication- Honest and proactive communication is essential and can make or break a farm business. Communication channels need to be open and accessible between the farm manager, farm employees, and farm family members. Do you meet regularly to make important management decisions? Is there dysfunction due to personal or family matters? In addition, a farm manager’s ability to communicate with neighbors, community and industry members, and business professionals is also important. Agricultural lenders especially appreciate timely communication, including discussions about current issues or concerns, future plans, operational changes, financial progress, and credit needs.

While this list is not all inclusive, it addresses some important facets of the character factor. These areas are not only important to agricultural lenders; they are important to successful farm business management, regardless of the farm business’ size, scope, and type.

Amber Bennett is Vice President- Farm & Home at Badgerland Financial, serving farmers, rural homeowners, and rural communities in 33 counties of southern Wisconsin. Amber works with a team of lenders who specialize in serving the unique financial needs of family farms, including operations focused on organic products, sustainable practices, and local food. She grew up on a dairy and livestock farm in southwestern Wisconsin and has 18 years of agricultural lending experience. She received a Bachelor of Science degree in agricultural economics from U.W. Platteville and an MBA from U.W. Whitewater. For more information, check out www.badgerlandfinancial.com.