Navigate the risks of rapid farm expansion

Stunted growth can be problematic for a farm operation, but so are the challenges that can come with expansion that happens too fast, too soon.

Consolidation of farms and major leaps forward in scale and investment can be exciting. But rapid growth can leave a business exposed to risks:

You really need to calculate your ratios before and after expansion.

Financing: “You need a strong business plan,” says BDO Canada’s Mark Verwey. “You really need to calculate your ratios before and after expansion, especially your debt service ratio.”

That’s a ratio that financial institutions will focus on to identify if a business has sufficient means to meet its debt obligations. It’s calculated by dividing net operating income by debt to service, which includes the principal and interest. Financial institutions, he says, typically seek a ratio of 1.25 or more.

Cash flow: Expansion brings new principal payments and interest, and Verwey urges you to consider whether you’ll be able to cover those additional requirements. He suggests running scenarios before taking on new debt obligations. Include good years, average ones and worst-case scenarios. “Profitability isn’t guaranteed in farming, but what is guaranteed is your new obligations as you take on new debt,” he says.

Ability to accurately strategize for the near and long term: Verwey stresses that this becomes more important as a farm grows because as its margins shrink, so does room for error.

Maintaining focus on the bottom line: The accuracy of your income statement and balance sheet becomes more important with growth, as expansion forces margins to tighten. If input costs rise or commodity prices fall, mistakes become much more magnified, Verwey explains.

Shifting roles and responsibilities: As the farm grows, operators need to be more involved in the financial, human resources (HR) and even marketing sides of the business, Verwey says. “All of these become paramount to success. So, you have to move away from the day-to-day activities to make sure you’re spending the right amount of time on running your business.”

Human resources needs: A larger operation will require a larger workforce, Verwey says. This may require operators to establish or expand their HR capacity to handle the increased load of hiring and managing the influx of employees.

Potential red flags

Verwey has identified a few red flags that may indicate your business has grown too quickly:

• Deterioration of financial results

• Not enjoying farming like you used to

• Feeling stressed

If any of these apply to you, review the above tips and identify where your operation might benefit from making adjustments.

From an AgriSuccess article by Richard Kamchen.