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Had a good year? Here are 3 ways to make the most of it

Posted on: April 19, 2012 | Author: ATB Business & Agriculture

Thanks to good weather, high prices, and lots of hard work, you've earned a little extra over the last year. But what should you do with it? It's a good problem to have, and an important question to ask.

"Last year had its own set of challenges with unique weather and a harvest that seemed to go on and on, but for most farm businesses the bottom line will be very good," says Greg Malyk, ATB's Agri-Industry Manager for Northern Alberta. "Farmers typically tighten the belt when times are tough, but when they have a good year, they are typically very good at getting their business current and then re-investing in the business by upgrading equipment or acquiring that piece of land they have been looking at for years."

To make the most of your revenues, consider these three financial options:

  1. Pay down debt.

    In 2010, Statistics Canada reported farm debt outstanding rose to $66.4 billion in Canada, up 6.1% from the previous year. That means that for every $100 of farm cash income, producers had a debt load of $420. By lowering your debt levels now, you will be able to borrow more when big projects (or hard times) occur down the line.

    When it comes to cutting your debt, a simple rule is to tackle the high-interest stuff first, including credit cards, trade accounts, and short-term loan facilities. If your term loan has pre-payment penalties, compare those costs with the savings you'd make in interest.

    It's obviously best to be debt-free, but at some point, it may be smart to switch from paying down debt to investing. A good guideline is to put your money towards whatever's higher: debt interest rate or investment rate of return.

    Read more on this topic
  2. Build up working capital.

    If you're benefiting from the current low rates and are comfortable with your debt situation, you should consider using your extra funds to build up working capital. By parking your money in a GIC or T-Bill account, you can earn interest and grow those savings in a secure place.

    If you're not sure when you'll need to access these funds, make sure you deposit them in an accessible account. A short-term GIC is one option; a cashable GIC is another. With a cashable GIC, you can withdraw your money at any time—but the longer you keep it in, the more interest you earn.

    Learn more about your short-term investment options.

    Another way to build working capital is to pay down your short-term credit (outlined in point 1) and pre-buy inputs for the next crop year. The pre-buy discount is often more than the interest you would earn in a short-term investment.
  3. Reinvest in your operation.

    The third option is the most fun: spend the money! But don't just buy something because you can—do some research and spend it on land, equipment, or upgrades that will make your operation more efficient or more profitable.

    Also, don't forget that you and your family are a big part of your operation. Invest in a weekend away to the mountains or new bikes for the whole family. The time you spend together will allow you to refresh and refocus on your operation.

    Whatever you decide to do with your hard-earned money, consider the short-term and long-term implications. Ultimately, the financial decisions you make in the good years should help you through the challenging ones.

If you'd like an expert opinion, don't hesitate to talk to your banking relationship manager.

As Malyk explains, "Relationship managers can help farm operators analyze the cost savings or rate of return associated with either paying down debt, building up their working capital, or reinvesting in their business so that they can prioritize and make good choices between these options."

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