Financial Risk
There are three basic components of financial risk management: 1) Managing cash flow so as to be able to pay bills on time, 2) Managing availability of credit and the cost of interest, 3) Preserving and building equity.
Strategies for managing financial risk:
* Keep good records and a detailed budget: The budget should be updated each month as actual expense numbers are recorded. This can then be compared to projected amounts and farm expenditures can be adjusted accordingly.
* Secure loans with fixed interest rates. Whenever financially possible, pay down debt so as to reduce the cost of interest.
* Be sure that borrowed money is going toward those things that will be most likely to guarantee a return. And don’t forget to take into account the cost of depreciation.
* Insure Farm Gross Income: Insurance policies such as Adjusted Gross Revenue or Adjusted Gross Revenue-Lite insure the gross revenue of your farm operation. This can be a useful tool to ensure that you make the amount of income that you need each year.