Debt Structure refers to the ratio of current/short term debt to long term debt in your business. This metric provides insight into how you are financing your business’ needs.

Those who know me know that I am consistent in my belief that short term assets should secure short term debt and long term assets should secure long term debt. This is because short term debt (think about your current liabilities) is expected to be paid off with current assets (like cash) whereas long term debt would be paid out with fixed assets (if a lump sum is required versus retiring the debt over time with regular payments.) That premise is Financial Management 101, and while not a hard and fast rule, it is sound guidance.

More to the Debt Structure conversation, we calculate this ratio by dividing Current Liabilities (all payments and payables due in the next 12 months) by Total Liabilities; same for Long Term Liabilities (total debt not yet due within the next 12 months.)  Here is an example:

In this example, there are total liabilities of $5,951,350 (calculated as $2,551,350 in Current Liabilities + $3,400,000 in Long Term Liabilities.) The debt structure is 42.8% short term and 57.2% long term. While this is good to know, the next question is “So what?”

On its own, the debt structure ratio does not carry much weight. The value is found in trending the debt structure ratio. For example, if your short term debt trend is increasing it may be an indication of liquidity challenges in your business.

Ideally, calculating your Debt Structure Ratio will cause you to ask more questions and seek more clarity, such as:

• What types of debt make up my short term liabilities? What are these debts for?
• Are my short term liabilities trending up, down, or remaining fairly steady? Why?
• What is the right ratio of Debt Structure for my business/industry?

With economic indicators preparing us for more volatility than years past, and with interest rate increases on the horizon, it is a good idea to have abundant clarity on your overall debt situation. Understanding your Debt Structure, including how your Debt Structure will affect your business under different economic situations, creates an opportunity to “get your house in order,” so to speak, before things start happening.

Plan for Prosperity

The winds of change are blowing. Are you simply going to lower your sail and wait it out, hoping to survive whatever comes? Or are you preparing to chart new courses so that whatever winds you get you are still able to make progress and move forward?

Working Capital is calculated by subtracting your current liabilities from your current assets.

It is important to calculate working capital correctly, not only to satisfy the requirements of your creditors, but for your own management information as well. Overstating your working capital will give false confidence. Understating your working capital could cause you to unnecessarily inject capital into the business, or to miss out on taking advantage of business opportunities.

Maintaining inadequate working capital carries many risks, both direct and indirect, such as:

1. Relying on operating credit and trade (supplier) credit.
   Heavy, or total, reliance on outside credit to provide access to the capital necessary to run your farm is as great a danger as a reckless crop rotation. There is no guarantee that these credit vehicles will continue to be available in the future as they were in the past. How will the crop get seeded next year if there is no working capital, and no operating credit, available?
2. Using debt to pay debt.
   Many businesses have plead their case by illustrating that the debt payments were always made on time. What they failed to recognize was that the debt payments made were sourced from an operating line of credit, and therefore using debt to pay debt.
3. Loss of profit potential.
   By leaning on outside credit, many farmers are forced to sell grain when they need cash to make payments, revolve credit lines, etc. instead of selling grain at a point of opportune profit. Selling grain when you have to instead of when you want to can mean the difference between profit and loss.

In regards to building and protecting working capital, here are just a few of the tactics I offer:

1. Know your Unit Cost of Production.
   This goes beyond crop inputs. It includes ALL costs to run the farm from fuel, to insurance premiums, to paperclips for the office. Knowing UnitCOP allows you to clearly understand where your profit is made.
2. Stretch loan and lease amortization periods.
   Interest rates are low, and recently there are hints that it might go lower yet. Stretching your payback period allows you to enjoy making lower payments. This is especially helpful in a year when cash flow & profitability will be tight. Accelerate payments in years when cash is abundant.
3. Plan with Strategy; Discipline in Tactics.
   Far too often, we see businesses that operate without a plan by simply focusing year over year on operations (getting the work done) and as such, most decisions are made in reaction to a need or want. By building a clear & well-thought out plan, decisions become proactive when employing discipline through the execution of the plan. Deviating from the plan (IE. a great deal on a new pickup!) can jeopardize working capital and future profitability.

Direct Questions

How often do you calculate your working capital? (HINT: it should be monthly at a minimum)

What is your minimum level of working capital to have available? (HINT: it should be 50%-100% of your annual cash costs)

What is your strategy to increase and maintain adequate working capital?

From the Home Quarter

Inadequate working capital causes business owners and managers to make decisions they otherwise wouldn’t. It forces their hand. It takes away their control.
Abundant working capital creates opportunity, allows flexibility, and puts control of the business in the owner’s and/or manager’s hands.
Critical State can be only a breath away when working capital is inadequate.

Considering that most farmers are still primarily production focused, there is likely no greater catastrophe in their mind than a crop failure. With Mother Nature offering challenging conditions every year (even 2013 which had a strong majority of farmers enjoying “the perfect growing season,” there were still many areas that faced insurmountable weather challenges) one would think that prudent risk management would involve many of the following strategies, each with a prescribed weight based on each farm’s specific need.

Provincial crop insurances, Agri-Stability, private revenue insurance, hail insurance, etc. are the most popular risk management tools used by farmers today. Most farms use one of those, or a combination of several. Each farm’s weighting of the various programs will be as unique as each farm. However, many farms use none of these risk management tools. They will each have their own rationale for why. Some are so well capitalized that they can self-insure, take the financial hit from poor production and keep on rolling. Others do not understand how the programs work, and because of their ignorance, they choose not to take part. In the middle is the majority, broken into two parts: one that clearly understands the nuances of each program, and utilizes it to the fullest, most prudent extent (which might mean not using them at all); the second does not bother to gain such understanding and simply does what’s always been done year after year.

There are four distinct factions described above in how many farmers approach risk management. Which one do you fit into?

1. Well Capitalized, avoids using the programs: you have abundant savings and working capital to withstand more than one year of zero, or near zero, gross revenues and choose to eliminate the premium costs for risk management programs.
2. Lacking full comprehension of programs, avoids using the programs: you feel that they are too complicated, too expensive, and never pay you.
3. Intimate understanding of the programs, uses (or does not use) the programs to the best net benefit to your farm: you know the ins and outs of the program(s) better than anyone who answers phones at the respective help desks. You carefully weigh premiums, coverages, and benefits with precision so that all match beautifully with your production practices. This may include not using the programs because the cost-benefit is not sufficient.
4. Not bothered to learn about program nuances, uses (or does not use) the programs because “that’s what we’ve always done”: you don’t have time to read through the acres of lingo and jargon that are provided to you, so you just blindly take the same coverage you’ve always taken, or not taken any coverage at all. “Just go with what we did last year!”

Of course, these groupings ignore the geographic issues in that, for example, some farms span so many miles that a hail storm is incredibly unlikely to affect the entire farm, some farms are so large that program premiums can represent a small fortune, and some farms (large acres or not) are in such tight proximity that weather risk cannot be “spread out.”

Direct Questions

Which category above do you fall into? If it is #2 or #4, what is your risk management approach?

Do you prefer reliance on risk management programs over building strong working capital? Why?

Production is critically important. How do you manage the risk of crop failure?

From the Home Quarter

Farming is risky business, and the risk of losing a crop can bring a farm to the point of Critical State. How we manage the risks, and in this discussion, the risks pertaining to crop failure deserve attention that is paramount. What certainly gets most of the attention when it comes to managing the risk of a crop failure is inputs. And while there is no arguing the importance of doing all you can to produce the highest yield and best quality crops, there is more to the equation. Much of what will bring success or failure to your efforts in production is out of your hands.

The only way to get off the train of risk management programs (and cash advances, and trade credit, and operating credit) is to build abundant working capital.

You cannot shrink your way to greatness and you cannot spend your way to prosperity.

Years ago, when I was still in banking, I was doing what can be argued young bankers should, or should not, do…I was listening intently to some well tenured, long-in-the-tooth bankers. It was good because of the insights they brought. It was not good because of the cynicism they had. One cynical comment in particular stayed with me; it was when that grizzled old banker said, “Farmers hate having money in the bank…as soon as it’s there, they go spend it!”

Maybe that comment showed his lack of insight into how a farm business is run. Maybe he was fairly accurate in his conjecture in how it relates to the psychology and mindset of a farmer. Although, I believe that “hate” is the incorrect descriptor for how farmers really feel about cash.

You may recall reading Spending Less is More Valuable Than Earning More in this commentary a few months ago. I regularly read comments in ag publications and on Twitter about how “farmers are good at making money, but trying to keep some is the hard part.” Not for everyone…

Investing in your business is something not to be taken lightly. Every year, month, week, and day, farmers battle with the decisions of what to grow, how to fertilize it, what to spray, when to spray it, etc. With almost the same frequency, many farmers are also looking at the tools to get the job done (ie. farm equipment.) “Newer, bigger, better” seems to be the name of the game when it comes to equipment. And less frequently, farmers consider expanding the land base. Whether to rent or to purchase is but one of the questions pertaining to land.

It is my belief that the issue of overspending would not be an issue if more discipline was used in ensuring that all expenditures met an ROI (Return on Investment) threshold. I’ve learned about the following instances in the last year that clearly show a lack of understanding the concept of ROI:

• disastrous chickpea crops despite as many as 6 fungicide applications (at $15-$20 each, that’s an extra $90-$120/ac in inputs)
• $90/ac rent paid on 640 acres that has only 420 acres available in the entire section due to excess moisture (so he’s actually paying $137 per cultivated acre)
• inability to make loan payments because the operating line of credit is maxed out.

I have gone on record many times in my prognostication that credit, specifically operating credit, will be difficult to maintain (and likely impossible to get) in the not-too-distant future. Those operations that do not run on cash, therefore relying on operating credit, will face insurmountable hardship when credit policy changes.

Control your own destiny:

1. Build working capital reserves, specifically CASH;
2. Discontinue relying on operating and trade credit to cash flow your farm;
3. Sell your production when it meets your profit expectations instead of when you need to make your payments (cash in the bank allows you to do this!)

Direct Questions

How would you describe the rationale employed when determining how to deploy resources, specifically cash?

As a percentage of your annual cash costs, what is your minimum cash balance to keep on hand?

From the Home Quarter

In a business within an industry that is renown to have multiple cash and cash flow challenges, it is not unusual to learn that adequate (or abundant) cash on hand is not common. And so when cash is available, the need (or temptation) to upgrade this or replace that can be too much to handle. Disciplined decision making, backed by a sound strategy, is often the difference between successful, highly profitable farmers and surviving, occasionally profitable farmers. Which would you rather be?

For guidance, support, or butt-kicking in developing your strategy, and the discipline to stick to it, please call or email my office.

Let me emphatically disagree with the ideology that cash is king.

One could argue that the king rules all, answers to no one, and has absolute power. While I’m sure that is what the king would have everyone believe, the truth is that kings have always been influenced by the likes of his queen, his advisors, other diplomats, etc. Is he, then, truly the top, unflappable, incontestable?

Since we live in a democracy and are no longer ruled by a king or queen, when I hear such terms I think of cards. The card games I enjoy the most are 3-Spot (also known as Kaiser) and Poker. In both games, the king is soundly trounced by one card that is even greater.

Yes, I’m saying it.

Cash is not King.

It’s the ACE!

If cash is king, then that means that something else is the Ace, something else is more important than cash. This is simply not so.

Cash is the ace, the pinnacle, the life blood of your farm.

Imagine how the decisions would be different, the decisions that are made every day and every year on your farm, imagine how they would be different if you had an abundance of cash:

• Instead of gambling on trying to time the commodity market high, you could sell your production whenever was most convenient and/or at an appropriate profit point.
• You would cease the need for operating credit, vendor credit, or cash advances.
• “Cash management” would no longer be juggling between various creditors and hoping you can deliver grain in time to make payments, but instead it would be paying bills on time (ahead of time?) and selling grain when it made the most sense.
• Risk management programs would be a non-issue.
• Equity loans to recapitalize the business would be a completely foreign concept.
• Acquisition decisions (land, buildings, equipment) would be easier, faster, and more empowering.
• YOU’D HAVE LESS STRESS!
  (That is capitalized for a reason.)

Cash is the Ace. It ranks above precision planting, Group 2 resistance, or the latest technology trends. The Ace outranks the King; it outranks all the other cards.

Direct Questions

Has cash always been your Ace, or have other things become more important?

What are the top three benefits to you and your business if cash was abundant?

How confident would you be to have TWO Aces in your hand?

From the Home Quarter

We often regard agriculture as doing amazing things with scare resources. Cash does not have to be one of those scarce resources even though that has been the mantra for generations (a.k.a Asset Rich – Cash Poor). Assets do not pay bills, cash does. The desire to convert cash into assets needs to be squelched at a time when debts are high, cash flow is tight, and profit margins are narrow.

Since cash is the life blood of your business, and a critical contributor to your financial health, when is the last time you had a checkup?

With your year-end financial statements now done, you’re ready for a checkup. Email your financial statements to me and I’ll provide you with a financial health report card. Normally a $500 value, this service is free if booked by June 13, 2016.

Granted, the macro factors that helped to create the US housing crisis are not prevalent here in Canada. My favorite term from the US crisis was “NINJA” Mortgage: No Income? No Job? …APPROVED! Lending criteria in Canada isn’t quite that liberal.

What exacerbated the problem in the US was how homeowners were using their homes as a personal ABM, taking cash out whenever they wanted for whatever they wanted from the rapidly growing equity they had in their homes because the house values just kept increasing. They leveraged the “found” equity they had in their homes to feed their consumer appetite.

Here in Canada, and specifically farms on the Canadian Prairies, we’ve seen something similar. Rapidly appreciating farm land is being used to secure more borrowing, and often to secure the consolidation of other loans. The renaissance of farmland value appreciation, especially in Saskatchewan, added a dangerous amount of fuel to a fire of pent up demand. Land “equity” was used for the feverish acquisition of equipment, buildings, and more land.

In the US, while sub-prime mortgages kept payments low, everyone was happy to be ticking along with borrowing and spending to their heart’s content…until the sub-prime period ended and the piper needed to be paid. With a property fully leveraged and no ability to repay the debt, many homeowners resigned themselves to foreclosure. Those who may have had an ability to pay the debt saw the value of their fully leveraged property start to decline because of all the other foreclosures, so when they found themselves underwater, they too went the route of foreclosure.

No one is arguing that things are different here. True. Borrowing criteria is more stringent in Canada. What is similar, however, is the experience of a rapid appreciation in the value of real estate and the leverage of said appreciation to support more (other) debt.

I was talking with a 17,000ac farmer recently who was very aggressive in expansion over the last several years. He has increased the size and scale of his farm in every way: land, equipment, labor, and debt. He made no bones about continuing to leverage all assets, including the appreciating land and his depreciating equipment, to the fullest extent in an effort to facilitate further expansion. The scourge of his actions over these last few years was the incredible drain on his cash flow to service all this debt. This came to light for him when recently he needed land equity to source an operating line of credit so that he could meet his debt payments.

Direct Questions

Have most of the increases to equity on your balance sheet come from appreciation of asset values or have they come from building your retained earnings?

How has your Debt to Net Worth changed over the last few years?

Are you drawing on your operating line of credit to make loan payments?

From the Home Quarter

It amazes me how what was ingrained into our long term memory for so long was so quickly forgotten. The memories of the indescribable hardships of the 1980s and 1990s have seemingly been overtaken by the boom years of 2007-2013. The willingness to replace the history lessons of tight margins and poor cash flow with the euphoria of big profits and cash to burn has led to many farms now facing a debt and cash crisis similar to what was common in the final 20 years of the last century.

The trickle-down effect of debt stems from when debt levels increase as fast as, or faster than, the borrower’s long term cash flow and net income. While asset levels increase, sometimes very rapidly, tremendous growth in debt levels eat away at potential equity and use up available cash flow. While the land base has expanded and late model equipment efficiently farms all the acres, while the bins may be full and the employees are busy, it all trickles down to cash.

When the demands on your cash are a raging river, it is pretty hard to live on a trickle.

As we look back over the last few years, we can identify what led to the current cash shortages. There is no point chiding anyone for those past decisions. What is in the past cannot be changed; we must acknowledge it and learn from it. After all, if we don’t learn from history, we’re doomed to repeat it.

Here are 3 strategies for managing cash as developed from my years in commercial lending and working with farmers on financial management:

Be conservative with projecting cash inflow.

Cash outflow has been allowed to increase lock step with, and sometimes outpacing, increases in cash inflow. This despite everyone knowing that farm cash inflow can be as unpredictable as the weather. Now we see many operations that are facing cash inflows like 2008 on required cash outflows of 2016. Calling the situation “tight” is at times an understatement.

Consider your lowest profit year in the last 10 years, and use your cash inflow from that year to compare it against your required cash outflow for 2016. How does that make you feel?

Protect working capital.

Recently, I tweeted, “Asset rich and cash poor will not suffice through this next cycle.” Many farms have squandered their opportunity to fill their working capital war chest because of large assets acquisitions and taking on significantly more debt for those acquisitions. Now, many of those same farms are borrowing every penny needed to operate the farm through a growing season. Working capital will be the greatest source of opportunity in the coming years. Access to adequate working capital could be the most limiting factor.

I read a piece recently that interviewed Dr. David Kohl (who I’ve quoted in the past.) Dr. Kohl says that his belief is the 60:30:10 profit plan. Of your farm’s profits, he says that 60% should go to growing the farm and making it more efficient, 10% to dividends, and 30% to working capital. Considering the general lack of working capital on currently on the farms, I suggest that the rule, in the short term anyway, be more like 80/20 with 80% of profits going towards building working capital and 20% going towards growth and efficiency; dividends might just have to wait.

Actually create and maintain a running cash flow statement.

Going through the exercise of constructing a monthly cash flow statement is often an “A-Ha” moment. Being able to clearly identify where and when your cash is flowing helps you understand how and when to best use operating credit, plan grain sales, or structure payment dates. While it is not new news anymore, it is worth repeating: set your payment dates for when you’ll actually have cash!

This is also a beneficial step to improving the relationship you have with your lender. When you can look your lender in the eye and tell them exactly how much operating credit you need, when you’ll need it most, and when you’ll pay it back shows that your focus on management is meeting their expectations.

Direct Questions

What changes would you make to your 2016 plans if you knew your cash inflow would be similar to your worst year in the last 10?

How have you invested your profits? How will you invest future profits?

What does your 2016 monthly cash flow projection look like?

From the Home Quarter

The outlook for cash will reach critical importance in the near future. Working capital will be the fuel for your growth in the coming years. Equity is the backstop. Equity does not pay bills, cash does. When cash is gone and unlikely to return, tapping into equity can replenish working capital, thus the “backstop.” The chase for equity over the last several decades in an effort to be “asset rich and cash poor,” like it was a badge of honor or something, has created a generation of farmers who would prefer to be rid of debt to the detriment of working capital.  It might be possible to finance growth and expansion without cash, but it is not possible to operate it.

If you’re like most farm businesses, you’ve been getting a bigger debt bowl over the last 5-7 years. In
fact, I would bet that if you looked back at your statements from 2005, you would wonder how you even
managed to operate with such little debt (relative to what you’re carrying today.) This is not unique, and
considering western Canadian agriculture (especially grains) has been in a boom for the last 7 years or
so, it is of little surprise that debt levels have also increased.

The question then begs, “How big can the bowls get?”

Lenders love to see strong cash flow and increasing equity. Record cash receipts and appreciating land
values have bolstered lenders’ appetite to lend into agriculture. With money being as cheap as it is (low
interest rates,) farms’ debt bowls have been easy to grow.

What’s been filling all those bowls? Primarily it has been rapidly appreciating land and an insatiable
thirst for more and newer equipment. You’ve read here in the past that there is a distinct difference
between “good debt” and “bad debt.” I challenge everyone to evaluate what is in their “bowls” and
identify the “bad debt.” What percentage of your total debt could be considered “bad?”

Generally speaking, bad debt is the unnecessary debt. Often poorly structured, it eats up cash flow like a
game of Hungry-Hungry Hippos chomps marbles, and it uses up the finite space in your bowl. Yes, there
will come a time when a bigger bowl cannot be had, and it is then that many will wish they had managed
their credit a little closer.

We talked about interest rates in last week’s article, and it spawned more reader feedback than I’ve
received in a while (I’ll credit that to harvest being a greater focus than commenting back to me.) Gerry
Bourgeois, Scotiabank’s Director of Agriculture Banking for Saskatchewan & Manitoba, offered an
interesting strategy in his reader feedback: “With interest rates at an all-time low, farmers with a lot of
debt on their balance sheet should be taking advantage of these current rates to consider locking in 5, 7,
or even 10 year money.” Acknowledging that rates are still going to go up, even if it will be later than
many had expected, Bourgeois says, “I view the current low rates as a compressed spring. Once they
start moving up, they will move up quickly.” He goes on to suggest “locking in rates and using derivatives
to hedge interest rate risk” as a sound strategy many farms could consider.

“Similar to how a farmer would use commodity derivatives in a trading account to hedge his commodity
pricing, we use financial derivatives to hedge interest rates on larger transactions,” Bourgeois says.
Using what are called Banker’s Acceptances, he describes how a “swap” works as a hedge against rate
increases, and alternatively can even goes so far as to structure a “cap” on potential future interest rate
increases, functioning like interest rate increase insurance. “Utilizing these market instruments can
provide greater flexibility in your hedges down the road,” he concludes.

To put more emphasis on managing your credit, here are some focal points to get you started:

1. Understand how your lender views your business. Are you seen as risky? Are you considered
   highly leveraged? (IE. Can you get a bigger bowl, and if not, is it right full?)
2. Recognize how your cash flow matches up with your debt obligations? More specifically can you
   meet your debt obligations should your cash flow decrease?
3. Eliminate bad debt, and keep it out of your operation. Just because you can afford the payments
   today doesn’t mean you should buy, and it certainly doesn’t mean you can afford the payments
   next year either.
4. Look back at the worst year you’ve had profit wise in the last 10 years. How much debt could
   you service if that was your profit for the next 3 years? Let this be your guide.
5. If your bowl is full, what is your strategy in case of an emergency (Eg. tractor needs an engine)
   or an opportunity (Eg. prime land unexpectedly hits the market)

Direct Questions

What are you doing to protect yourself from market changes? (Eg. interest rate moves, lender’s
adjustment to credit policy, etc.)

How can you strengthen your overall debt structure?

What happens if your lender instructs you to use a smaller bowl?

From the Home Quarter

Every business needs access to credit to facilitate growth. It is the reckless depletion of many farms’
credit capacity that will further heighten a potential cash flow crisis stemming from shrinking gross
margins. While we cannot change the decisions of the past, we can learn from them. And there is no
time like the present to take steps to improve your debt situation if it’s not currently ideal. There is no
time like the present to strengthen your credit structure to protect what you’ve built considering the
current lending environment.

There are many circumstances where it is a smart decision to get a bigger bowl, but it is often smartest
to know when the bowl is big enough, or even when to get a smaller one

I haven’t done the research, but it’s fair to say that we’d be hard pressed to recall a year when we’ve
had such a string of days where the daily low temperatures are well below freezing. Word has it that
farmers in many areas now are beginning to prepare for reseeding.

Show of hands: how many built reseeding into their 2015 crop plan? I didn’t think so. How many of you
who are reseeding are rejigging your budget and projections? It better be all of you.

It’s not just the extra cost of seed, fuel, wages, etc. It also means later emergence and maturity which
will impact yield, and maybe quality. For how challenging it has been to deliver grain in the last few
years, if late maturity means you now cannot deliver off the combine in August or September as per
your contract, will you be forced to wait until December, or even March? Have you considered how this
could impact cash flow?

Don’t get lulled into oversimplifying the adjustments to your projections. It’s easy to just add in cost for
more seed. But a couple bucks an acre here for labor, and a couple more bucks there for fuel on the
extra pass add up. And I don’t know of too many 2015 projections that have much wiggle room.

Direct Questions

Have you provided realistic amendments to yield and price projections based on reseeding dates and
rates.

Have you considered how the later seeding dates due to reseeding will affect your new crop delivery
opportunities, and therefore, your cash flow?

Do you have sufficient working capital to get through this unplanned extra cost?

From the Home Quarter

Anyone who is dealing with Mother Nature’s blindside string of frosty nights will be significantly
impacted in all 3 critical areas of their farm: production, marketing, and financial management.
Consequentially, the other critical areas of your business will also be affected: family, wealth, and
potentially your health.

You must, at your very first chance, update your projections for 2015 with realistic and conservative
information. And for goodness sake, let your lenders know ASAP, not just next spring when you’re doing
your annual review.

This bolsters my argument for strong working capital. Every farm, your farm, is at risk of a blindside
attack at any time from a variety of sources. Adequate working capital is the best way to ensure you’ll
get through it.
If you’d like help establishing strategies to ensure you build adequate working capital,
then call me or send an email.

We know what you are planning, but what aren’t you planning? Here are the 3 biggest issues that
farmers tend to not plan, based on nearly a decade of my experience in the banking and financial
corporate world:

1. Anticipating Cash and Operating Credit Requirements
What is worse than running out of cash when you need to make a purchase? Running out of
credit when you need to make a purchase! With the incredible highs and lows of a farm’s cash
position through a one year cycle, this is a CRITICAL planning process to undertake. And once
that’s done, work with your banker so he/she is not getting a 5-alarm phone call begging them
to extend your limit.

2. Creating a realistic capital expenditure plan
CapEx drives as many urgent financing requests as anything else. “Hello, Banker? I just bought a
sprayer at the auction. Can you make sure the cheque clears? I’ll be in tomorrow to apply for a
loan.” CapEx should be part of the overall business plan, not a knee-jerk reaction in response to
that hair-trigger you pull when the auctioneer is looking your way.

3. Being Unaware of Family Aspirations
Can you picture what a combination of fear and obligation look like? It’s what a banker sees in
the face of a client who just came in advising that his/her son/daughter wants to farm, so “we
need to add land and equipment.” Fear over the volume of debt that is needed (likely requiring
the parents to co-sign.) Obligation because “the kid needs to get a start somehow.”

I wasn’t a family negotiator then, and I’m not one now. If you need that kind of help, speak to a
family coaching or mediation expert (I know some good ones, so I can help.) But for crying out
loud, please start talking to your family early about their intentions. A farm is more akin to a
barge than a ski-boat: it’s not highly responsive, takes time (and room) to maneuver, and can’t
hit top speed without a whole lot of things going according to plan!

Direct Questions

Do you know how much operating credit you’ll need this year? Will you just rely on cash advances when
your line of credit is at limit?

When you acquire assets, is it “because it seemed like a good deal at the time” or because it fits your
overall business plan?

Do you assume you know what your family wants, or have you sat everyone down to talk? Don’t know
how to have that talk? Pick up the phone and get some help; your legacy (meaning your family and your
farm) are too important to let this slide.

From the Home Quarter

There are many factors that can affect your plans for the new crop year and if trade show exhibitors can
provide some of that influence, then they’ve succeeded in their plan. I’m suggesting that you have your
own plan in place, and whether you’re at the show or at your kitchen table, seek out the advice that
provides the most value to your business based on your plan.