Recently another group of young agricultural producers graduated from the Farm Credit University Ag Biz Planner blended education class. During a panel discussion, one of the participants asked the CEOs from various lending associations in attendance, with the combined experience of over 120 years, to answer the following question. Based on your experience, what are five points of wisdom that can increase our chances of working more effectively with our own lender and being successful?
1. Cash Flow
Each CEO stressed the importance of preparation of a cash flow projection. They indicated that if one thinks through their plans on paper including resources needed for production, marketing, and finance, this builds confidence between the borrower and lender. Knowing when periods of deficit are anticipated and how much operating loan needs will be is critical. On the positive side, times of cash surplus and how you will allocate those dollars will be very important also. Each CEO stressed the cash flow plan needs to be executed, followed up, and monitored for results.
2. Sensitivity Analysis
Next, each seasoned CEO mentioned the importance of sensitivity analysis related to price, cost, and production changes. The change from $8 per bushel corn down to $4 per bushel corn is an example. Effects of replanting crops due to bad weather that impacts costs or a rise in interest rates are both part of scenario and sensitivity planning.
Third, a topic that is on everyone’s radar is financial liquidity versus equity. While older producers are often stronger in equity, younger individuals with less time in the business or those who are in a growth mode will often not have as much net worth or equity. Financial liquidity, that is, the ability to generate cash by selling short-term assets without disrupting normal operations, will be essential for success. Build liquidity in the positive economic cycle and preserve as much as possible in the downturn.
Next time I will cover some additional points to consider.