Like it or not, it’s impossible to eliminate the possibility of a financial crisis happening. This article will tackle the possible, but manageable, problem of financial difficulty. The good news is most farms have high levels of equity making restructuring of assets and/or debt a viable option to navigate out of a bad situation.
The aim is to find the best solution — one that does not compromise personal, family and business goals, and that is no small feat. The other issue in looking for a solution in these situations is that the status quo is not normally an option.
Before developing a recovery scenario it is also necessary to define the problem in the context of the farm’s current financial state. You’ll need an up-to-date statement of assets and debts, relevant financial ratios and indicators from the present balance sheet. As well, you should do one-to two-year cash projections based on your present situation. What do the numbers and ratios tell you? What will happen if you carry on as at present?
After completing this initial financial review, the farm manager should talk to the affected stakeholders. These include the family involved, business partners, lenders and the tax advisor. What do they think and how do they view the situation? You want to maintain necessary confidentiality, and not spread your problems around the community, but you may be surprised at how they view the event and the solutions they offer. A common way of dealing with problems is to hide them. It’s best to set your pride aside and face the problem head on.
When the above is done, you have set the stage for development of a plan to resolve the issue. Be sure you don’t try to find the solution before you know what the problem is. Maybe there really isn’t a problem, or maybe it isn’t what you thought it was. Maybe there is an obvious solution that you are not aware of. Maybe there is even an opportunity in the crisis — there often is.
A MAP TO RECOVERY
You are now ready to start working on your plan to resolve the crisis and recover.
1)Lay out all reasonable options. Be creative.
2)Be realistic. Is a part of the farm non-viable or is it really just a bad year? If you are going to make changes, make sure they are good ones that will work in the long term. Resist taking action that will only mask the problem, such as selling cows to create cash to pay arrears, when possibly the business isn’t viable.
3)Maintain cash flow as much as possible
4)Don’t allow your credit standing or relationships with others you have financial dealings with be compromised if you can help it. You might need to borrow money to get through this phase, or sell some assets you don’t really need. Don’t have your creditors lose confidence in you when you are working toward a solution. If you do need to go into arrears, keep them informed.
5)In times of financial crisis, expansion, or making major changes to operations are not normally good options. These kinds of changes should normally only be made from positions of financial strength, not weakness
You may need to look at several options before you decide on the right one. Do up the numbers for each to see how they will work and how they will impact on your overall financial situation. Be realistic. Often the unknowns make financial projections uncertain, but by working through different scenarios, the best one often becomes evident. If you don’t think you have the ability to do the financial part, engage a consultant who has skills in this area. You can ask your lender for a referral, or go look at the Canadian Association of Farm Advisors (CAFA) website ( http://cafanet.com/) or call them at 877- 474-2871 to see who does this work in your area. Run through a few scenarios, and when you settle on the one you think you would like to go with, do some sensitivity tests on it (i. e. What would happen if income drops 10 per cent, expenses rise by 20 per cent, etc.).
Before you implement your plan, pass it by others who have an interest in your business. Be sure to include your accountant if you think there may be tax implications.
For those who feel they need help working through the process of developing a plan, or in cases where the crisis has progressed to the point where outside help or intervention is necessary, there is an Agriculture and Agri-Food Canada program. For qualifying farmers, the Farm Debt Mediation Service will assign an approved consultant to assess the situation, review options and assist in the development of a recovery plan. For information and to talk to a program officer, call toll free 866-452-5556.
Financial crisis is stressful. Make every effort during this time not to compromise your major goals, but be prepared to to make short term compromises to meet your long term objectives. Most of all, maintain your personal integrity, and protect your relationships with your family, friends and neighbors. Although financial crisis can be difficult, it can be your opportunity to show yourself and others that you are made of the right stuff.
LarryLindquist,P.Ag.isafarmfinancial consultantworkingoutofEdmonton.Larry workedasanagriculturelenderfor20years. Since1998hehasbeenanindependent consultantprovidingservicetofarmerclients, governments,banksandcolleges.Youcan contacthimat [email protected] or780-483-3055