Les Behonest called us the other day and his heart was racing. He had just finished combining and the crops turned out worse than he had imagined. Barney Binbuster called an hour later with the news of a huge crop. In fact, he told us the crop was so big he filled every bin and still had to shovel out the corner of the last truck into the bush. It s definitely a year of extremes on the Prairies. Some people are taking pictures of their yeild monitors and others are covering up the readout with electrical tape. Regardless of what side of the spectrum you find yourself on, now is the perfect time to do a quick scan of the financial vital signs of your business. If you only check on one, focus on liquidity.
DETERMINE WORKING CAPITAL
For both Les and Barney, we had done some financial planning last winter and they had a general idea of where they had expected to be. The value of that planning is that they intuitively knew the implications of their situation at harvest, and knew they should be making changes to their plan. The first step was to update their balance sheets with accurate after-harvest inventories. This is where the most significant deviations from the plan will be evident. This changing relationship between current assets and current liabilities is a measure of the liquidity within the business and quickly indicates the potential for existing inventory to cycle into cash, or lack thereof, and fund operations for the next fiscal period. The actual difference between current assets and current liabilities is defined as working capital. This liquidity analysis should be used as a guide for decisions around how to fund purchases.
In Les s case his working capital had deteriorated greatly as his inventory fell to half of what it was projected to be. The implications for Les is that he had planned on making two equipment purchases and pre-buying his inputs for next year s crop before year end. He also had 10,000 bushels of canola pre-sold however if he sells 10,000 bushels this will be his entire inventory and he will no longer be able to take out a cash advance. The cash advance funds were supposed to be used to purchase next year s inputs to save on tax. Les is now going to get hit with a double whammy no crop and no cash to pre-buy inputs resulting in a large tax bill. We came up with the following options for Les.
1. Use financing to purchase inputs to reduce the tax bill.
2. Apply for Agristability interim
3. Take out Agrinvest.
4. Delay equipment purchase.
5. Take out a term loan to purchase equipment.
6. Lease equipment for short term with minimal down payment.
7. Pay the tax and wait to buy inputs until next fiscal year.
A GOOD PROBLEM TO HAVE
Our discussion with Barney started with him calling us on his cell phone as he was sitting down in the lounge at the machinery dealer. This discussion was much easier and revolved around a significant improvement and working capital. Barney had excess working capital for which he had no immediate plans. Our discussion surrounded use of that working capital as it cycles into cash. We identified the following options on Barneys bucket list:
1. Pay off highest interest bearing debt.
2. Pre-buying of inputs to take advantage of discounts and tax savings.
3. Purchase needed equipment on short term capital lease
4. Expand land base.
5. Off-farm investment (registered or non registered).
6. Max out RESP and make sure the little Binbusters get some higher education.
In summary no matter what side of the yield curve you re on your process should be the same. Evaluate and understand your position. Look at all your options and construct a plan that you can then execute. Never more evident than in 2011, careful planning will prevent cash flow from making management decisions and, in the case of Binbuster, will ensure your financial resources are put to efficient use within your business.
AndrewDeRuyckandMarkSloanemanage twofarmingoperationsinsouthern ManitobaandarepartnersinRightChoice ManagementConsulting.Withover25years ofcumulativeexperience,theyoffersupport infarmmanagement,financialmanagement, strategicplanningandmediationservices. Theycanbereachedat [email protected] and [email protected] or204825-7392 and204-825-8443