Market News & Headlines >> Brock Consultant Katie Hancock's Blog: Financials for Financing
Insights from Brock Associates Consultant Katie Hancock
Dr. Dave Kohl, professor Emeritus of Virginia Tech, spoke last week for a western KY farm meeting sponsored by River Valley AgCredit. He has a background in agricultural and applied economics and helps farmers and lenders worldwide. Besides being an influential speaker, Dr. Kohl has great knowledge about what creditors and farmers need to work one on one. I heard him speak at the Brock Ag Economic Symposium three months ago, and though he reiterated many of the same points, the biggest takeaway for me this time was the importance of financial records.
We all know the importance of business record keeping, especially in highly leveraged farm situations. Why? Because you have to prove your strengths. Hearing rumors of farms going out of business makes us more focused on what it takes to survive.
The biggest risk we’re seeing during tough times is financing. Brock Associates held around 30 marketing meetings with lenders across the U.S. this past winter. Each lender was not only concerned with farm marketing, but also the financial planning tools their farmers used to make these decisions. The concern existed even before 2015 financing needed renewing.
How do I protect myself from losing financing? Simply put, sell yourself through financial records. You may be one of the greatest producers and even have a financially solid business, but detailed financial records will make or break your selling point. If you can’t show your strengths in a confident matter through records, don’t expect much buying power in terms of interest rates or a loan in general.
Bank regulations have requirements, restrictions, and guidelines that are tougher than in the past, and are becoming stricter. The creditors that finance farms aren’t only under pressure internally, but also from regulators. When farm profitability was stronger, lenders may have become more complacent along with farmers. This is changing—especially for next year. Regulators that have less than 5 years of experience may tend to panic more quickly, and create added pressure for lenders and ultimately farmers. Good records will take you over that hurdle.
How do you start? Hire a firm to figure your accrual profitability if you can’t do it yourself. Maybe even go back a few years and have it figured for a better picture. If you didn’t have a strong year in 2014 and face an equally or more challenging 2015, you will benefit from historical records averaging a previous year that may have been more profitable. For example, you may have made $300,000 in 2013 and lost $100,000 in 2014, but on average made $100,000. An adjusted average may present a comfortable track record, yet prevents psychological overconfidence from the past.
Paper equity may be misleading. Land values have made balance sheets artificially strong in some cases—making you feel stronger than you really are. This will adjust. Up to date records take equity adjustments into consideration while providing a better value of the business’s assets. Your burn rate that measures negative cash flows in terms of years you can survive without having a positive income will change with these equity adjustments.
Dr. Kohl stressed having a plan B, so I recommend knowing where you are to know when the plan B needs to come into play. The quicker you know your situation, the quicker you can adjust. Sell your strengths with proper records. Liquidity will be your saving grace, and good records will paint the true picture for planning and survival.
Email Katie at [email protected]