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Most farmers are well into the 2009 production cycle. The to-do lists are getting longer and the days are getting shorter. So, it’s now time to ask the question – do you know where your liquidity is at?
At this time of year, there won’t seem like there is enough time to cover all the tasks on your list and some inevitably may ‘fall off’ your radar. Some tasks such as office related functions, like financial management, are seemingly too easy to defer. However, given the narrow margins of profit, the market volatility and the impact of weather, it is increasingly important that farmers take the time to work through a summer liquidity analysis. Avoid deferring this important exercise! If you are one of the large number of farmers in western Canada who are experiencing disappointing crop prospects, this exercise will be even more beneficial.
Farmers will have started developing plans for the 2009 crop well before the year even arrived. Decisions will have been made on capital purchases, acreage, rotation and market commitments prior to seeding. Financing was arranged based on the operational plan. The operational plans will have projected net profit and cashflow outcomes to the end of the business year (either calendar or fiscal). As we are well into the production cycle, those plans on paper are being impacted by reality.
Liquidity and cashflow go hand-in-hand. A liquidity analysis exercise can include two parts:
The first part is to understand what your current cashflow picture looks like – comparing projected to the actual cashflow and calculating the variance. The second part is to project what the cashflow might look like going forward, given the mid-year actual scenario as a starting point. For farms that are in a fortunate situation where yield prospects are still good and where market prices are close to what was projected, the future projection will likely only need to be carried through to the year-end.
Calculating the variance helps bring focus to either revenue or expense items that have material differences from projected values. What can management do with respect to future projected sales or purchases to improve the situation? In the example below, given that chemical purchases are already over budget, are the applications that are planned for July and August necessary?
Sample Cashflow analysis
Mid-year management decisions can have significant impact on year-end profit results.
For farmers who found themselves in situations where they did not get their entire crop seeded and/or where the yield prospects are significantly decreased, the cashflow projection should be extended through until the fall of 2010 when new crop sales for that year will be available. The rationale here is simple and important. There will likely be a cashflow (working capital) shortfall – severe in some situations, and steps will need to be taken to ensure that there will be enough cash available to get the farmer through. One of these steps will involve the lender. It is much better to go to a lender sooner than later. Having completed a liquidity analysis exercise that includes the anticipated cashflow requirement through to next fall will help you through the process. If the lender is unable to provide all the liquidity relief, the farmer then has time to examine other alternatives.
This is really an important planning process. If you do not know how to work through a liquidity analysis and/or are unclear about options that you can use to manage liquidity problems, talk to an advisor, a consultant, an accountant or a lender to help you understand your situation and your options.
Terry Betker is a partner with Meyers Norris Penny LLP, working out of the Winnipeg, Manitoba office. He is director of practice development in Agriculture – Government & Industry.
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