These times in the agriculture industry, specifically, in the grain sector are analogous to the 2008 to 2009 time period for the general public as the economic crisis was brewing. During that time, an individual’s 401(k) was downgraded to something more like a “201 (b)!” Many people avoided information on their financial status and investments and filed away any information regarding without review.
In agriculture, negative margins and declining asset values place many producers in this same financial mindset. However, especially if you are borrowing money, examination of your historical financial information is extremely important. These records will allow you and your lender to ascertain direction and negotiate terms for the upcoming season or long-term growth.
What are some of the key items you need to review in your historical financial information? Approaching your examination from your lender’s perspective will help you be prepared.
First, examine the trends and profitability over time. If your business was not profitable during the great economic super cycle from 2002 to 2012, but more specifically, during the 2007 to 2012 timeframe, there is certainly a problem. Many producers attempt to minimize profits on their Schedule F or cash accounting books. Well, this could be a short-sighted fix for a long-term problem because your lender or perhaps more importantly, the regulator that oversees your lender’s portfolios will seek accounts with favorable economic profits. Thus, a quick accrual adjustment of inventories, receivables, payables and prepaid expenses will be necessary to analyze past financials, moving forward.
Next, pull out your balance sheet and determine percent equity by dividing net worth into assets. You should see an increasing trend. A positive trend is good but was it achieved through retained earnings or capital asset appreciation? A detailed explanation of your business trends will be essential in discussions with your lender. Moving to the top half of your balance sheet, look for working capital trends or building and preserving working capital. Working capital is financial liquidity or assets that can be turned into cash without disrupting normal operations.
Regardless of current financial status, positive financial trends and past performance in your business can still help you. When preparing your case for the lender, other considerations may include: What are the trends in open accounts or accounts payable? In which direction are the trends? Are your assets in productive or non-productive areas? What was the trend in your personal living costs? Each of these is an issue that may require further explanations. So, instead of avoiding your financial situation, it is time to put your past to work for your future.