January 18, 2021
One question I get asked a LOT is - How do I make a decision based off a projection? My banker won’t make a decision based off my projection for a loan, but I’m expected to make decisions for the year based off it. How?
This is a great question. I have three points for you to consider when using your projections to make decisions. Because unlike your banker you can’t just say – well, let’s give it a bit more time before we make a decision. You have decisions to make now to get 2021 going in the right direction
Always lean toward the conservative side when it comes to relying on your projected income to make a payment. If you use the current prices in the market and those prices are above or maybe even well above breakeven, the answer to all your buying decisions would be yes. BUT – have you locked in all your crop at those prices? If you only lock in 10% of your crop at the prices in your projection then the price drops. Where does that leave you with the outstanding payables you accrued under the assumption prices would remain at the level you used on your projection? This is where you use stress analysis. Run it all at the higher price, but then copy and paste that projection and decrease the income by different percentages. You can have a best case, average case, and worst case scenario and make your decision based on the scenario you feel most comfortable with.
Update your projection as you lock in prices. Using the same projection from the beginning of the year and never updating it in order to make decisions throughout the whole year is the recipe for disaster. A projection is an estimate. Why keep using an estimate to make decisions when you have real data you can update it with? Once you get prices locked in the uncertainty gets mitigated somewhat, and however you stressed your projection at the beginning of the year you can now stress it less.
Make adjustments to expenses as you pay them. This will not only help you keep an eye on how the projection will shake out overall, but it will also help you aware of overages on line items and how to address them. If you see you go way over on one item, you can look to see in what other areas you have room and make adjustments accordingly before you end up with a bigger problem.
To sum all that up, when making decisions using your projection, always be conservative and keep the projection fluid. A one-time projection at the beginning of the year does you no good if you don’t update it and use it to make the best possible decisions throughout the year. You make decisions based on your projection by keeping your projection up to date and being as realistic as possible.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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