It is the middle of the pandemic version of football season with very few fans here in the U.S. The autumn chill is the foreteller of the winter season ahead. There is an old saying in the football world that the best defense can lead to a good offense. Let's apply this philosophy to the financials of your farm and ranch business.
When examining your financials this fall and winter, a financial depth chart can provide the necessary balance for adversity and opportunity. The defensive line is analogous to a business’ ability to generate profits, cash flow, and earned equity on the balance sheet. In football, a good defensive line can stop the runner or sack the quarterback, which creates opportunity to improve field position through the loss of yardage or, better yet, a possible fumble. In business, profits and cash flow can allow the business to grow, be more efficient, upgrade and integrate technology, and improve business operations and management. Profits and cash flow can allow a business to go on the offensive to capitalize on an opportunity.
Next on the defensive chart is financial liquidity, which would be analogous to linebackers in football. The linebackers are available if the defensive line breaks down as a backstop. In some cases, the linebackers may create offensive opportunities with a sack or improve field position. If a business’ profits and cash flow are hindered, similar to what has happened during the COVID-19 pandemic, working capital can be a great fallback position. Others will leverage extra working capital and cash for proactive growth opportunities to capitalize on a competitive position or a possible marketing window.
Finally, examine equity and capital on your financial depth chart. Equity and capital can be used as a backup for a debt restructure if profits, cash flow, and working capital are hindered. If profits and working capital exist, equity and capital can be utilized as financial leverage to offensively grow the business. In football, equity and capital are analogous to safeties and cornerbacks, which are available as a last resort countermeasure if all else fails before them. However, safeties and cornerbacks may resort to taking some proactive chances for an interception or blitz to force a turnover. They will do this if they are assured that they have a strong defensive line and linebackers or, in the business case, strong profits and working capital.
Analogous to defensive schematics in football, analyzing your financial depth chart is important to develop your defensive and offensive game plan for your business.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.