October 14, 2022
For many of you reading this column, loan renewal season is just around the corner for operating loans and interest rate resets on long-term loans that were fixed years ago. Layer on negotiations for cash rents and the next few months have a number of important tasks. I was recently on a panel where I was asked, “What should lenders be discussing with borrowers in this type of economy?” Let's discuss the “starting five” topics.
Monitoring financials once per year will not cut it in this economic environment. Inflated costs, increasing interest rates, and large deviations in commodity prices can quickly change profit outcomes in any business. A projected quarterly or even a monthly cash flow can be a great tool to anticipate both surpluses and deficits. Better yet, develop various cash flow scenarios with different costs, prices, interest rates, and production to determine profit and loss outcomes. The year 2023 appears to be setting up some economic scenarios with much uncertainty. This is why overall budgets and enterprise budgets can be tools to allocate resources to generate profit given various pricing and cost windows.
Breakeven Cost of Production
Next, cost of production and breakeven points are one of the starting five. In order to take advantage of profit windows, you must know your breakeven point. The days of government payments to soften the blow of margin compression will dwindle in number and amount. As an exercise, determine your breakeven cost of production excluding government payments as a guideline to ensure profitability and sustainability.
Marketing and Risk Management Plans
A marketing and risk management plan will be in the vocabulary of proactive and progressive producers. The key is to not only to plan, but to execute, follow through, and monitor results. Extreme rainfall, droughts, and other adverse weather events require a plan to prevent major losses occurring on the balance sheet.
Working Capital and Liquidity
Lenders really need to address working capital and liquidity needs with borrowers. The amount of available funds on working capital lines of credit can quickly be reduced with inflated costs. “Just in time” or “just in case” inventory plans may require one to activate plans B or C where working capital is quickly converted to cash. In these situations, having adequate working capital on hand can be a difference maker when taking advantage of opportunities.
Accrual-adjusted Income Statement
Making decisions using accrual-adjusted income statements versus a Schedule F tax form can be a useful analysis for lenders, but also for borrowers. Remember, studies completed by both Purdue University and University of Illinois found that Schedule F tax forms vary by 40 to 60 percent when compared to accrual-adjusted income statements. Imagine making decisions using information that lacks this type of transparency and accuracy in today's economic environment!
Both producers and lenders need to “step up their game” as the economy continues to throw twists and turns in the decision-making process.
Source: David Kohl, who 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.
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