On a recent webcast with lenders, I suggested a written, one-page recovery plan for producers seeking refinancing or debt restructuring. Clearly, producers in this situation are experiencing cash flow and working capital issues, which require corrective action. One of the lender participants asked, “What are the elements that should be monitored on a monthly and quarterly basis in the recovery plan?”
To begin, the plan should establish targets concerning price, production, and cost. From those, develop a projected cash flow with different scenarios with good, poor, and average outcomes. For example, start with a round estimate of the number of bushels, or pounds per milk or meat.Then, apply a range of price scenarios for that production. Estimates of quarterly or monthly expenses, and business and living withdrawals could also be developed for each scenario.
With projections for various scenarios, one can more easily work with a lender, and other advisors to track performance and possibilities. Of course, when poor performance is not corrected, possibilities become more limited. In addition, it is very useful to list deviations from the projections, both positive and negative. The next logical next step is to list the reasons for those deviations. For example, was production down because of weather event, or did a decline in feed costs boost your net income, or perhaps lower fuel costs cut operating expenses.
Another item to monitor in the recovery plan is the marketing targets. Did the producer breakeven? And are the marketing strategies being executed? In other words, too often producers get caught up in emotional marketing decisions, allowing a weather forecast or market signal to sway them from their logical, objective plan.
One other category to monitor is family living withdrawals. Similar to cash flow, projected numbers are useful for family withdrawals. Many times, this means making a family budget with specific categories. In fact, some of the best family budgets are developed using data from state farm record systems such as Nebraska, Kansas, Kentucky, Illinois, the FINBIN data out of the University of Minnesota, and others.
While the specific elements to be monitored are important, it is the actual, consistent monthly and quarterly financial monitoring that is crucial to business success. Today’s farm business owners and managers simply cannot wait until November and December to assess financial conditions if they want to stay viable. Particularly in cases where the lender has worked to grant refinancing and alleviate short-term financial pressure, savvy producers will use monitoring to lead and navigate the business through recovery.