A Look Ahead for 2022
January 14, 2022
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A Look Ahead for 2022
You have read in past articles that this time of year is sort of like a harvest time of our own in the bank, in that we get very busy helping customers determine how 2021turned out, and, we’d say more importantly this year for sure, what 2022 may turnout to look like. If we had a crystal ball, our job and your job would be much easier, but of course that is not the case. Rather, there are ways to maybe not predict, necessarily, but otherwise project what may take place based on what we know today. We have sat down with most, if not all, of our producers by now to at least put together the year-end balance sheet. Obviously in 2021 with strong yields (in most areas), strong prices, and what now looks to be very reasonable input costs this past year, things in general look very strong. People were able to build equity and working capital that we spend a lot of time talking about. In short, profits were good!
The focus now quickly turns to 2022, and it might be safe to say that most producers are nervous about the coming year with much higher input costs standing in front of us. Will these products cost more or less by spring? No one knows, not even several of the people selling the products due to various supply issues that we won’t discuss here. However, this is where the cash flow projection comes in.
When you sit down with your lender to do your cash flow projection, you plug in acres, anticipated yields, input costs, loan payments, living expenses, etc. You might say, “How do I know what to plug in for certain inputs?” Well, one place to start is either what you may have spent so far if any were prepaid for tax purposes, or current prices based on anticipated application rates for this year. As of the date of this article, new crop cash prices were around $5.00 for corn and $12.00 for beans in this area, give or take. Starting with current numbers including costs, what does that project for 2022? Can profit still be made albeit less than 2021?
From here, once you have established a baseline cash flow projection, you can start to look at other scenarios. What if input prices go up even more by X%? What if yields are more/less? “What if” questions can be applied to each and every category. Based on those scenarios, a person can look at a projected balance sheet and say if things happen in2022 exactly how it is plugged in (which of course it likely won’t), then this is what my balance sheet will look like one year from now. Does it show additional strength in the financial measures? Does it show some deterioration, but may still look good at the end of 2022? Does it suggest a coming financial train wreck (such as negative working capital or other form of significant deterioration)?
So now you have an idea of what a scenario will look like in terms of projected end-result, the next step is what to do about it. Maybe it still projects a very desirable outcome. Well, then you just do your best to stick to that plan and do everything you can, in fact, control to make it happen. Maybe it projects a highly undesirable result. In that case since you are just starting out on the year, there’s still time to see what tweaks can be made to instead project a better result. It is still no crystal ball, but it might be the next best thing when you can utilize this type of tool.
As we’ve said in many past articles, awareness is half the battle. This sort of exercise also goes back to Dr. Kohl’s Business IQ chart that we have talked about, and hits a good portion of those points. To name a few of those that this exercise would address:
*Knows of Cost Production *Understands Financial Ratios
*Knows Cost of Production by Enterprise *Marketing Plan Written and Executed
*Utilizes Projected Cash Flow *Proactive vs Reactive vs Indifferent
*Financial Sensitivity Analysis
Going through what is described in this article will help you score high on at least half of Dr. Kohl’s Business IQ checklist of 15 critical questions right off the bat because the information gained can be used to accomplish all the items listed above. Our lenders are in the process of helping put together cash flow projections right now at this time of year. The race for 2022 has started, and at this time, you have the ability, to some extent, to influence where that financial finish line is placed to increase your chances of winning the race!