How Comfortable Are You With How Your Operation Is Positioned?

March 22, 2021 | AgFocus-Ag Focus

The spring-like weather has been a welcome thing, and we are also thankful for the much needed moisture recently received! Spring farm work will begin before we know it. We’re a year in from when the COVID-19 pandemic started in the United States and in our area, but as we’ve seen our rural communities have been able to keep going relatively well, and we are on the doorstep of planting the next crop. We wish you a productive and safe planting season!

How Comfortable Are You with How Your Operation is Positioned?

By Lee Potts | Vice President / Senior Credit Officer

It has again reached that time of year where all the numbers have been crunched, taxes have been filed (or will be soon), plans put in place, and various things getting started for the 2021 crop. Here at the bank, we have also pretty well finished our own harvest season of sorts as we work through renewals with customers. As planters hit the fields, grain continues being hauled, and cows get moved to pasture, we, too, move into the next phase at the bank. Before we do that, however, we thought now would be a great time to reflect on the benefits that the numbers you and your lender worked hard to put together and analyze. 

At the end of each year,  your lender asks you to provide updated balance sheet and/or cash flow numbers. As you know, doing so does so much more than just checking a box on a checklist of information needed to complete a loan file. You spend valuable time putting the numbers together to bring to your lender, therefore it only makes sense to interpret what those numbers mean for your operation. 

The numbers should be able to provide answers to the following questions.

Balance Sheet

  • What is the current level of working capital and how did it change from last year?
  • Is the current level of working capital enough? If not, how much would be enough for my operation?
  • What is the current level of equity?
  • What is the equity change as a result of earnings in the operation, and asset valuation changes factored out of that change?
  • Was the equity change as a result of earnings in the operation enough, and how much would be enough for my operation?
  • Does my current debt structure help or hinder my operation? What changes might make sense?

Cash Flow Projection

  • What is an adequate limit for my line of credit? How might that limit be affected by changes in timing of income or expenses?
  • What effect on my working capital and equity will this projection have? 
  • Will said effect move my operation closer to or further from my financial goals in the coming year?
  • Will this projection demonstrate positive earnings in the coming year? If so, will those earnings be enough to service debt and build working capital and equity?
  • What changes, if any, should I make in my operation to better answer the questions above?
  • If this projection suggests satisfactory results, what do I need to start doing from a marketing standpoint to begin securing the revenue needed to achieve this result?
  • Are there various small, incremental changes I can make to cost structure which could add up to significant dollars?

As can be seen, there is a vast amount of insight to be gained by finding answers to the questions to the right. Upon reading the questions, more may come to mind. Looking at these numbers to draw detailed insight can be a powerful tool with which to make decisions each year for your operation and in turn work toward certain financial goals in a methodical, calculated way. Overall, you become more in control of the financial aspect of your operation, gain the ability to achieve goals, and if necessary, roll with the occasional punches. How comfortable are you with how your operation is positioned based on the elements discussed as you go into 2021?