Farming can be frustrating and at times unforgiving, especially when dealing with unfavourable weather.
It becomes worse when the adverse weather, like too much rain during harvest, goes on and on.
With higher input costs and lower commodity prices, it doesn’t take long before yield and quality loss begin to affect financial performance. Cash flow will at some point get tighter.
The severity of the cash flow challenge and the timing of when it begins to become an issue depends on the financial strength of a farm.
One bad year can be difficult enough, but it can become almost unmanageable if the problems start to compound over two or three years.
If you are one of the many farmers caught in this situation and are already dealing with cash flow problems or are wondering if you are headed in this direction, do not procrastinate:
- Determine as soon as you can if you have or are going to have cash flow issues.
- Determine the severity of the issue. Compare the cash you will have from the sale of inventory and other sources of cash to what you need to run the farm for the next year.
- Address the issue right away. Cash flow problems usually don’t fix themselves.
What are the options?
Farmers with inadequate cash flow have options. You may want to consider selling assets, contributing personal money to your business or even asking someone other than a lender to invest money in your farm (equity capital).
However, the first option usually is restructuring. Commonly known as terming out debt, it involves re-organizing the debt in your business. Debt is categorized as current (due to be repaid in the next 12 months) and long-term.
In its simplest form, restructuring the debt in your business moves some or all of the current debt to long-term debt.
It does not increase the debt in your business, but it increases your commitment to make principal and interest payments on the new long term loans. You must ensure you have the earning ability to make those payments.
The benefit of the restructuring is that unsold inventory can now go to operations instead of paying current debt obligations such as trade credit, repaying outstanding advances or maxxing out operating loans.
If the operating loan was repaid through the restructuring and the original approved limit was left intact, those funds are available to also finance operations
You need to determine how much working capital (cash) you require to finance operations for the next year. Looking at your cash needs to operate last year provides a good indication as to what you will need.
It is critical that you arrange the restructuring (terming out enough of the current debt) to end up with enough working capital. I’ve seen too many situations where farmers simply applied a Band-Aid to the problem.
Any action that takes away the stress associated with no cash flow will feel good, but will the restructuring provide longer term relief? If not, there’s a better than average chance that the cash flow problems will re-appear sooner than later.
It’s much better to organize the restructuring correctly, or as optimally as possible, the first time. Lenders will often look negatively at a situation where a farmer is back asking for some help with cash flow relief only a year or two down the road.
Whether you choose to restructure or opt for other options, there are pros and cons. That’s why it’s important to consider each option carefully and seek advice from people who can help make the best decisions for your unique circumstances.
Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or firstname.lastname@example.org.