It’s often difficult during the busy growing season for farmers to complete all the jobs on their to-do lists. Some office-related tasks, such as financial management, are easy to postpone.
However, given narrow profit margins, market volatility and the impact of weather, it is increasingly important that farmers take time to work through a summer liquidity analysis.
If you are one of the many western Canadian farmers facing disappointing crop prospects, this exercise will be even more beneficial.
You likely started developing plans for the 2009 crop before the year arrived. You decided capital purchases, seeded acreage, rotations and market commitments. You arranged financing based on the operational plan. The plans projected net profit and cash flow outcomes to the end of the business year, either calendar or fiscal.
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Now you are well into the production cycle and those plans on paper are being affected by reality.
Liquidity and cash flow go hand in hand. A liquidity analysis exercise can include two parts:
n The first part is to understand your current cash flow picture. Compare your projected cash flow to the actual experience and calculate the variance.
n The second part is to project what cash flow might look like as the year advances, using the mid-year actual scenario as a starting point.
If you are in the fortunate situation where yield prospects are still good and market prices are close to what was projected, the future projection will likely need only to be carried through to the year-end.
Calculating the variance helps you focus on revenue or expense items that are differing significantly from projected values. Ask yourself what you can do with future projected sales or purchases to improve the situation.
In an example presented in the accompanying table, chemical purchases are already over budget. The farmer must decide whether applications that are planned for July and August are necessary.
Mid-year management decisions can have a significant impact on year-end profit.
If you did not get your entire crop seeded or if yield prospects are significantly decreased, you should extend your cash flow projection through until the fall of 2010, when new crop sales for that year will be available. The rationale here is simple and important.
There will likely be a cash flow shortfall, severe in some situations, and you will need to take steps to ensure there will be enough cash available to get you through.
One of these steps will involve your lender. It is better to go to a lender sooner than later.
Completing a liquidity analysis exercise that includes the anticipated cash flow requirement through to next fall will help you through the process. If your lender is unable to provide all the liquidity relief, you have time to examine other alternatives.
If you do not know how to work through a liquidity analysis or are unclear about options to manage liquidity problems, talk to an adviser, a consultant, an accountant or a lender to help you understand your situation.
Terry Betker is a partner with Meyers Norris Penny LLP, working out of the Winnipeg office. He is director of practice development in agriculture, government and industry. He can be reached at 204-782-8200.
