By Sylvie Lévesque
Between risks of storms and rare sunny breaks, this year has not been an easy one. Maybe our economy, with its up and downs, has put a damper on your new measures to control expenses. How do you keep a clear head when we seem to be constantly caught between storms?
1st point: Measure the impact of your investments. The typical entrepreneur is by nature very imaginative when the environment is grim. Therefore, we see people make large investments under the pretext that their old methods of production are the main cause of their company’s problems. For example, a crop producer might invest in levelling and drainage for his fields. Is the business currently in a financial situation that allows him to make this investment? What seems to be a logical and profitable investment may not be at the time you come up with it. Each investment must be justified and its impact on available cash (working capital) must be accurately measured in the short and long-term. The solution to a difficult financial situation is not necessarily additional debt.
2nd point: Keep some room to manoeuvre. At the time of writing, the prime rate is 3.25%, but don’t think that it will stay at this level for very long. Always imagine a situation that is more pessimistic than reality. For example, if the rate increased to 6%, by how much would you have to increase your productivity or decrease your expenses to make your payments?
3rd point: Keep your cash and avoid large investments. In a difficult context, you must always think in terms of the worst. Beware of super “deals.” Even if you are convinced that a particular deal is a once-in-a-lifetime opportunity, don’t rush to change a comfortable situation into a high-risk one. Think it over!
4th point: Guarantees do not make payments. In agriculture, guarantees are generally more than enough; the hard part is generating enough money (or funds) to make loan payments. When it becomes hard to make your payments, be sure to work honestly and openly with your banker. In exchange, ask him to comment on your financial situation. This will make it easier for you to make decisions.
5th point: Watch for warning signs and react quickly. Your ability to quickly see a storm coming and react appropriately will make all the difference during a difficult period. Certain signs cannot be mistaken, especially when accompanied by several others: for example, you presently have a moratorium on paying principal or interest; you are overdrawn; you have requested a bank note to pay your suppliers. These are some signs of a precarious situation. You must think short term and quickly make the decisions necessary to avoid a financial meltdown.
6th point: Think about divestiture. Certain investments are too costly for what they return. A dairy farmer who makes less than 100 large round bales per year could sell his baler and contract out the work. Divestiture may be temporary. To free up some cash for your business, you can get rid of some equipment (the least used or the most expensive) and buy it back when your situation has improved. Another way to divest would be to focus on what is most profitable for your business. Sometimes it is better to rent out certain buildings or land instead of using them. Rental income will increase your short-term cash holdings.
Everything can be summed up in a few words: in difficult economic situations, you must hope for the best, but be ready for the worst.
* Sylvie Lévesque is a Senior Advisor at National Bank of Canada
This article first appeared on Farmcentre.com (http://www.farmcentre.com/News/TodaysStory/Article.aspx?id=d799667c-a206-4ee2-bd17-b3cca2115bf3) and is the property of the Canadian Farm Business Management Council.”