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Back in the Black? Don’t Just Sprinkle the Money Around
Jul 19, 2013
10 smart ways to prioritize spending of your dairy’s excess cash.
By Riley Walter, attorney
Recent reports on declining corn prices and possible increased prices are giving distressed dairymen some hope. They realize they may soon have some excess cash remaining after paying the operating expenses and debt service.
So, what does this mean? Does it mean distressed dairymen should just resume business as usual? Having been through these crises in the past, I know that the typical response is to "sprinkle" the excess revenues around over the various, long patient vendors, with a little bit going here and a little bit going there.
Because it is my view that this "sprinkling" is not the best approach, I thought I would elaborate on some things that you might think about as this excess cash becomes available.
The crisis has been long and deep. It is not likely that distressed dairymen are going to be restored to perfect health in the short term. This means that the wise distressed dairyman will prioritize how this excess cash might be best used.
Below are a series of things that you might think about.
1. First, look at your list of payables and figure out which ones really helped you get through the crisis. It might be a vet, CPA, lawyer, feed supplier, harvesting company, etc. Consider rewarding your "friends" before paying those who cut you off. Don’t just "sprinkle" the cash.
2. Look around to see if you have deferred maintenance. Of course you do. Maybe that excess cash should be used to get your place back into proper condition.
3. In most financial crises, the first people to be let go are the bookkeeping types. Most of the time, people emerge from the crisis with records in shoddy condition. Now would be a good time to figure out how to get the records in proper order. Get all tax returns on file. Get all environmental reports up to date. Work on financials.
4. You have probably deferred investment in technology. This might be a time to get caught up.
5. Look at your legal structure. You probably saw how painful it can be to be organized as a partnership when things are going south. Should you now look at alternative structures?
6. You need to look hard at your list of payables. There will be many people on the list that have been very patient. Many creditors have not sued to collect on the debt because they knew it would not be worthwhile. However, now that there may be light at the end of the tunnel, you really should expect that the number of collection lawsuits will pick up. Are you prepared for this?
7. During the crisis, did you become lax on keeping titles to assets correct? Do you need to re-title anything and get it on the appropriate set of books?
8. Is there any possibility of building a reserve or cushion? Do your loan documents require that you keep every bank account at your primary lender? Can you open an account at another bank?
9. Consider whether you can use excess cash to go to vendors and offer to settle debts at a discount. Be careful about cancellation of indebtedness being treated as income.
10. If organized as an entity, can you pay the debts that have been personally guaranteed?
The point of this is to urge you not to revert to the "old ways." This crisis has been brutal. Hard lessons have been learned. Don’t revert to doing things the way they were done during the flush times. While distressed dairymen may be emerging from a long nightmare, it is not entirely over yet. Use the welcome excess cash to strengthen the operation and don’t just sprinkle the money around. Prioritize.
Riley Walter is an attorney and founder of the Central Valley-based Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at 559-435-9800 or RileyWalter@W2LG.com.