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April 2012 Archive for Fiscal Fitness

RSS By: Dairy Today: Fiscal Fitness, Dairy Today

Financial management experts, lenders and accountants share ways for dairy producers to improve money and credit management. Look for help on budgets, taxes, loans, financial performance and even bankruptcy.

Caught Unaware: Observations from the Recent Crisis

Apr 30, 2012

Five eye-openers about legal structures, liens, tax consequences and property ownership from an attorney who’s seen them firsthand among dairy producers.

 
Riley Walter bio photoBy Riley Walter, attorney
 
I have had the opportunity and honor to represent at least 40 Central California dairies since the beginning of 2011. It has been an extremely difficult time for many of these dairymen and their families.
 
It has been a real eye opener. Dairymen are among the hardest working people ever. They are also great risk takers, given the tremendous complexity of the dairy business. There is a risk everywhere you turn. 
 
Over the course of a year and a half, some generalized observations can be made. The hope is that readers would be able to apply these observations so as to prevent some of the heartache and hardship that results from not learning the lesson.
The points below are fairly general and are only the tip of the iceberg of my observations about dairymen and their financial acumen. Naturally, not all of these observations apply to every dairyman.
 
1.       It has been a real eye opener to realize that many dairymen do not really understand the consequences of their legal structure. I have heard numerous dairymen express a complete misunderstanding of what it means to be a general partner and have joint and several liability on all of the debts. It also has come as a surprise to realize how many dairies are sole proprietorships even though they are very large, sophisticated, complex businesses.  Lesson No. 1 is to make sure that you understand the consequences of whatever structure you are using.
 
2.       It has also come as a surprise to realize that many dairymen do not understand the nature and extent of the security interests and liens against their assets. Many have expressed a complete misunderstanding of what a blanket security is, such as that typically held by a commercial lender. So many dairymen seem to think that if the item of equipment or livestock is not shown on the list attached to the security agreement, it is free and clear. Not so. The second lesson to be learned is that dairymen would be well served to periodically double check the nature and extent of the liens against their assets.  
 
3.       It seems to come as a huge shock to many dairymen to learn that if their herd and other assets are liquidated they may, nonetheless, end up with a huge tax consequence. Dairymen are masters at playing the tax game and rolling things forward. However, when the merry-go-round stops, it can come as a rude shock to find out that hundreds of thousands of dollars are owed to Uncle Sam and the state governments. The third lesson to be learned is that dairymen would be well served to have a complete understanding of their tax situation and the consequences of a bankruptcy or liquidation.
 
4.       Dairymen often seem surprised to learn that there are a number of “secret liens.” These are liens that arise by statute such as the California Livestock Service Lien and the California Dairy Cattle Supply Lien. These are liens that can be placed against the assets of the dairymen without even obtaining a signature from them. It can tie up a lot of assets and cause great consternation with the dairymen's lender who has been “primed.” The fourth lesson to be learned here is that when times get tough there are a number of secret liens that can pop up and attach to the assets of dairymen.  
 
5.       This observation deals with titles to both real and personal property. Some dairy operations have been going on for generations, and they have transmuted from father, to brothers, to partnership, to limited liability company, etc. Yet many times the title is never changed. It has been a surprise to me to come across so many situations where the land is not in the name of the entity that is farming it or operating it. Similarly, major personal property assets may never have been properly titled. This can create real issues when times get tough. So, the fifth lesson is that dairymen need to make sure that the titles to their assets line up with the operating structure.
 
These five items are just a few of the many observations gleaned over the last year and a half.  In the next article, I will address lessons learned about the financial acumen level of dairymen and what might be done to upgrade that level.  
 
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.

Keep Your Lender in the Loop to Stay Ahead of the Game

Apr 16, 2012

Financial communication with your lender is critical as the dairy industry heads into a possible period of red ink. It makes a huge difference in how your lender can help you.

By Marc Ehlers, Bank of the West
 
As our cycles in the dairy industry continue, we are facing a period of marginal or negative cash flows. Since 2009, communication with your lender has become even more important (not that it wasn’t before), both from your standpoint and theirs. With increased regulations and scrutiny within the lending industry, quality and timely information becomes a necessity for your lender to be able to meet your needs. 
 
Below are three keys to successful communication with your lender.
 
1. Verbal communication with your lender.
Keep in touch with your lender on a regular basis. This doesn’t mean you need to call, email, text or drop in to visit him daily, but a short phone call goes a long way. If things aren’t going perfectly, increase the frequency and make sure he is in the loop with what is happening in your operation. The flip side is true as well: Know what your bank thinks of what is going on in the industry.  If you are having difficulties cash-flowing, chances are your neighbor is as well, and your lender already knows. What your lender doesn’t know is what you are thinking. How are the decisions you are making effecting your cash flow? Is your perspective of where the market is going the same as your lender? Let your lender know what your plans are going forward.  Be sure your lender is informed with what is going on in your operation, lenders don’t like surprises.
 
2. Numerical communication with your lender.
As most of the industry knows, reporting requirements by your lender have increased significantly over the past three years. This probably includes increased frequencies for position reports, financial statements and collateral inspections.  These requirements were born out of both increased regulatory pressure on your lender as well as the overall performance of the industry in 2009. With the difficult times we are in, provide your lender with your updated cash-flow projection. Don’t send him something that shows milk and feed prices that aren’t attainable.  Send him a cash flow that you can support by historical or actual current information. If you have a negative cash-flow projection, how are you going to cover the shortfall?  Do you expect your lender to cover it? Your feed supplier, local farmer, outside cash/investor?  This makes a huge difference in how your lender can help you. 
 
What changes are you going to make to improve your operational efficiencies? Are there any that can be quickly accomplished? How does it change the overall performance of your operations? Provide your lender something tangible that can be used to help him meet and support your needs. Whatever you provide your lender shouldn’t be a surprise since you have been communicating verbally with him on a regular basis. You know your business better than your lender does. Provide him with accurate timely information.  What you provide them helps him be a better lender and you a better client. 
 
3. Fiscal communication with your lender.
Most of you can provide a snow storm of information about your operation that can overwhelm your lender. Most lenders are not dairymen. If they were, why would they be lenders?  They are trained to look at information in a systematic way, which enables them to compare and evaluate your performance relative to your past performance, current industry conditions and your peers. In order to do that effectively, they require CPA-prepared accrual financial statements (review quality preferably). These financial statements are your communication method with your lender and his organization. Since they are prepared according to a standard set of accounting guidelines, they are a valuable communication tool for your lender within his organization.  This allows him to represent your operation in terms a decision maker will understand. 
 
Since financial statements are the primary tool a lender uses to evaluate your operating performance, they should be accurate, timely and representative of what you have been communicating to your lender.  A quality CPA firm can provide you with accurate, consistent, and timely financial statements that your lender will appreciate. With this level of reporting, you will recover in better financing.  The CPA information you provide to your lender is from an independent third party and validates the prior information/communication that you have provided on a more frequent basis. 
 
As with the prior communication, make sure you understand the financial statements you are providing your lender.  Spend the time to go over them with your CPA so you can answer most of the questions your lender will have about them. If you understand them and what the differences are between your information and your independent CPA financial statement, you will be ahead of the game.
 
Keep your communication conservative, consistent and pragmatic to keep a sound relationship with your lender.
 
Marc Ehlers is a senior vice president and regional manager with Bank of the West. Based in Visalia, Calif., he can be reached at Marc.Ehlers@bankofthewest.com.
 
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