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.