Business Matters: Optimize Your Lender Connection

February 24, 2016 02:16 AM

Communication is the single, most-important aspect of your relationship with your lender during difficult times. Access to capital for the foreseeable future will have a different look from in recent years. High cash rents, land payments, equipment payments, labor costs, family living expenses and taxes still require basically the same amount of cash as when commodity prices were much higher. 

This situation has caused many operations to burn through working capital as farmers face tight margins. Accrual accounting or some form of profit-center analysis will be key, as there will be more operations needing access to capital at higher levels.

Getting Started. What basic information does your lender need? Start with a clean set of cash-accounting documents and personal balance sheets, along with business and personal tax returns. Additionally, an accrual-based set of books with accurate inventories will soon be a basic requirement. Ensure you have an accurate balance sheet with consistent year-over-year values assigned to large assets such as land, equipment and infrastructure. 

Once those details are in place, ask what additional information your lender would like to see. It might include written business, operational and marketing plans. Once you have a clear understanding of the lender’s expectations, you’ll better understand where you’ve been, where you’re at and where you need to be, moving forward. 

Office Objectives. Then develop a lender checklist, like the one below. Develop a standard operating procedure as you put information together so data are compiled in the same manner each year. 

Clearly identify the profit centers within your business. Distinguish expenses for cattle, trucking and grain, for example. The only way to know which parts of your business are profitable is to clearly identify each unit and evaluate it on its own merit.   

Additional support from a cost-of-production tool listing all expenses including price, yield, premiums and government payments can quickly help you see how strong prices and good yields, or lower prices and challenging yields, will affect your bottom line. Use this information to show your lender you’ve thought through the challenges and opportunities ahead and have developed solutions for each scenario. 

Prioritize Finances. We’re just entering the growing season and the heavy workload that comes along with it. Be conscious of your workload. 

Prioritize your duties to stay closely connected to the financial health of your business. It’s critical you designate ample time for the office. If the workload on the farm seems like more of a priority, consider hiring an office person, secretary or CFO. 

Even subtle neglect of financial conditions during this loss or low-margin timeframe might be catastrophic for some farms. Conversely, paying attention to details and staying in close contact with lenders, financial partners and consultants will set the stage for your business to eventually thrive.  

Sample Lender Checklist for 2016

Use these action items to guide conversations with your lender to communicate information that will help you maintain healthy finances. 

  • Identify year-ending cash flow
  • Project next year’s cash flow
  • Create personal balance sheets
  • Build an earned-equity balance sheet
  • Craft a market-value balance sheet
  • Pull farm and personal tax returns     
  • List actual cost of production from previous year for each profit center
  • Project cost of production for the upcoming year for each profit center
  • Outline stressed, average and best-case scenarios for profit centers     
  • Draft a profit plan with action items    
  • Set quarterly meeting dates for communication
  • Control and monitor plan implementation


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