"Our lender indicated that the business should breakeven."

The other day, I overheard a current agriculture business owner with over $10 million in annual revenue state that, “After 10 months in operation, our lender indicated that the business should break-even.” With today's larger agriculture businesses with more zeros and commas on the balance sheets, income statements, and cash flow statements, one would surmise that the managers would have a better grasp on the financials. As we enter the seventh year of the agriculture economic reset, razor thin margins and extreme volatility do not allow for many mistakes.

Owners or managers of agriculture businesses, particularly large operations, should not be in a position of the lender providing a projection of the business’ financial viability. However, I often observe this situation with many larger producers. With that being said, the manager may delegate the financials to a qualified chief financial officer, accountant, or financial consultant. However, monitoring the financials is crucial for short-term and long-term decision-making.

Some lenders are indicating that if the financials are not closely monitored, then a six- or seven-figure loss can mount very quickly. If the owner or manager is not aware of the business’ financial position at any point in time, it is a red flag for increased risk.

Many businesses that have a normal risk rating in the “acceptable” to “good” range can quickly deteriorate to a “watch” or “substandard” rating. This not only places them into a higher risk category from the lender’s perspective but can also result in higher interest rates as the risk increases. The bottom line is that regardless of whether the business is small or large, passive and indifferent management of the financials is a recipe for disaster.

The cure for this situation is that the owner and manager must develop a cash flow for 2019. The next step is to use variance analysis to monitor the actual monthly or quarterly cash flow compared to the projections. 

Managing finances in today's economic environment is a side-by-side relationship between the business and the lender. Then, the business’ marketing, production, and financials can be tweaked as economic conditions change throughout the year.

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