Bigger crops could also mean bigger financial headaches

By Randy Buhler

CSU Cooperative Extension agent, Logan County, agronomy

Colorado

This column has information gleaned from The Corn and Soybean Digest articles by David Kohl. David Kohl was our featured speaker at the Chamber of Commerce Ag Appreciation Day last winter. A few of you attended.

With high grain prices and potential large paychecks for this year's harvest, you may become a victim of a good thing going bad. Dr. Kohl maintains that more business management mistakes are made in good times than in bad. The recent blow up with sub prime mortgages illustrates his point.

Even in good times, the high costs of production can require the acquisition and use of credit to manage your cash flow through the year. Dr. Kohl has listed five ways in which you can harm your chance of receiving credit or a better deal for credit.

If you, or your spouse, have a credit score below 600, you will likely be denied credit. A score of 650 or below means getting a very close look before any approval. A score above 700 indicates a low risk loan.

Making a large equipment purchase or land buy down payment with your credit line or credit card can put you in jeopardy. Check with your ag-lender before making any large capital purchase with credit as a down payment. Otherwise, your relationship with that lender could get you a very high rate loan or no credit at all.

Stay current with your crop inventory and cash flow. Expecting refinancing while holding large inventory will not endear you with your lender. Trying to hit the very top of the market is not good marketing, or good management.

Inflating balance sheets to qualify for higher loan balances will not work unless you have the cash flow to go along with the higher balances. Inflating land values could put you into a high balance status, but your cash flow may not indicate an ability to pay financing costs. The lender looks at cash flow to approve your financing agreements.

Large paychecks can bring about extra spending for family living purposes. The business cash flow should warrant the cash expenditure on personal needs and wants. Excess spending can hinder your credit approval.

Dr. Kohl concentrated on the characteristics of good agribusiness management during his presentation at the Ag Appreciation day. The following principles were presented.

Failure to have a written business plan before startup can result in a shortage of capital that can doom many businesses before launching another enterprise or initial startup.

Have proper financial monitoring in place when starting your enterprise. A good accountant that understands the proposed business is essential. The proper financial measures need to be in place to help monitor financial progress or decline.

Understand and recognize the difference between price, value, and cost. Many businesses respond to problems by trying to increasing value and sales. Without knowing the breakeven costs, increasing size accelerates the problems and puts the business even deeper into the hole

Managing cash flow is paramount to success. For any business, cash is king. Inventory must be sold to generate cash flow. Trying for maximum profit by holding out for the top price does not generate cash flow, only bragging rights. That is assuming you are still in business by then.

Growth is essential for a business to thrive. The scary statistic is that 25 percent of all businesses filing bankruptcy had just completed their best year profit wise. Businesses that grow need to grow their working capital as well. Business failures accompany outgrowing the available business capital

Lenders can push a business failure, and not just by interest rates. Having the wrong terms, using cash flow to fund long-term assets, and short-term borrowing can devastate the economic viability of a business.

For agribusiness, failure to train a successor will become the second leading cause of failure during the next few years. The average age level of farm operators is over 55 years in northeastern Colorado. Without a competent, able successor to maintain and grow the future business, many farm operations will die with the death of the operator.

The University of Illinois, extension farm management specialists, Gary Schnitkey and Dale Lattz remind growers that rising grain production costs are attributable to much more than what goes in the tractor's gas tank.

Less than half of the increased operating costs are directly attributable to rising energy prices. Oil and natural gas are commodities. Commodity prices are notoriously sensitive to supply-and-demand changes.

Production costs that are not as energy sensitive such as cash rents, seeds, and pesticides have less chance of declining. This higher level of costs heightens risk as revenue declines could lead to lower levels of income.

They concluded that "Overall, higher revenue caused by rising prices may counter cost increases, leaving per-acre returns near recent levels."

Enjoy the good harvest and high grain prices. Take care you do not become one of the business failures that statistics predict.

10/8/07
3 Star CO\5-B

Date: 10/3/07

	Web hpj.com

Copyright/Privacy
Copyright 1995-2011.  High Plains Publishers, Inc.  All rights reserved.  Any republishing of these pages, including electronic reproduction of the editorial archives or classified advertising, is strictly prohibited. If you have questions or comments you can reach us at High Plains Journal 1500 E. Wyatt Earp Blvd., P.O. Box 760, Dodge City, KS 67801 or call 1-800-452-7171. Email: webmaster@hpj.com