We are all aware of the challenges to managing finances when margins are tight. It may be surprising, however, that there are challenges to managing finances when margins are wide. I’ve heard it said that “some of the best managers are made when managing through the good times.” If that’s true, then we’re making some of our best managers right here, right now, this season.
This season has us facing a different set of challenges than the last few years. With these challenges come opportunity, though. As margins widen and working capital increases, opportunity is abundant. As a lender, the challenge that sticks out to me is finding the right mix of debt reduction and asset purchases while managing working capital and future cashflows. So, what’s the opportunity accompanying this challenge? The opportunity is the ability to heal some of the wounds picked up in the lean years to make progress on some of your farm’s growth goals.
A common question that gets asked is why is balancing debt reduction and asset purchases so important? Because – as demonstrated in the next two points – getting the balance right is key to positioning your operation for success in the future. Balancing debt reduction and asset purchases is vital to setting your operation up for success in the future.
Maintaining debt payment levels consistent with - or less than - prior years is an excellent strategy for setting your operation up for success when the margins narrow once again. Paying cash for purchases today reduces the payments you have to make tomorrow, thereby freeing up your future cashflows to take advantage of future opportunities. Beyond that, it more closely matches up your tax bill and liquidity by avoiding payments on fully depreciated assets.
Borrowing money for all your purchases in this environment may work now, especially with these low rates. However, remember that asset values rise and fall with profitability trends and this translates directly through to your balance sheet. The machinery that you borrowed against at a 60% loan-to-value may fall to a 75% loan-to-value just based on valuation changes. A deteriorating collateral position reduces your ability to commit collateral when financing future opportunities.
AgCountry likes to see strong working capital on a balance sheet. Even more than that, we like to see an operation that utilizes its working capital to encourage future growth. If you’ve had an asset on your purchase list for years and there is an opportunity to buy it, talk with your lender to find the best blend of cash and financing. Today’s low-rate environment makes it a great time to borrow money. Don’t get me wrong, as a loan officer, I’m here to write more loans! Just be sure to consider future cashflows before adding payments to today’s cashflow. Thoughtful management through the good times will ease the stress of managing through the lean times.
