John Ellsworth and his staff at Success Strategies have helped us to better organize our business decisions through the development of an annual operating plan.
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This is a question many people are asking. I believe it’s something we need to be looking at regularly. As far as when you should fix them, that depends on many factors.
* Are you planning to stay with your current lender?
Are there any Prepayment Penalties? They have committed to investors to pay a fixed rate on their funds. Thus, you will likewise be committed to the bank.
* Will you be increasing your loan amounts soon?
Be certain that this doesn’t impact your rates. Often, they’ll set up fixed rates on portions of your loan at various maturities.
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Use the following questions on the financial analysis of your business. The first question, “What is our current performance?” In the area of finance, we would naturally consider measures such as profitability, cash flow and debt service coverage. Many of us study expense items when our revenue is lower, as in 2006. I would challenge you to review these line items in the good times as well. It is easy to let costs slip upward when there is less downward pressure on milk prices and cash flows.
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Wow! Wasn’t 2009 a real tragedy in terms of overall cash flow and bottom line results? It was absolutely pathetic for most producers. Since then dairymen have been enjoying the fruits of higher milk prices. How can we avoid revealing the same calamities again? What could you have done differently as a manager? These are critical items to spend some time on.
The world of finance continues to amaze me. Recently, I had two clients whose banks decided that, in their opinions, they can no longer survive.
Well, well, isn’t that interesting…I don’t want to rain on anyone’s parade, but they had already survived! We had been in the process of rebuilding their working capital and positioning them for a better outcome during any future downturn. Learn from the past, and see what needs to be changed. For those items not optimal, let’s adjust our course so we achieve better results going forward.
I’ll give you an excellent example that had recently happened with one of my clients. We approached the bank with the possibility of refinancing their real estate and moving some short term debt onto their real estate. This is not that unusual of an approach to restructuring someone’s debt load. Nonetheless, it was an excellent example of how something as simple as a debt restructure can turn an operation around. This client achieved a positive monthly cash flow within 2 months! As you can imagine, they moved forward in a very positive manner when milk prices climbed. The lesson here was that if their lender had dwelled in the past, they would still be struggling with their cash flow today.
What can we do to position ourselves for a better future? First, here are a few things not to do:
- The worst strategy is whining. Whining is rarely a successful response, so stay proactive in managing your operation.
- Do not, under any circumstances, burn any bridges. Successful businesses are built upon RELATIONSHIPS. Develop them and guard them closely.
- Don’t attempt to “spend your way out of a business slump.” Analyze your capital expenditures and operating expenses.
Here are some items you should do for your business:
- Be proactive. Study your business and make smart decisions. Consult with your lender.
- Utilize your professionals wisely, and seek advice from the right people.
- Are you having your Accountant prepare regular accrual financial statements? If not, you are missing one of the best tools available to your dairy operation. They will also assist greatly in obtaining the financing you need.
- Take a close look at developing a marketing plan for your milk. Look closely at Put Options to place a floor under your future milk prices.
- Finally, develop a plan. This should be a guideline that includes each of the previously mentioned items.
Develop your plan and include your lender in it. Then, you won’t be asking yourself where all the lenders have gone. They will be knocking on your door.
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One of the most common problems faced by many businesses today revolves around their ability to obtain financing they need. This challenge becomes even more pronounced when we are faced with a tight lending environment. This has been compounded by the Sub Prime Mortgage mess and its related financial issues! This certainly magnifies the importance of maintaining a solid banking relationship.
Whenever one of my clients or a prospective client I am working with gets turned down on a loan proposal, it is imperative that we review the facts and explore “why?”
Subject: The Virtues of Speed
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For a fascinating example of speed and action combined, just watch what happens in the pits at an Indy car race. As outlined in Fast Company’s book The Rules of Business, there are four primary rules that guide both the driver and his pit crew in their respective roles.