Farm Financial Health

Transcription

1 Farm Financial Health Annual Checkup, Pitfalls, Strategies for Success Aquaculture Economics & Marketing Workshop July 15,2017 Carole R. Engle, Ph.D. Engle-Stone Aquatic$ LLC

2 Successful businesses are complex & require many good decisions. Market decisions Production decisions Scope & scale decisions Profitable Business Personnel decisions Financial decisions Management decisions

3 Each farm business is unique: Different financial positions Different labor forces Different strengths & weaknesses Production decisions Scope & scale decisions Market decisions Profitable Business Personnel decisions Financial decisions Mgnt. decisions

4 Use Marketing Plan to Inform Overall Business Plan Revise annually; set new goals to improve! Facilities, location Production system Permits, licenses Customer service Risk management Financial plan

5 Cash Flow Financial Position Profitability Financial Success $ Successful Aquaculture Businesses

6 Cash Flow Financial Position Profitability $ Successful Aquaculture Businesses

7 Do you have a cash flow budget projected for 2017? 1. Yes 2. No 3. Working on it 4. Not a producer 52% 20% 28% 0%

8 Where does cash go? (Why are cash flow problems so common?) Debt payment New equipment Business Unexpected expenses Well pump goes out Vehicle repair Renovations to meet codes Receivables Inventory

9 Revenues often seasonal.

10 Given the amount of capital used in aquaculture, two key questions are: 1. What is my cash balance right now? 2. What do I expect it to be 6 months from now?

11 How often should cash flow be measured? Monthly!

12 Common pitfalls in developing a cash flow budget Overly optimistic yields Overly optimistic sales Under-estimating expenses Omitting capital replacement items Omitting loan interest & principal payments

13 Preparing a cash flow budget Prepare sales forecast Project cash inflow Project cash outflows Combine month by month Analyze & take action

14 A monthly cash flow budget $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 -$25,000 -$50,000

15 INTERVENTION NEEDED!!! $80,000 $60,000 $40,000 $20,000 $0 -$20,000 -$40,000 -$60,000 -$80,000 -$100,000

16 Watch your cash! Protect it! Pay attention to the details, monthly.

17 Cash Flow: Checklist Indicator Interpretation Good Marginal Problem Ending cash balance Outstanding oper. loan Cash flow coverage ratio Higher or lower than beginning balance? Higher or lower than beginning of year? Above or below 1?

18 Cash Flow: Checklist (Cont.) Indicator Interpretation Good Marginal Problem Debt-servicing ratio Cash flow risk % revenue can decline & meet cash flow % op. expenses can increase & cash flow Higher or lower than beginning balance? Higher or lower than 10-25% Higher or lower than 10-25%

19 Managing cash flow: Short-term strategies New borrowing line of credit. Re-schedule loan payments. Establish clear payment terms. Keep bank informed. Slow expansion, renovations.

20 Surviving cash shortfalls Delay large capital purchases, like new equipment. Collect receivables. Get rid of stale merchandise, even if at a discount. Selling & leasing back assets, like tractors.

21 Surviving cash shortfalls Supplies: may get extended terms, if a good customer. Liquidate assets (last resort). Choose which bills to pay carefully. Payroll first. Crucial suppliers second. Ask others if payment can be skipped. Or make a partial payment.

22 Cash Flow Financial Position Profitability Financial Success $ Successful Aquaculture Businesses

23 Do you study your balance sheet and debt-to-asset ratio each year? 1. Yes 38% 2. No 29% 3. Working on it 21% 4. Not a producer 13%

24 Critical Warning Sign: Financial Position From Balance Sheet (Statement of Finances) Debt-to-Asset Ratio greater than 50%!

25 Hold em or Fold em?

26 Debt-to-asset ratio Debt-to-Asset Ratio & financial risk 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% Debt-to-Asset Ratios as Early Warning <50%, Low Risk >50%, Moderate Risk >100%, High Risk Foreclosure Year 1 Year 2 Year 3 Year 4

27 Indicator Interpretation Good Marginal Problem Current ratio Debt-toasset ratio Net worth Greater than 1.5; lower than 1? < 40%; > 65%? Positive? Increasing?

28 Production efficiencies (operations) Production efficiencies Stocking rates Feed formulations Feed conversion Quality control Inventory management Implementation timelines

29 Indicator Interpretation Good Marginal Problem Net farm income Positive or negative?

30 Initial symptoms of problems Simply run out of cash

31 Business must be adequately capitalized How will equipment be replaced if the business does not generate enough money for its replacement?

32 Does the farm have enough equipment to handle emergencies?

33 Risk: A Hidden Cost Research yields: Do not account for normal probability of losses from diseases & other factors.

34 Equipment already owned by farmer Cost frequently ignored if farmer already has a tractor. Yet tractor is needed for fish crop & cannot be used for other crops when used for fish.

35 Some budgets don t include costs of pond construction (annual depreciation). Where will $$$ come from for rebuilding?

36 Farmer s labor: Often not included in budgets. Farm must make enough money to compensate farmer for his/her time. Or, will quit farming fish to do something else. Need to value operator s labor at more than minimum wage. Farmers need to pay for college, insurance, retirement. Benefits can be 25% or more.

37 Farmers get tired of working long hours without financial compensation.

38 Nathan Stone s Wal-Mart Test We should be asking people if they can make as much money from small-scale aquaculture as they can as a greeter at Wal-Mart. Otherwise, they are better off working at Wal-Mart, where they can stay warm. Even hobby farmers need to make money.

39 Keys to avoiding pitfalls? X Plan for adequate capitalization. Maintain adequate cash flow. Farms that make adjustments every year. Do not let themselves get too far into debt before taking action.

40 Your Turn to Work! Choose one of the following & complete the annual checkup of financial performance: A. Baitfish/sportfish scenario B. Trout scenario C. Aquaponics Scenario D. Marine shrimp E. Your own business (if you have some financial information with you)

41 When Checklist Completed, answer the following questions: 1. What is the most serious financial problem on this farm? 2. What target should be set as a shortterm goal for the coming year to begin to address this highest-priority financial problem? 3. What is the next step to take in the search for options in terms of how to achieve the short-term goal set in #2.

42 Questions? Carole R. Engle, Ph.D. Engle-Stone Aquatic$ LLC