Milk Producer - May 2010 - (Page 21)

FARMFINANCE By Jim Snyder Beyond the numbers Your financial records and business plan can reveal a lot about your business success f you’re looking to expand or pass along the farm to your son or daughter, your financial records and business plan can reveal a lot about your financial performance and chance of success. Although you may run a profitable farm business, providing adequate financial records will help your lender better understand your operation, while helping you obtain the working capital you need to reach your goals. The lending environment has changed dramatically the last few years. Margins are smaller and risks higher. You may be surprised to learn the criteria your banker used when you first entered the industry no longer fulfil today’s lending requirements. As such, your lender cannot rely on your Measuring your financial performance is financial statements alone to just one of the criteria your lender uses assess your farm business. to evaluate your farm business. Farm records are usually a good indicator of progress. However, financial statements give farm income, non-dairy enterprises lenders only half the information and insurance coverage. A detailed they need to evaluate your dairy business plan can also bolster your operation. application to help secure financing. To conduct a thorough financial Information on your balance sheet analysis, your lender will want to and income statement gives lenders evaluate your income and cash flow the data they need to calculate these statements, balance sheets, tax key ratios: records, debt and asset values. They • working capital as percentage of will also want to determine your abilnet worth; ity to raise immediate cash in an • debt to tangible net worth; emergency, including evaluating off• debt service coverage; I • funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization). Analysing these variables, along with your collateral and cash flow, will help your lender determine your loan risk. Your milk cheque and DHI report also offer valuable clues into your farm’s production and efficiency. Top producers often rely on benchmarking to evaluate business success. It lets them compare their farm management practices to those of their peers with similar operations. Benchmarking also helps you understand and respond to business opportunities and threats. You may have heard the expression, “if you can’t measure it, you can’t manage it.” Your relationship with your lender is also important, an area that should not be overlooked. In addition to your financial records, your lender will judge your business character by assessing your ability to manage the farm. Criteria used can vary between lenders. Essentially, your lender is looking for the story beyond the numbers. The traditional banking model of the three-legged stool, which relied on collateral, cash flow and character, has changed. The premise was that if each area represented a leg of the stool, all three being equal, the MilkPRODUCER | May 2010 | 21

Table of Contents for the Digital Edition of Milk Producer - May 2010

Milk Producer - May 2010
Contents
Editor's Note
DFO Chair's Message
Provincial Perspectives
Dairy Update
National Policy
Farm Finance
Retailers Spotlight
DFC Promotion
The Future Arrives
Farm Business
Research
Applied Science
Ruminations
Markets
New 'N" Noted
Back Forty

Milk Producer - May 2010