Talk With Your Banker About Where You Stand

Last week I talked about having an understanding of where you are financially with your withering crops and your crop insurance. That article spurred a number of comments. It is obvious from those posts that there is some misunderstanding about the latest crop insurance rules. We're finding that as we have these insurance conversations with our clients, their bankers are also very interested to know how things are going. It's a good idea to be pro-active and share the information with your banker.

Bankers are worried, just as you were before you knew where you stood. We had a situation recently where one of our client's bankers did not believe that he could be in good shape with the crop losses that are out there. Using the right tools the right way makes all the difference. It's good to check in with your agent so you have the best understanding.

Two metrics that you can discuss with your banker are net worth and working capital. Both of these are good to track from year to year. Net worth trends are a reflection of the overall strategic business decisions that you're making. For instance, if you decided not to purchase crop insurance this year, the trend of your net worth is going to be much different than if you had. If you passed on insurance and forward marketed your crop early in the season, now having to buy back because of poor production, the situation is dire and your net worth goes down. The other metric, working capital, also suffers under those types of decisions.

Net worth is the part of the balance sheet you own. Your net worth is the equity that you have in your operation. If you have a million in assets and one half million of equity, you own half of your asset base. That means the bank owns the other half. Your net worth would be at 50%, which is your equity-to-asset ratio.

Working capital deals with the cash side of your farming business. It's your current assets minus your current liabilities. As you produce crops, raise livestock, or even collect an insurance indemnity, the cash you make builds your working capital. Bankers want to see growing working capital because that tells them you have a viable business. Your business plan is working and you're managing things properly. If working capital is going down, the banker will want to know why you're not making money and what you will do to change that.

There are different ways to figure working capital, but we look at the farm's gross revenue. Then we simply take working capital and divide it into gross revenue. Forty percent is ideal for the volatile times we've been in.

If you don't have enough working capital, first figure out why. Is it a production, insurance or marketing problem? Is it a spending problem? Diagnose what you need to fix and get your working capital moving in the right direction, even in the face of a weather-related financial setback. Then you can be truly proactive when discussing the situation with your banker.