Talk with your banker about where you stand


by Darren Frye, President & CEO, Water Street Solutions

At Water Street Solutions we custom-tailor financial, risk protection and marketing plans together to fit each operation and its level of risk tolerance. That means we frequently have conversations with farmer clients to help them gain an understanding of where they are financially—because the farm's overall financial health is a main focus.

Another partner who works with farm leaders and is very interested in an operation's financial health and viability is their lender. Safe to say, your banker is very interested to know how things are going. It’s a good idea to be proactive and openly 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 a 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. 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 leading into a poor production year, the trend of your net worth would end up much different than if you had. If you passed on insurance and forward-marketed your crop early in the season, later having to buy back because of poor production, the situation would be dire, forcing your net worth 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. If working capital is going down, the banker will want to know why you’re not making money and what you’ll 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.