When margins are tight, you need to know where you stand

Calculating your current ratio will tell you if you’re in good shape — or if trouble is heading your way

When margins are tight, you need to know where you stand
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Commodity prices and the weather have been volatile and expenses are trending upwards because of a weaker Canadian dollar — so now is a good time to review your marketing plan.

“If you aren’t paying attention to your marketing plan or don’t have one, you may find yourself with a reduced margin,” said provincial financial specialist Rick Dehod.

“If severe weather has affected your farm this year, your yields may be negatively impacted and you may also end up with a reduced margin. If there is a large crop and issues with delivery or shipping, you may find yourself with a reduced cash flow.”

But there are things that can be done to help, he said.

“Start with your current ratio, which is your crop and input inventory (accurately valued) and accounts receivable and cash divided by your accounts receivable, your operating loans, advances and your principal payments on debt coming due within the next year,” said Dehod. “If this ratio is 1.5 to one or greater, you probably can focus on other things for the short term.

“If the ratio is under 1.5 to one, you should probably be concerned about how things will look for the winter. You may want to fine tune your marketing plan and your cash flow management. If the ratio is below one to one, you should be taking steps to make sure your farm survives to the next growing season.”

Also look at debt service requirements.

“This is the total of your principal and interest payments that are due in the coming year, expressed in cost of production per unit.”

Take, for example, a 2,000-acre farm with $600,000 of debt. If the annual repayment of principal is $80,000 per year and the interest is $30,000 (a five per cent interest rate), the total yearly payment is $110,000 — or $55 per acre.

“This number can be used to quickly gauge if your yield/price combination will be enough to pay the input costs and make your payments,” said Dehod.

It’s important to be proactive and keep in regular contact with your lender, he added.

“Lenders consider themselves as partners in your operation and will usually work at maintaining a relationship with you,” he said. “You should view things the same way. As a farm manager, keeping your lenders up to date with what is happening on your farm is very important, especially when things may be tightening up in cash flow or profitability.

“With proper lead time, most lenders will try to work with you to maintain a manageable cash flow and keep your farm moving forward.”

For more information on cash flow management and a grain-marketing plan, go to agriculture.alberta.ca and search ‘farm manager.’

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