Navigating a Class V Economic Rapid
The other day, a reporter asked a good question, “Is there one underlying theme amongst producers, lenders and agribusinesses that presents itself during your webcasts?” One word that describes the feelings of many is uncertainty. How does one navigate these uncertain economic and social times where new trends appear to be occurring overnight? Let's dust off a few of my favorite tips.
Start by managing the factors you can control with a focus on drilling down to the strategies and tactics that lead you closer to your vision, goals and objectives. Controllable factors include knowing the cost of production and executing a marketing and risk management program that aligns with profit objectives or, in some cases, minimizes losses.
For some producers, this year has brought government support payments. These new programs and stimulus checks have made a difference on the bottom line for both business and personal cash flows. The payments may have assisted in navigating the short-run financial and economic white waters, but what is the long-term plan if government payments are no longer available for support?
A word of caution is appropriate for many of these programs with low interest rates. Recently, I overheard a producer indicate that he was going to borrow as much as he could during the low interest rate environment. My comment was that cheap money can be expensive when there is insufficient net earnings or cash flow to service the principal and interest payments.
Over the years, I have stressed the importance of working capital and cash flow for both households and businesses. On the personal side of the budget, it is recommended to keep at least six months of living expenses as liquidity. And on the business side of the budget, when dividing net working capital by expenses, the target should be 20% or more. When this ratio falls below 10%, a sudden shift in financial or economic conditions could result in a wipeout.
Finally, having a good sounding board of advisors who work well together can provide both financial and emotional support. Initially, the unfolding implications of the COVID-19 pandemic were very distracting. Focusing and working together as a team increases the probability of navigating a Class V economic rapid and arriving safely on the other side.
Please send your remarks to AgGlobeTrotter@accountlist.com. I would like to know what you are thinking.
< View All Blog Posts