There are so many things that are beyond our client’s control that have an impact on their businesses. The weather, as we have seen this year starting with the flooding in Nebraska this past spring, has been unusually wet resulting in a lot of crops being planted late or not at all. As summer went on some areas then became too dry and then too hot and now concerns about an early frost before crops mature are all things taking place that are out of our clients' control.
Trade, with the negotiation of a new USMCA agreement, now waiting for its ratification; new tariffs with China with those trade negotiations being up and down practically on a daily basis; along with possibly new trade agreements with Japan and Europe are all factors that impact our clients business on a daily basis and are out of our client’s control. Then add in one “TWEET” for good measure, and it all changes again.
All of this constant change is out of our clients' control. It can be very unsettling to their businesses and their peace of mind, but if we can help our clients to focus on the things they can control in their business, they can be more successful. There are many tools available and many things that can be done to help our clients increase control of the direction of their business. For a dairy farm a good starting point is putting together a detailed balance sheet. Taking a close look at working capital is a good first step. Spending time to formulate strategies to preserve working capital or improve it by managing the current assets and current liabilities and managing the farm business is important.
Helping your client to focus on the net worth of the farm business and to analyze the noncurrent assets and noncurrent liabilities is also important. Are there opportunities to sell some nonproductive assets such as some underutilized equipment and reduce debt and increase equity percentage? Perhaps selling some land that’s further away from the dairy and renting land that’s closer can help improve the equity position of the farm business. Equity of the business is the culmination of all the years of earnings and hard work of your client, and is the war chest of the business to take it through difficult times. Encouraging your clients to take time brainstorming and planning on methods to preserve and improve their equity position will help then bring more control to themselves and their businesses in these volatile times.
Another tool for your client to help bring more control back to them in their business is to put together a detailed monthly cash flow budget. That budget will help indicate to the client when the cash surpluses and shortfalls are expected to occur in their business. Knowing those surpluses and shortfalls in advance will help your client manage their cash flow better and be more in control. Also having your client compare budget to actuals at least quarterly and then digging into the reasons of why the farm business is either ahead or behind budget and what changes need to be made will help your client take more control over the direction of their business. Running breakeven analysis and sensitivity analysis on those budgets also will help your client’s better see what may be coming well in advance which will help them manage better and give them more control.
There are also many risk management tools available to your clients to help them minimize risk which helps them control their business, from marketing using the futures market, dairy revenue insurance, and crop insurance, just to name a few. Using these risk management tools in conjunction with the balance sheet and income statement tools discussed above all help bring control back to your client as they manage their business.
Your dairy clients also do not have to do this alone. Advising your client to utilize their team of nutritionists, crop consultants, veterinarians, financial consultants, brokers, machinery and equipment specialist, and you, their banker, for ideas and expertise, all help your client manage their business better and bring back control.
In summary, we all know there is a ton of “uncontrollable” that impacts your clients' businesses in today’s world and that is here to stay. The best way, in my estimation, for your client to try to “control the uncontrollable” is for your client to take control of their own farm business by controlling the things that are controllable in their business. As your clients take that control in managing their business using some of the tools and methods mentioned in this article, they will make their businesses stronger and more able to withstand more of the volatility that they will continue to face. As a result, this will also give your clients less frustration and more peace of mind and control over the uncontrollable.
Adams is senior vice president of agribusiness banking with BMO Harris Bank, NA in Green Bay as is the current Past Chair of the WBA Agricultural Bankers Section Board of Directors.