Balance Sheet Changes May Bail Out Cash Flow

In today’s agriculture economy, “creative financing” means looking beyond cash flow to put your operation on better footing.

We have developed case studies examining three actual farm operations, all solvent (a positive net worth) but with liquidity problems (insufficient working capital and, in some cases, negative net cash income). Instead of focusing on variable costs, the producers restructured loans, unloaded underperforming assets and applied other “creative” solutions to liquidity problems.

Steve Johnson, farm and agriculture business management specialist with Iowa State University Extension, is presenting the case studies at our free GrowingOn® 2016 meetings scheduled for February 29 in Emporia and March 1 in Seneca and Ottawa. Larry Landholder is one of the featured producers.

Larry owns 1,500 acres and rents 500. His operation is solvent, with net worth of $4.5 million, including $2.5 million in land equity. Net farm income for 2015 was positive at $64,000. However, Larry lacks working capital, which is negative $77,000 ($34/acre), and has two machinery loans with annual payments of $138,000 and one real estate loan payment of $95,000 a year. Suppose Larry trims his input costs by $35/acre. That boosts his income by $70,000 — certainly an improvement. But Larry still can’t meet his machinery payment and he risks reduced yields. And what about next year?

Instead, looking at his strong balance sheet, he could use equity in his land for a new $130,000, 10-year loan to pay off a machinery loan. A new 20-year loan for $800,000 on real estate equity would allow him to pay off the other machinery loan, pay down his operating loan and strengthen his cash position. As the simplified table below shows, working capital would jump from minus $77,000 to $414,000. And while real estate payments would rise from $95,000 a year to $180,000 a year, machinery payments would drop from $138,000 annually to zero. Netted out, that’s $53,000 a year less in debt payments.

Financial categories Status Quo Solution
Working capital -$77,000 $414,000
Machinery/equip. payments (princ + int) $138,000 $0
Real estate payments (princ + int) $95,000 $180,000
On a per acre basis
Working capital per acre -$38 $200
Machinery payment per acre $69 $0
Real estate payment per acre $63 $120

We invite you to attend one of our GrowingOn meetings in eastern Kansas to learn more about how Larry Landowner and other producers are managing fixed cost to better position their operations for success in today’s challenging agricultural economy.