Farm Finances: Where did the cash go?
As farmers are gearing up for spring and busy planting corn, lenders are busy reviewing their financial information. One would think that all financial information is prepared alike. However, as a lender, I can tell you first hand we work with many different types of financials. Some provide market-based balance sheets and tax returns while others provide full Generally Accepted Accounting Principle (GAAP) statements. No matter what the operation, one question we’re hearing lately is, “Where did all the cash go?”
For the clients who provide market-based financial returns, our analysts will work with the producers to make the proper accrual adjustments on their income statements. This includes accounts receivable, accounts payable and most importantly any adjustments to inventories. As we are reviewing market-based financial statements with our clients and analysts, the question inevitably comes up: “Why is cash flow tight when I am making money?” It isn’t hard to see that we continue to have a rising corn and hog market with impressive positive margins forecast through the summer months. The problem is, for individuals that are using cash accounting, it may seem like they are struggling to realize the cash flow they were counting on. Where producers can help their own understanding of the financial performance of their operation is to move to GAAP or make the appropriate accrual adjustments to their balance sheets.
Just looking at the database information we compile at Compeer, cost of production went from $69.59 per cwt. at year-end 2020 to $81.94 per cwt. by year-end 2021. This was a $26.45 per head increased productions costs year over year with an average 214.2 lb. carcass. Using the database costs assuming a $40 wean pig cost, that is an average of $107.75 inventory costs for year-end 2021 versus $94.53 per head the previous year. This is $13.22 per head increase in your previous year’s inventory costs. For an operation that sells 100,000 head or has 50,000 head on inventory, that is an increase to inventory of $661,000 that should be realized on the balance sheet with a positive adjustment to earnings. This is just one example of where your cash went. As I stated earlier, I believe we all understand that, but the importance is being able to have that conversation with your lender and making certain you have adequate working capital during an inflationary period especially when it looks like we will have a similar increase to inventory costs for year-end 2022!
For more information on managing your operation, check out our other insights and resources!