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Balance sheets do not guarantee security

There is a misconception that everything on a balance sheet guarantees security in an operation. Irv Bard discuss the importance of understanding the relationship between a balance sheet and security, emphasizing that it depends on the structure and type of operation.

Want to learn more about finances and business? Keep reading to find out!

 

Balance Sheets and your operation

Irv begins with the mention of eyeballing cattle instead of counting them. This sets the tone for the discussion about the misconception surrounding the balance sheet and security. Simply having items listed on a balance sheet does not automatically mean they are secured.


Irv mentions that people often believe that everything on the balance sheet is tied up in security, but this is not the case. The level of security depends on the structure and type of operation. For example, if someone is in a 30-acre ranch in Oklahoma and moves cattle frequently, they may have a more secure position. However, we caution that this is not always true for every situation.


There is a great unfairness of lenders staking a claim on everything listed on a balance sheet. We know lenders can sometimes become heavy-handed and want to have control over all assets. However, this is not always necessary or fair. If the operation is strong and has a good security position, there is no need to secure personal assets like a family member's house.


The importance of a trusted business relationship and understanding the diversity among lenders is crucial. Borrowers should explore different lenders and their approaches to security. Compare this process to dating, where it may be necessary to switch lenders if the current relationship is not working.


There is a changing landscape of ag banks and some institutions are stepping away from the agricultural sector. Not all banks have the expertise or capacity to underwrite agricultural deals. This further emphasizes the need for borrowers to explore different options and find a lender that aligns with their needs.


In terms of financial documentation, Irv discusses the industry standard of tax returns as proof of income and expenses. However, he also mentions that having a good set of actual income and expense records can provide a more accurate and consistent picture of the operation's financial health. He also highlights the importance of matching the balance sheet to the year-end of the operation, as it helps in preparing for tax-related matters.

 

Syncing financials with calendar year


Syncing financials with the calendar year is a crucial aspect of managing a business's finances effectively. Aligning balance sheets with the year-end is crucial for structuring loans to correspond with the calendar year. We also explore the impact of the timing of financial statements on different types of operations, such as cattle operations and stocker operations.


Walter Lynn, is praised for his proactive approach in advocating for balance sheets that align with the calendar year. He emphasizes the importance of providing accurate and complete information to lenders, rather than rushing to restructure loans based on incomplete data. This approach ensures that the financials are meaningful and reflect the true financial position of the business.


The timing of financial statements can vary depending on the type of operation. For example, in a cattle operation in Northern North America, taking a balance sheet on March 1st may not provide an accurate picture of the business's financial health. This is because most of the liquid assets, such as feed, would have been depleted by that time. Expenses would have already been incurred, resulting in a less appealing balance sheet. On the other hand, a stocker operator on the Southern Plains may find September 1st to be the ideal time to assess their financials, as they have completed their year and can present a more accurate representation of their performance.


We also highlight the importance of a good lender who understands the specificities of different operations and can take into account the seasonal nature of certain businesses. By providing additional context and information about future prospects, such as upcoming crop yields or the availability of liquid assets, a business can present a more comprehensive financial picture to their lender.


It is crucial for business owners to ask questions and seek clarification from their lenders. Understanding the terminology and jargon used in financial discussions is essential to ensure a clear understanding of the business's financial position. By actively engaging with lenders and sharing information about the business's financial standing, business owners can establish a trusted relationship and gain valuable insights into their financial health.

 

Financial ratios vary for different operations


Financial ratios vary for different operations. Irv discusses the importance of considering various factors when assessing financial ratios for lending institutions. He mentions that there are 16 different ag ratios, but emphasizes that it all breaks down to a few basic ones that are focused on by lenders.


Each operation is unique and needs to be evaluated in its specific context. Factors such as the operation's maturity, structure, and goals all play a role in determining the relevant financial ratios. For example, a well-established operation that has been around for 40 years will have different financial needs and priorities compared to a young beginning person trying to get started.


One key aspect that he emphasizes is the importance of cash. He mentions that cash is always king and having liquidity and risk-bearing ability is crucial. He highlights the significance of having cash and some wiggle room to ensure smooth operations and prevent potential financial crises. There are times when running a tight financial ship is necessary, but it is not sustainable in the long run.


It is also important to transition appropriately as the business grows and matures. As businesses progress, they need to ensure they are adjusting their financial ratios accordingly. He cautions against staying in a mode where the rubber band is super tight for too long, as this can lead to problems. Irv stresses the need for businesses to recognize their stage of maturity and adjust their financial structure accordingly.

 

Different generations, challenging business visions



Challenges arise when different generations have differing business visions come together. There are inherent differences in risk tolerance, asset bases, energy levels, and interests between a younger generation looking to start a business and an older generation who has been in the industry for many years and is nearing retirement. These differences can create tension and difficulties in managing a business together.


One of the key points is the importance of putting enough margin in the business to weather unexpected glitches. The example given is of a situation where the cost of hauling steers was higher than budgeted, but because the cattle had enough margin in them, the business was still able to survive. This highlights the importance of having a financial cushion and being prepared for unexpected expenses or market fluctuations.


Another point is the importance of learning from past mistakes and being prepared to go broke in order to learn how to make money. This highlights the learning process that comes with running a business, especially in the agricultural industry where there are many variables that can impact profitability. Successful business owners are those who are able to adapt and come up with a plan to work their way out of difficult situations.


There is also a need for business owners to have a plan in place when approaching lenders during tough times. Going into a lender's office with a clear plan of how to address the situation and work towards a solution is crucial. It shows the lender that the business owner is proactive and committed to finding a way out of the difficult situation. On the other hand, not having a plan and simply continuing with business as usual is not a viable solution and can hinder the lender's ability to help.

 

For more tips on lending and ranching head over to listen to our podcast episode where we talk to Irv about all things lending for your business.


The Ranching.FYI is part of an initiative to create an online library of the best information available for ranchers. The team recognizes the need for professional development that doesn't require ranchers to leave their properties for extended periods. By providing access to a variety of quality education the aim is to empower ranchers to improve their practices and achieve greater success.

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