Getting In “Over Your Head” Financially

July 16, 2010

In a recent webcast for Canadian bankers, I was asked how I could tell when an agricultural producer is getting in over their head financially. While this list is not comprehensive, these are a few characteristics I have observed during my career.

• For agricultural producers, a common sign of financial difficulty is the failure to pay operating lines of credit to a zero balance. Yes, occasional problems like weather, markets, or timing of sale of income generating assets will result in balances. However, the refinancing of shorter term debt on a consistent basis results in the loss of equity and long run deterioration of the farm business.
• Build-up of accounts payable in the business accounts and credit card debt on the personal balance sheet are additional signs of distress. Common balances on distressed credits are close to $100,000 for many businesses and $20,000 to $40,000 on the personal balance sheet.
• Sale of capital assets like land, livestock, and machinery to meet operating losses is a telltale sign of trouble. Selling capital assets generates non-recurring income, but it will eventually erode the asset structure and earning power of the business.
• In large, complex businesses with multiple owners, a sign of getting in “over your head” is financial problems with partners or third party counter party risk. An example of this is when businesses have financial problems because they are not paid for work or products.
• Sometimes communication problems from both the lender’s and borrower’s perspective become an issue. Often the lender is too busy or the borrower does not realize problem exists or is avoiding the problem.
• Finally, late payroll for employees and workers is usually the final straw denoting serious cash flow problems.

Annual financial summaries, open communication, and early detection are keys for success.