Balance Your Financial Stress
Gus Wruck, Quality Assurance Specialist
In the November 15, 1998 issue of Hogs Today, Dennis DiPietre and Lee Fuchs provided suggestions on managing cash flow, working capital, and the balance sheet during this period of record-low hog prices. Suggestions include:
- Update an accurate balance sheet monthly;
- Calculate and manage your working capital. Build a working capital reserve (during good times) by taking the current ratio to 1.5 or more;
- Sell stored grains and buy back feed ingredients as needed;
- Avoid pre-paying long-term debt, and avoid structuring long-term debt payments over too-short a time frame, e.g. 10-year loan paid over 7 years;
- Renegotiate contracts or rates with suppliers. Bid-out nearly everything. Don't pre-pay insurance or rents. Renegotiate to monthly payments;
- Add equity capital from other business you own, or get subordinated debt infusion from suppliers such as feed companies;
- Consider joint ventures with partners who can add cash to the business or defer payments;
- Increase the level of contract production if you are expanding;
- Lease any asset whose technology changes rapidly, such as computers, buildings, trucks, etc.
- Re-structure short-term debt into long-term debt;
- Delay payables where possible (maximize your float). Speed up receivables. Shift your pay-period to monthly or every-two-weeks rather than weekly;
- Negotiate a temporary suspension of your principal payments on long-term debt. Renegotiate or refinance to lower interest rates. Avoid any unnecessary loan origination or processing fees;
- Turn inventory faster, such as selling hogs at lower weights. Do not hold any excess inventories in feed, medicines, breeding stock, etc.;
- Use a conservative market-value approach to valuing assets.
Financial danger signals include:
- Working capital below 10% of gross revenues;
- Current ratio less than 1.2;
- Long-term debt to equity ratio greater than 125%, with no new equity available.
