Acquiring Working Capital. Presented by Allen Lash, CEO AgriSolutions Inc. Top Producer Seminar January 22, 2009

Transcription

1 Acquiring Working Capital Presented by Allen Lash, CEO AgriSolutions Inc. Top Producer Seminar January 22, 2009

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3 Working Capital Fundamentals

4 Working Capital Sources The Only Ways to Build Working Capital Profit Partial liquidation of non-current assets Equity Gifts or inheritance Sale of an equity interest (stock or a partnership) Move current liabilities to long term Debt compromise

5 Working Capital Working Capital Formula Total current farm assets Minus total current farm liabilities Equals working capital Positive Working Capital Example Total current assets $1,000,000 Minus total current liabilities $ 600,000 Equals working capital $ 400,000 Negative Working Capital Example Total current assets $400,000 Minus total current liabilities $600,000 Equals working capital <$200,000>

6 Asset Philosophy's Effect on Working Capital

7 Working Capital and Growth You can Grow your total farmed acres FAST Or Purchase farmland, build sheds, etc. But you can t do both.

8 Why? Assets with a low annual turnover can t produce cash fast enough (farmland, etc.) Assets with a low annual revenue over time may add equity BUT equity is not cash (working capital). Unless the assets are sold OR borrowed against, you can have lots of equity and no money.

9 Your asset philosophy has a major impact on the amount and availability of working capital

10 PROFIT DEBT EQUITY

11 A Primary Financial Concept Debt and Equity s only purpose is to fund assets (includes current assets). Assets only purpose is to generate revenue. Operations only purpose is to convert revenue into operating profit. Operating profit s purpose is to increase equity, to pay debt, provide for family living, and add working capital and/or more assets.

12 Financial Problems Assets that can t generate enough revenue Operations management s inability to convert revenue into operating profit Results of the above problems: 1. Have trouble paying principal as it becomes due 2. Depletes working capital 3. Can t grow Debt, assuming the assets and operations are efficient, is NEVER a core problem

13 There are Three Types of Assets General Asset Description Operating assets ATO 50 to $1+/$1 assets Investing assets ATO 8-15 rev/$1 assets Personal assets ATO minimum/no annual revenue Implication to Working Capital The best for working capital Slows working capital Impedes growth and working capital Preferred Funding Alternative Debt Equity with limited debt Cash very little debt

14 Heritage Viewpoint of Profit use Ranking Philosophy Operating Investing Personal 1. Farmland 2. Equipment 3. Buildings 4. Technology 5. Infrastructure 6. Toys 7. Working Capital 8. Employees 9. Taxes

15 Three Profit Use Philosophies Fast Aggressive Growth Taxes (9) Working Capital (7) Infrastructure (5) Technology (4) People/Employees (8) Equipment (1) Buildings (3) Farmland (2) Toys (6) The items in bold are operating assets. Heritage Growth Equipment (1) Farmland (2) Buildings (3) Technology (4) Infrastructure (5) Toys (6) Working Capital (7) People/Employees (8) Taxes (9) Serious Investors Farmland (2) Working Capital (7) Infrastructure (4) Toys (6) Taxes (9) OR Hobby Investors Farmland (2) Toys (6) Infrastructure (4) Taxes (9) Working Capital (7)

16 Of the Three Asset Philosophies Only the operating assets concept is conducive to building significant working capital

17 Asset Funding Concepts

18 Debt and Equity Concepts Assets = Liabilities + Equity (Net Worth) The right side of the Financial Statement (debt and equity) 1. Current liabilities 2. Non current liabilities 3. Equity Contributed capital Earned capital Inflation-related capital

19 Debt or Equity Which is Best for Funding Assets? Use debt to finance operations (current liabilities) and for assets (long-term) that have a high asset turnover. Equity funding should be used for low return and/or high risk assets.

20 Working Capital Concept

21 Financial problems of the 1980 s Marginal or negative working capital Asset values plummeted Operations had no cash and/or access to cash

22 Volatility usually makes liquidity working capital a much more important financial management factor. Because Lenders will foreclose or shut off credit first to operations with: Marginal or negative working capital. High debt to asset amounts.

23 Liquidity is Key Liquidity/working capital is one of the most important financial concepts: During good times, there are more expansion/growth opportunities. During bad times there are more expansion/growth opportunities. Liquidity offers the opportunity for more revenues commodities can be held through low prices. Liquidity often reduces costs (can purchase cheaper and cheaper interest). Liquidity reduces stress.

24 Analyzing Liquidity Four basic working capital business rules: 1. Get liquid with good working capital. 2. Get liquid with good working capital. 3. Get liquid with good working capital. 4. Do whatever it takes to accomplish 1, 2, & 3.

25 Methods for Measuring Liquidity There are four methods for measuring liquidity: 1. Current ratio 2. Working capital quantifies dollars 3. Working capital - as a % of revenue 4. Working capital per unit (i.e., acres, sows, cows)

26 Working Capital Working Capital Formula Total current farm assets Minus total current farm liabilities Equals working capital Positive Working Capital Example Total current assets $1,000,000 Minus total current liabilities $ 600,000 Equals working capital $ 400,000 Negative Working Capital Example Total current assets $400,000 Minus total current liabilities $600,000 Equals working capital <$200,000>

27 Working Capital Percent of Revenue Working capital $400,000 Divided by annual revenue/vfp $2,000,000 Equals working capital percent 20%

28 Working Capital Different types of operations need differing amounts of working capital. Factors outside an owner s direct control determines the amount of working capital.

29 Working Capital Risk Factors Farrow/Finish Grain Dairy Cow/Calf Livestock Feeder 1. The ability to hold the commodity through periods of lower prices 2. Has government and/or other prices supports 3. Price stability of major input costs Yes No No No Yes Yes No No Yes No No No 4. Disease usually reduces production as opposed to eliminates production, i.e., causes death 5. Stable replacement costs (i.e. feeder livestock) Yes No Yes/No Yes/No n/a n/a n/a No

30 Working Capital Risk Factors Grain operations least amount of working capital 1. Commodities can be held through periods of lower prices. 2. There are government price support and/or loans. 3. Input costs are relatively stable. There are several major expense categories (i.e., fertilizer, chemicals, seed & rent). 4. Most plant diseases reduce yields; not kill the plants. 5. There are no replacement costs.

31 Working Capital Risk Factors Dairy operations low average amount of working capital 1. Milk cannot be held through extended low price cycles. 2. Most dairies have access to some form of price protection. 3. Feed is the major input cost and feed prices can change rapidly. There is less input cost stability. 4. Most cow diseases or sicknesses reduce production as opposed to killing the cows. 5. Replacement costs are reasonably stable with cows/heifers..

32 Working Capital Risk Factors Farrow-to-finish, farrow-to-feeder pig/weaned pig and cow/calf operations average amount of working capital 1. Market pigs cannot be held through extended low price cycles. 2. There are no price supports or loan programs. 3. Feed is the major input cost and feed prices can change rapidly. There is less input cost stability. 4. Most serious cattle and pig diseases, PRRS, TGE, Lepto, etc., kill unborn pigs and calves and eliminate production. 5. Replacement costs are sows & cows. Price is reasonably stable.

33 Working Capital Risk Factors Purchased feeder livestock (cattle and feeder pigs) highest level of working capital 1. Market cattle and pigs cannot be held through extended lower price cycles. 2. There are no price supports or loan programs. 3. Feed is a major input cost and at times there is rapid changes in price. 4. Most feeder animal diseases slow production. 5. Replacement feeder cattle and pig costs are another major input cost and prices for replacements fluctuate significantly.

34 Working Capital per Annual Revenue Minimum Working Capital as A Percent of Revenue Grain farming Dairy operations Farrow - finish/cow calf feeder pig Feeder cattle and pigs Pre % or more of revenue 20% or more of revenue 30% or more of revenue 40% or more of revenue 2008 & Beyond 20% or more of revenue 25% or more of revenue 35% or more of revenue 50% or more of revenue

35 High Plains Revenue/Acre Working Capital % Working Capital/Acre Pre 2008 $280 15% $42 Post 2008 $450 20% $90 Working Capital increased a minimum of $48 per acre

36 Midwest Revenue/Acre Working Capital % Working Capital/Acre Pre 2008 $450 15% $67.50 Post 2008 $850 20% $170 Working Capital Increased a minimum of $ per acre

37 Theoretical Example

38 Theoretical Example

39 Theoretical Example

40 Assuming a $100 per acre profit, after paying income taxes, reserving working capital and arranging storage for additional crops, an operation has a projected $17 to $31 per acre to allot for the following: Servicing Current Debt Additional Owner Demands Growth in excess of 10% per year Equipment Infrastructure Technology Etc.

41 Summary Five alternatives to improve Working Capital Asset philosophy impacts the ability to build working capital. Volatility impacts the importance of working capital Ensuring adequate working capital in 2009 should be a priority

42 Questions? Allen Lash, CEO Daryl Pohlman, Director of Industry Relations AgriSolutions Inc Delhi Road Brighton, IL If you re near Brighton, IL, please be sure to stop by and visit us at our Corporate Headquarters... only 40 miles northeast of St. Louis, MO.