Holiday cheer is behind us and another year beckons us with all of its challenges and opportunities. The following are some of my thoughts on the radar screen, thinking strategically for 2014.
The large grain crop in 2013 resulted in price adjustments on the revenue side for grain operations. Cash flow projections using these new prices and possibly lower costs of fertilizer and some other inputs will be necessary to ascertain margins. Cash rent and land value adjustments may require more time to determine whether the lower price expectations are a blip on the radar screen or part of a longer term trend.
The burn rate on working capital will be a focus for 2014, particularly in the grain industry. First, schedule an appointment with your lender. Pay close attention to the top half of your balance sheet, which includes current assets and current liabilities. The difference between these two factors is net working capital, which is a measure of liquidity. If your business projections predict a negative margin, divide that amount into the working capital reserves to determine the burn rate on your working capital. Will the reserves be used up in one, two or three years at that rate? The longer the time, the more resilient your business will be in a downturn.
Pay close attention Federal Reserve action. Tapering, or the reduction of economic stimulus, has begun. Expect this to occur at a rate of approximately $10 billion less per month incrementally if the economy improves. Pay close attention to unemployment rate reductions that may prompt change in Federal Reserve action. In the first quarter of 2014, follow gross domestic product (GDP) growth rate. If growth continues at a rate similar to the most recent quarter, around 4 percent, along with increase in inflation rates, then an increase in interest rates will be a higher probability.
What is your tolerance for interest rate hikes? First, conduct a financial sensitivity test on the impact of rate increases on the bottom line. If it is a major game changer, discussions concerning debt and interest rate structure may need to be a high priority in 2014.
This New Year, like any other year, starts out with identifying your business, family and personal goals and testing these against the vision and core values of your business. Work from a set of accurate financial statements with your lender to discuss financial metrics and benchmarks for your business and for the industry. Developing a cash flow operating plan with a sound risk management plan in alignment with your financial statements and goals can be a good kick off regardless of the business cycle.