It’s Ground Hog Day! or How to Escape the Cycle of Debt.
Recently, I was reading a book entitled Your 5 Day Weekend and discovered the following quote, which was part of an analysis that the authors Nik Halik and Garrett B. Gunderson were relating to their readers about the dangers of the historical mantra of putting in our 40-hour work week and then retiring, after which we would get to live on about 40% of the income that we had previously received each week when we were working. I’m not here to judge the merits or challenges of doing this, but it got me thinking about another “drug” that we sometimes get trapped by when we are in business.
“There are essentially only two drugs that Western civilization tolerates: caffeine from Monday to Friday to energize you enough to make you a productive member of society, and alcohol from Friday to Monday to keep you too stupid to figure out the prison you are living in.” Bill Hicks
While I am not an advocate of this type of thinking, nor am I judging its merits, it did stimulate my own thinking with regard to another “drug” or crutch that many businesses depend on – DEBT…
Three years ago, I suggested to many of my Clients that within the next five years, most banks would not be willing to offer herd and feed lines of credit to dairy operations any longer. Guess what. As the saying goes, “It’s Ground Hog Day!” We are seeing this more and more. Unfortunately, it came sooner than even I thought it would. As a result, it might be a great time to start thinking about better ways to finance your business.
I am in favor of using more secured long-term real estate loans to finance your business whenever it is possible and then minimizing the amount of herd and feed debt you carry in your operation. My reasons for this are multiple. First, it will tend to boost your overall cash flow by amortizing and repaying your loans back over 20-25 years. It also will keep you within normal lending guidelines as you repay the loan.
I have had several occasions where Clients have said, “Geez, I’ll never get out of debt with that 25-year amortization.” Try telling that to the producer who has now ratcheted up his short and intermediate term debt just to stay alive in business. Please don’t forget, that with long term real estate loans, you also two options: 1.) You can repay it early if you hit the lottery or just become very profitable in your operation. 2.) You can always re-borrow against the same real estate or additional improvements you’ve made on it. This simply takes some planning, and that, in and of itself, is not a bad thing…
It’s time to start weaning ourselves of any extreme dependence on these short and intermediate term loans. Yet, how about the producer who says, “Well, golly. I’m just not cash flowing. I need these short-term loans.” My response is three-fold. First, do you know your production cost per cwt? If not, you are “traveling the world without a map.” Second, have you gotten your costs within a reasonable level to where, in relatively normal times, you could cash flow? Finally, have you identified any new revenue sources lately? This could be your long-term solution or even possibly a way to get all of your debt paid off. I recently suggested that a Client of mine sell his excess heifers to generate some additional cash. “What? They won’t bring as much as they used to, John.” I agreed that this was true. However, they will bring in some cash, and they ended up bringing in more than we had thought they would. Guess what… They also cut his cost of feeding heifers by $6,000 to $7,000 per month, representing a solid continuing monthly cash improvement. Think about it.
If you would like to learn more about similar topics and the tactics our Clients have used to improve their outcomes, as well as what applications of these lessons you can make in your business, please join us for our Success Strategies Mastermind Groups. They are designed to teach more people the Finance & Strategy Concepts that I offer business people. Signups have now started, giving you the opportunity to learn these same concepts and meet with other producers who have overcome some of the same challenges you may be facing. Check them out at:
https://success-strategies.com/mastermind-group-for-dairy-farmers/
If you have any questions, please e-mail me at john@success-strategies.com. I’m always open for a follow-up call and, as always, wish you the best of success!
