how either lenders or farmers wish to satisfy borrowing obligations. The operation must be able to generate sufficient cash flow to finance the principal and interest repayments. Cash flows from operations must also provide adequate funds for the farm family to meet their living needs; many producers underestimate what that amount is.
Lenders will often refer to many calculations to determine the amount of cash flow available to service debt. Depending on the commodity being produced, most lenders will look for debt servicing capacity of 1.10 to 1.25 times the expected annual repayments of principal and interest.
Character
In addition to the financial criteria, it is important for your lender to be able to assess your ability to manage the farm operation and your commitment to success. While many farmers have had ongoing relationships with their lenders for years, those just starting out may have difficulty demonstrating this. For that reason, it is important that as a new generation takes over the management of the farm that they be integrated gradually into that role. They should be involved in the regular meetings with the lenders, accountants and other advisors to begin supplementing the technical knowledge that they possess about the operation with an understanding of the administrative matters.
Financial Statements It is important to have good accounting records for a variety of reasons – making management decisions, filing tax returns, estate and succession planning and presenting to your lender.
Most farms file their tax returns on a cash basis. While this is often favourable for tax purposes, it does not provide as accurate financial results as accrual financial statements do.
Accrual financial statements will consider the value of inventory, accounts receivable, accounts payable and prepaid expenses and provide a
20 British Columbia Berry Grower • Spring 2010
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better indicator of the profitability of the operation. Many lenders will insist upon full financial statements for that reason.
While there may be an added cost
to have them prepared, the value can easily be recovered with more favourable lending arrangements and an improved ability to accurately assess the viability of the farm. Accrual financial statements can then be converted to a cash basis for
income tax filing purposes.
Conclusion It is important that farmers understand the need for all of these factors to be solid. Providing good information to support your management abilities along with adequate financial records will help your lender understand your business and help you maximize the benefits
from your borrowing relationship. — Farm Business Management Council
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