Financial Management of Pig Businesses: Making Your Lenders, Investors & Partners Comfortable with Your Business Plans

Posted in: Production by admin on January 1, 2007

A business is more likely to achieve its long-term potential, if all parties involved, from the investors down to the staff, are aligned toward a common goal: optimizing the long-term profitability of the business. Because pig production is a business, all parties involved in a swine enterprise should be exposed to at least some aspects of the business’s financial information. The Profit and Loss Statement (P&L) is usually the first bit of financial information reviewed by all stakeholders. Depending upon their specific roles or positions, some parties look initially at the P&Ls for individual flows or farms while others initially examine the consolidated financial information from all flows and farms. When financing is being procured, lenders and investors will want to see projections of financial information at least for the term of the loan, and they usually want to review it in the context of historical information. Direct adjustments to the P&L statement for specific cash and non-cash line items are made in the creation of simple CF reports. Non-cash items reflected in the P&L (e.g. depreciation) are added back to the P&L. Similarly, all cash items that were excluded from a P&L analysis are included in the CF statement. The financing of fixed assets (i.e. Term Debt) is typically based upon a lender financing a portion of the appraised value of the asset. While lenders typically require 25% or greater equity in order to finance an asset, the percentage of equity required may vary with the market value of the asset, which, in turn, usually varies with market conditions. Some type of marketing agreement having a reasonable term will usually be required for lenders to finance a fixed asset. Also, lenders will always need to understand the financial structure of your business if they are to: (1) be able to accurately interpret its financial performance and (2) ensure that they understand their risk. The Balance Sheet (B/S) is the financial statement commonly used by lenders to get a handle on a business’s financial structure. The B/S portrays the financial structure of a business; that is, its assets, liabilities and owner equity. We believe that solid (trusting and long-lasting) relations with lenders will best occur: with the open sharing of all business and financial information and when you understand their needs and expectations. They need to be convinced of the ability of your business to repay their loans. In most cases, this requires that, in the short term, the business generates positive cash flows and that, in the long term, the business is sustainably profitable. While everyone involved with a pig business has different needs, orientations, and goals, they should all be committed to the common goal of the business being financially successful. We believe that the more minds that work on the problems and opportunities of a business, the more likely the business will be successful. Business success appears to be more likely when all parties are united around a common business model, one that provides the correct balance of profits, risks, and leverage.

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