Central California Winegrowers Second Central California Seminar “Better Planning For the Future”

Central California Winegrowers Second Central California Seminar Why Do We Need Better Planning? Cycles Seem To Be Getting Longer and Deeper - Tree fruit - Raisins - Wine Grapes - Dairy ? - Almonds

Central California Winegrowers Second Central California Seminar The last three decades in agricultural lending has seen transition…………. (1)70’s collateral and equity lending (2)Late 80’s -90’s demonstration of adequate cash flow. (3)00’s is and will be the period of performance (comprehensive based) lending practices, particularly for volatile sectors.

Central California Winegrowers Second Central California Seminar Performance Based Lending from the bank’s perspective is a “better plan for the future”. It involves asking ourselves the right questions… ( 1) What specifically is the money going to be used for? Too many loans in the past have been used to subsidize lifestyle, refinance carryover debt and finance capital purchases. (2)How will the loan affect the Borrower’s financial position? Analyze the client’s situation before the loan is made AND after the loan is made. (3)How will the loan be secured? Collateral is adequate ONLY if under the worst conditions enough could be sold to repay the loan AND cover the cost to liquidate.

Central California Winegrowers Second Central California Seminar (4)How will the loan be repaid? - Operating Cash Flow? - Off Farm Income? - Self Liquidating Asset? - Refinance? (5)When will the money be needed and when will it be repaid? A specific repayment plan, agreed to by the lender and borrower that is detailed in the form of a cash flow budget. (6)What are the other expected outcomes and how will that impact repayment of the loan?

Central California Winegrowers Second Central California Seminar (7) How much can the borrower afford to lose and still maintain a viable operation? - Minimum Equity/Asset Position above 40% (Debt/ Equity of 1.50:1) - Consider the Combination of Potential Operating Losses AND Decline in Asset Value. (8)What risk management measures are or will be in place? - Meaningful Loan Covenants Will Play a Much Bigger Role in Production Lending Than Ever Before. For example………………………………

Central California Winegrowers Second Central California Seminar i.Working and Permanent Capital Maintenance Covenants pegged at a number that insures shared risk. ii.Distribution Covenants pegged at a number that reigns in extravagant lifestyle but allows food on the table. iii.Non – Financed Capital Expenditure Covenants pegged at a number that limits the outflow of cash for non essential capital improvements. iv.Interest Rate Risk Covenants v.Debt Coverage Covenants vi.Reporting Requirements

Central California Winegrowers Second Central California Seminar Performance Based Lending involves asking the right questions of you as well. (1) What kind of manager are you? Are you a transitional leader that can manage well at the extremes of the market? Are there fresh and new ideas flowing? Is management keeping itself informed? Is there a meaningful succession plan in place in writing? Are there any train wreck family issues that have not been resolved in writing?

Central California Winegrowers Central California Winegrowers Second Central California Seminar  Which Management Style Are You? Decide Negotiate Doing Decide Negotiate Do Bad Practice Good Practice

Central California Winegrowers Second Central California Seminar In Summary #1 Being profitable is not enough anymore! What did you do with your profits? Banks are looking more favorably on clients that retain profits for: (1) purchase of proven cost saving technology (2) prudent debt reduction (3) working capital maintenance equal to no less than 20-25% of budgeted expenses.

Central California Winegrowers Second Central California Seminar # 2 Do you know your cost of existence? (1) Every farmer thinks he knows what his/her cost of production is. (2) Cost of existence considers the following….. a.Annual Cost of Production & Overhead b.Annual Cost of Living c.Annual Cost of Deferred Maintenance d.Annual Cost of Saving for Retirement e.Reasonable Return to Management For the Risk Taken. If Revenue – (a through e) is less than zero, you are not funding your existence

Central California Winegrowers Second Central California Seminar #3 Do you plan your finances or is the whole process just a big mystery to you? A show of hands would probably tell me (if you were honest) that many of you spend more time planning your next vacation and your eventual retirement than you do your business’ future.

Central California Winegrowers Second Central California Seminar Another show of hands would probably indicate that many of you do in fact plan for revenue and profit growth. Yet, there seems this big disconnect between the profits you anticipate and the financing needed to get you there! Forecasting finances is an integral part of profit planning.

Central California Winegrowers Second Central California Seminar There are countless examples where our ability to predict the future is less than perfect. “ If forecasting the future is so difficult, and plans are built on forecasts, why engage in the planning effort? The answer does not lie in the accuracy of the projections, for planning offers its greatest rewards when the future is the most uncertain.”

Central California Winegrowers Second Central California Seminar “ The reason is that planning is the process of thinking about what the future might bring and devising strategies for dealing with the likely outcomes” Mother Hubbard-1973

Central California Winegrowers Second Central California Seminar Planning is thinking in advance, and thinking in advance provides the opportunity to devise contingency plans that can be quickly and easily initiated, thereby reducing the cost of responding to adverse circumstances or profitable opportunities.

Central California Winegrowers Second Central California Seminar Thank You!