Michigan Dairy Review Vol. 8 No. 3

With currently depressed milk prices, many Michigan dairy operations are struggling to meet current cash flow commitments. This article, the first of a series of articles addressing cash flow problems, examines ways to manage debt. The other articles to follow will explore profitability of the Michigan dairy industry, other methods for improving cash flow (including income tax management), understanding and determining your production costs, and risk management strategies. Why the emphasis on debt management in addressing cash flow problems? Preliminary 2002 financial figures for Michigan dairy farms in the Telfarm project emphasize the impact depressed milk prices have had on business cash flows. In 2001 the average dairy farm in the project had $74,359 available for servicing the principal and interest on intermediate debt. In 2002, less than $15,000 were available to service this debt. Debt is utilized by most Michigan dairy operations. In 2002, the average Telfarm dairy farm had a debt-to-asset ratio of 31 percent, with a range from zero to 87 percent. About one-half of the debt was long-term debt (debt on real estate). Intermediate debt (debt on equipment, livestock and some buildings) accounted for 28 percent of the debt, with the remaining debt being short-term debt (operating loans and unpaid bills). Debt interest expense was 5 percent of cash expenditures. How can debt management make a difference? First, because of the sluggish economy, the Federal Reserve System has implemented policies that have cut interest rates to their lowest level in nearly 50 years. These same policies have increased availability of capital. Thus, there are opportunities to restructure debt with a positive effect on both cash flow and business profit. Also, for some operations there are opportunities to make adjustments, aside from restructuring, with respect to debt and improving the cash flow. Possible adjustments are discussed later in this article. When examining ways to improve cash flows through debt management, it is critical to determine whether the business is profitable. The difference between cash flow and Managing Debt To Improve Cash Flow