New Mexico State University Financial Risk Management in SW Medicinal Herb Production and Marketing Charles Martin, Ag Specialist NMSU Sustainable Agriculture

New Mexico State University

Financial Risk Management in SW Medicinal Herb Production and

Marketing Charles Martin, Ag Specialist

NMSU Sustainable Agriculture Science Center, Alcalde, NM

Acknowledgements• New Mexico State University

• Western Center for Risk Management Education, Washington State University

• USDA/NIFA• This material is based upon work supported by USDA/NIFA

under Award Number 2010-49200-06203.


Goals and Objectives• Goal – Fully understand the financial risks that producers participating in the project face

and how the proposed producer results, if applied, will lead to producers making an improvement in their ability to manage those financial risks.

• Growers will need to describe accurately what the financial risks are, what creates the financial risks that your project is addressing, and be able to show their direct correlation to other session topics that will result in the improved ability of your producer participants to manage the financial risks you have identified in the Proposed Results section.

• Obtain a good understanding of financial risk management among growers and entrepreneurs.

• Demonstrate knowledge and understanding by development of a financial risk management plan.

• Proposed results: implementation of the financial risk management plan.


What is Financial Risk Management?

• “Managing credit, market and financial instrument risks”

• Debt/borrowing management/avoidance

• Managing Cash flow, (seasonality, storage, inventory), fraud risks, market volatility (price/inputs)

• Foreseeing/planning for delayed return on investment



The Risk Management Process: Step 1: Assess Grower Circumstances

• Net worth

• Asset/liability ratio

• Liquidity

• Access to financing

• Understand the nature of financial risk

Step 2: Identify risks

Step 3: Develop a risk management plan

Step 3: Implement your plan

Step 4: Evaluate your results


Identifying Financial Risks

• Capitalization (start-up, operating, expansion)

• Cash flow (perennials, seasonality, demand/sales fluctuations)

• Delayed return on investment

• Excessive production overhead/capacity

• Unforeseen/unexpected costs/losses

• Debt/borrowing


Other (related) types of risks

• Marketing risks – how much to grow, how much product to make? (keep records of sales, volumes, prices and dates)

• Unknown market volume and trends

• Crop losses interrupts cash flow, unable to meet payments


Include Hidden/Indirect Costs!!

• Insurance

• Travel expenses

• Vehicle maintenance/repair/overhead

• Utilities

• Employee/workforce training


Unforeseen/Unexpected Costs

• Vehicle /equipment breakdowns

• Accidents

• System failures/ power outages

• Family emergencies


Market Risks/Opportunities

• Boom/bust cycles

• Seasonality (availability, demand)

• Limited niche market = rapid saturation

• Can turn disadvantage to an opportunity (small entrepreneurs can respond more quickly to rapidly changing situations)


Managing uncertainty


Delayed Returns on Investment


Know Your Financial Risks!

• Having a business plan

• Knowing your cost of production

• Knowing your break-even price (to cover variable and total costs)

• Managing cash flow

• Reducing/Avoiding Debt


Financial Management Tools

• Business Plan

• Enterprise Budget

• Cost/Benefit Analysis

• Cooperative/Group Effort or Financing


Start with a Business Plan

• Assessment of your enterprise’s capacity of making money

• Solve/fill in unknowns to the equation (sensitivity analysis)

• Work backwards from a $$ target

• Compare to fixed/variable costs


What is a Business Plan?• business plan is a formal statement of a set of business

goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals.

• Business plans may also target changes in perception and branding by the customer, client, tax-payer, or larger community. When managing a business, a business plan, or B-Plan, is often confused with the term Marketing Plan. When the existing business is to assume a major change or when planning a new venture - a 3 to 5 year business plan is essential.


Work Backwards

• Start with marketing, end with production. Marketing is THE big unknown.


The Known, The Unknown, and The Unknowable• Use dimensional analysis

• Solve for the unknown.

• When more than one unknown, plug in estimates (sensitivity analysis)


An Iterative Process

• First an educated guess, then decisions based on info collected from others, then collected directly from one’s own business.

• Experience is gained along the way.


Assessing and Balancing Tradeoffs


Avoid Debt with Compound Interest !



Debt-Free Financing

• Cooperative investments

• Shared facilities, equipment, labor

• Incremental investing – first by hand, then small-scale equipment, then larger equipment/facilities


What about grants?• Grants are not handouts or bailouts

• Not for capitalization

• Not a way to salvage a business

• VAPG – Value-Added Producer Granthttp://www.rurdev.usda.gov/rbs/coops/vadg.htm

• SBIR – Small Business Innovation Research http://www.sbir.gov/

• NMDA Specialty Crop Marketing Grant http://nmdaweb.nmsu.edu/marketing-and-economic-development/hidden-files/Binder326.pdf


Goatheads as a working example


Documents

New Mexico State University Financial Risk Management in SW Medicinal Herb Production and Marketing Charles Martin, Ag Specialist NMSU Sustainable Agriculture