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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

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financial risk management in sw medicinal herb production and marketing

Financial Risk Management in SW Medicinal Herb Production and Marketing

Charles Martin, Ag Specialist

NMSU Sustainable Agriculture Science Center, Alcalde, NM

New Mexico State University

acknowledgements
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.

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goals and objectives
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.

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what is financial risk management
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

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the risk management process step 1 assess grower circumstances
The Risk Management Process: Step 1: Assess Grower Circumstances
  • Net worth
  • Asset/liability ratio
  • Liquidity
  • Access to financing
  • Understand the nature of financial risk

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Step 2: Identify risksStep 3: Develop a risk management planStep 3: Implement your planStep 4: Evaluate your results

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identifying financial risks
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

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other related types of risks
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

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include hidden indirect costs
Include Hidden/Indirect Costs!!

Insurance

Travel expenses

Vehicle maintenance/repair/overhead

Utilities

Employee/workforce training

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unforeseen unexpected costs
Unforeseen/Unexpected Costs

Vehicle /equipment breakdowns

Accidents

System failures/ power outages

Family emergencies

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market risks opportunities
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)

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managing uncertainty
Managing uncertainty

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delayed returns on investment
Delayed Returns on Investment

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know your financial risks
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

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financial management tools
Financial Management Tools

Business Plan

Enterprise Budget

Cost/Benefit Analysis

Cooperative/Group Effort or Financing

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start with a business plan
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

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what is a business plan
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.

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work backwards
Work Backwards

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

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the known the unknown and the unknowable
The Known, The Unknown, and The Unknowable

Use dimensional analysis

Solve for the unknown.

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

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an iterative process
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.

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assessing and balancing tradeoffs
Assessing and Balancing Tradeoffs

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avoid debt with compound interest
Avoid Debt with Compound Interest !

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debt free financing
Debt-Free Financing

Cooperative investments

Shared facilities, equipment, labor

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

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what about grants
What about grants?
  • Grants are not handouts or bailouts
  • Not for capitalization
  • Not a way to salvage a business
  • VAPG – Value-Added Producer Grant

http://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

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goatheads as a working example
Goatheads as a working example

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