Financial Risk Management in SW Medicinal Herb Production and Marketing

1. 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

2. 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. New Mexico State University

3. 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. New Mexico State University

4. 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 New Mexico State University

5. The Risk Management Process: Step 1: Assess Grower Circumstances • Net worth • Asset/liability ratio • Liquidity • Access to financing • Understand the nature of financial risk New Mexico State University

6. Step 2: Identify risksStep 3: Develop a risk management planStep 3: Implement your planStep 4: Evaluate your results New Mexico State University

7. 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 New Mexico State University

8. 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 New Mexico State University

9. Include Hidden/Indirect Costs!! Insurance Travel expenses Vehicle maintenance/repair/overhead Utilities Employee/workforce training New Mexico State University

10. Unforeseen/Unexpected Costs Vehicle /equipment breakdowns Accidents System failures/ power outages Family emergencies New Mexico State University

11. 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) New Mexico State University

12. Managing uncertainty New Mexico State University

13. Delayed Returns on Investment New Mexico State University

14. 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 New Mexico State University

15. Financial Management Tools Business Plan Enterprise Budget Cost/Benefit Analysis Cooperative/Group Effort or Financing New Mexico State University

16. 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 New Mexico State University

17. 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. New Mexico State University

18. Work Backwards Start with marketing, end with production. Marketing is THE big unknown. New Mexico State University

19. The Known, The Unknown, and The Unknowable Use dimensional analysis Solve for the unknown. When more than one unknown, plug in estimates (sensitivity analysis) New Mexico State University

20. 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. New Mexico State University

21. Assessing and Balancing Tradeoffs New Mexico State University

22. Avoid Debt with Compound Interest ! New Mexico State University

23. New Mexico State University

24. Debt-Free Financing Cooperative investments Shared facilities, equipment, labor Incremental investing – first by hand, then small-scale equipment, then larger equipment/facilities New Mexico State University

25. 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 New Mexico State University

26. Goatheads as a working example New Mexico State University