Financial data

Compiling Your Financial Information

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The proverbial shoe-box, or an organized file package.
Maybe a shoe-box that supports accounting software.
Maybe it’s a fully completed accounting software package that includes all depreciation expensed and dividends paid.

For those of us on a December 31 year-end, the calendar has turned and the clock is ticking. If you haven’t had a planning meeting with your accountant prior to now, it’s likely too late to act on some of the options you had.

When are you able to get your information in to your accountant? My mentor threw down the gauntlet last year when he showed me that his accountant had his financial statements prepared a mere 28 days after his fiscal year end. That’s some WOW factor there! For my file, I’m shooting for thirty-five days or less; target: early/mid-February.

For me to help my accountant meet my goal of a 35 day turnaround, I need to provide him with accurate information as fast as possible. I need to provide clear information on income and expenses (not a shoebox full of invoices and receipts.) I need to provide a detailed report on changes in my fixed assets over the year, my accounts receivable at year end, etc. The better the quality of info I provide to him, the faster he can get my file off his “To Do” pile and onto the “Done” pile.

It is a typical comment made every year: we have to wait for the bank, and other creditors, statements before the final month report can be ready to send to the accountant. I’m not waiting. I’m logging into my online banking and retrieving transaction info right away. The details are there, so why let this time go to waste?

When getting your taxes and reporting completed as quick as possible, the benefits are many:

  1. You will get ahead of your accountant’s busiest time, which  makes him/her happy!
  2. You will get your bank annual review done earlier and on time, which makes them happy!
  3. You will receive your financial reporting earlier allowing you to fully analyze last year’s results and make improved decisions for this year accordingly.
  4. You will be equipped to seek new credit before seeding, if required.

The government has filing deadlines for taxes, the bank has reporting deadlines for your annual review. To receive your December 31 financial statements in August because it took you so long to get your info in to your accountant provides you, and your financial partners, little use. The information in those reports is too old because so much has changed on your farm since the date on the statements. Would you write a cheque in August based on the balance you see in your December bank statement?

Direct Questions

What systems and processes do you have in place to compile your business and financial information as quickly and accurately as possible?

How are you using your financial information to make business decisions?

Have you discussed with your accountant as to how he/she prefers to receive information from you? Making their jobs easier will get you higher quality reports much faster.

From the Home Quarter

Getting your year-end completed quickly will help you be more profitable. When your statements are early (or at least on time,) you create opportunity with your creditors. Opportunity with your creditors creates strategies for growth (and possible lower borrowing costs.) Strategies for growth create opportunities to expand, increase efficiency, control expenses, etc…all which lead to greater profitability.

And it is all starts with getting your information compiled and delivered to your accountant fast and on time.

 

sustainability

The RISK 2-Step

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Here is a quote I recently read that was attributed to John D. Ingalls in Human Energy:

“The degree to which ambiguity can be tolerated determines the amount of difficulty
the individual can, and is willing to, meet and overcome in coping with the problems of
human life and in taking advantage of the opportunities life has to offer.”

Let’s make a few changes and see how it applies to business:

The degree to which risk can be tolerated determines the amount of variability the
business owner can, and is willing to, accept and manage in coping with the cycles of
business and in taking advantage of the growth opportunities that risk presents.

A good fair portion of any given week has me speaking with some very smart farm business owners,
lenders, and other business advisors. I continue to hear the same message: “guys (farmers) just don’t
understand the risk they are taking when they “

Risk is something every entrepreneur faces. We get paid for taking risks, and the more risk we take, the
higher the expected payday. Of course we all also recognize that the more risk we take, the greater the
potential loss as well.

But isn’t that pretty much what John Ingalls said above (or at least the paragraph I amended?

  • The risk averse cannot tolerate variability, is unwilling to manage cycles, and fails to capitalizeon growth opportunities.
  • The risk ardent embrace variability and cycles as opportunity to grow and expand.

The first step in being rewarded for taking risk is understanding the risk. It cannot be understood until is
acknowledged. Acknowledgement happens either when one steps out of his comfort zone and takes a
good hard look around, or when an outside party brings their perspective to the table, such as a
creditor, who might for example, change the terms of the relationship due to an inappropriately
managed risk.

Acknowledging that a risk exists, and recognizing its potential impact on your business can often be
difficult, scary, or even embarrassing. It can be hard to admit that we don’t know or understand
something that we (society) feel(s) we “should know.”

The second step in this 2-step, once you understand the risk, is to manage the risk. You’ve heard me say
many times “you can’t manage what you don’t measure,” which holds true for risks as well. Managing
the risk takes an understanding of how it could affect your business, measuring that effect and the
opportunities to mitigate the risk (think of it as a projection of best case and worst case scenarios.)

What does this all mean from a practical standpoint? Let’s consider a real world example from 2015.
Many growers were struggling on whether or not to apply fungicide to their durum. They were looking
for ways to reduce costs. The crop wasn’t looking so great (frost in late May and no rain until mid-July.)
The environmental factors that contribute to high fusarium were not as apparent as 2014.

The risk was the potential detriment to crop yield and/or quality from eliminating the fungicide
application to durum in 2015.

To understand and manage the risk, here are some questions that needed to be addressed:

  • How much damage can you withstand before lower quality grading eliminates profit potential?
  • How will lower grading affect ability to sell/deliver? (impact on cash flow)
  • Is there enough crop now growing to pay for the cost of fungicide if grade and yield are 100% protected? (cost/benefit consideration)
  • Is the crop at an even enough maturity to facilitate proper timing of the fungicide application?

Once these, and many other, points have been given appropriate consideration, one can make the best
management decision he/she can. In the case of the 2015 durum fusarium issue, some farmers sprayed
and still had toxic levels of fusarium; others didn’t spray and had manageable levels of fusarium. The
outcome is never guaranteed, but the process empowers you to make the best decisions possible.

Direct Questions

How are you determining which risks to pay attention to, which risks to manage, and which risks to
simply live with?

Even if you can’t dance, The RISK 2-Step does not require fluid movements or talented feet, but may still
require a lesson or two; who is interested in some “dance” lessons?
Are you risk averse or risk ardent? Knowing is important in being able to manage risk.

From the Home Quarter

Don’t kid yourself when answering the 3rd Direct Question above. We all know we need to be able to
handle some risk; my goodness, if we couldn’t, we wouldn’t be able to farm! But deep down at your
core, how do you handle risk? Consider this the “warm up” before stepping onto the dance floor for The
RISK 2-Step: truly acknowledge where your approach to risk lies, and then start the dance.

planning

Financial Literacy Month

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November is Financial Literacy Month, an initiative of The Financial Literacy Action Group which is “a
coalition of seven organizations that work to assist and improve the financial literacy of Canadians.”
http://www.financialliteracymonth.ca/About-FLAG/

Watching some news the other morning while having breakfast, I saw a financial commentator discuss 3
simple financial questions to which Canadians have averaged 1.8 out of 3 correct answers. And trust me,
these were SIMPLE questions. But anyone who knows me knows that I will always acknowledge that
“you don’t know what you don’t know.”

That being said, there is no shame in not knowing what you don’t know. It is when you don’t know what
you should know that risk is increased. Here is a short quiz for you to take regarding your farm financial
literacy for the occasion of Financial Literacy Month.

1. Your current assets are MORE than your current liabilities. This means your working capital is
a. Negative
b. Positive
c. I don’t know

2. Your contingency fund (emergency cash) has a balance of $50,000 in a savings account earning
1% interest per year. If inflation is currently 2%, then the net real value (the buying power) of
your contingency fund after 1 year is
a. More than $50,000
b. Exactly the same as the start: $50,000
c. Less than $50,000

3. The tractor you bought last year for $200,000 can be sold today for $215,000. You’ve claimed
$30,000 in depreciation on that tractor, meaning it has a book value of $170,000. You’ve just
sold the tractor for $215,000, and now you will have a
a. $45,000 capital gain
b. $15,000 capital gain
c. $30,000 recaptured CCA
d. Both b) and c)
e. None of the above

4. My banker is always in a hurry to see my financial statements because
a. He’s looking for a way to increase my interest rates
b. They need to ensure I’m still a good credit risk
c. She’s trying to lend me more money

5. I’m a farmer; I don’t need to know all those ratios and analysis and stuff.
a. True
b. False

While these questions I’ve posed to you aren’t the simplest questions that everyone should know, they
will create a benchmark for you to get an idea of what you do know and where your mindset is. At the
end of the day, it is up to you to determine if and how you will tackle the imperative task of advancing
your farm financial management. In a bit of shameless self-promotion, I have developed a classroom
seminar titled Advancing Your Farm Financial Management.
https://fbdi.gov.sk.ca/LP_LearningActivityDetail.aspx?id=Q6UJ9A03H15A&area=Financial+Management

It is a one day commitment. It has been developed for the farm business owner who wants to take his
basic financial knowledge to an intermediate level. It has been approved for reimbursement under the
Farm Business Development Initiative. http://www.agriculture.gov.sk.ca/GF2-FBDI

Course participants will learn what is important to their banker and why. They will develop an
appreciation for the risks all farmers face, plus the risks to their specific farm and how to mitigate those
risks. Each participant will go home having built the foundation of their own personalized financial
management plan. And the best part: lunch is on me!

Direct Questions

When it comes to financial jargon, the importance of financial management and how to use the
information, if you don’t know what you don’t know, who will you call for help?

I hear it is not uncommon to pay upwards of $10,000-$20,000 to your equipment dealer for them to go
through your combine to ensure everything is up to par. What is it worth to do the same for your farm’s
finances? Do you do it as often as you do for the combine?

From the Home Quarter

In a business with as much inherent risk as production agriculture, ignoring certain aspects of your
business increases risk exponentially. And whether that ignoring stems from a lack of interest or
understanding or time, the risk does not simply go away because it has little attention paid to it…in fact,
it grows. To create an analogy, ignoring risk is like ignoring a weed in your field: pay little attention to it,
it still grows; deal with it right away, and you increase your probability of a successful crop.

In the spirit of Financial Literacy Month, I challenge everyone to become more fluent in one new
financial term each week in November.

And for the answers to the quiz above, send me an email.

Our proprietary Farm Financial Analysis provides you with a straight-forward, easy to read report of
your farm’s financial position with focus on areas of strength, caution, and danger. Call or email for
more details.

grain2

Innovation in Agriculture

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Innovation
Noun | in·no·va·tion | \ˌi-nə-ˈvā-shən\
: a new idea, device, or method
: the act or process of introducing new ideas, devices, or methods
(Source: http://www.merriam-webster.com/dictionary/innovation)

No one could ever decry the innovation of Canadian agriculture. Often looked favorably upon for
consistently being on the leading edge, Canadian farmers are typically the envy of other nations’
producers for our advanced processes and our willingness to constantly strive for something better.
Innovation takes many forms. It need not be monumental. It does not require a farm to re-identify itself.
While significant innovations like direct seeding and minimum tillage required major capital
investments, many others do not. If you’re like virtually every farm, there is innovation all around you…if
you take the time to look.

Consider the changes you’ve made to your farm since you began farming. Again, not just the big obvious
changes, but the little things too. The little things often make the biggest difference, and yet they are so
easy to overlook. Just think about the positive effect of doing your own grain moisture tests on farm.
I was having a conversation with a client recently about the impact of grain sampling and how the
grading at delivery points can sometimes be a bone of contention. He described in detail how and why
he samples every load as it is being augered from the bin onto the truck. This is an innovation he has
employed to ensure he has taken appropriate measures to protect himself during a dispute. It has paid
off several times in the past, and will likely be of continued value in the future.

An interesting conversation, to which I was privy, among a group of very progressive farmers was about
how each of them managed the challenge of “feeding their help” during harvest. Crews that number
well into the teens require more than a cooler full of sandwiches and donuts. One innovation that I
thought was most creative was the customization of an old Class C motorhome into a quasi food-truck.
While we automatically focus on operations when considering our success with innovation, we cannot
ignore the management side of business. A common issue among my clients this fall is land rent
renewals. Many of them are seeking better ways to access their rented land without taking on so much
risk with these high cost all cash arrangements. As with land prices, rents have also increased
substantially over the last several years (thank you Captain Obvious for contributing to this week’s
article.) Farmers, generally, are becoming less comfortable with the $70-$100+/ac they’ve added to
their LBF (Land, Buildings, Finance) costs for land rent over the years and are now recognizing that they
often can’t make money on that rented land. Unless you’re running a charity, one that benefits your
landlords, “re-think profit” becomes an innovation all on its own.

Innovation is refining your record keeping, automating your payroll services, or focusing on improving
your working capital. While innovation also includes variable rate, advanced water management, or
specialized grain monitoring systems, it need not always be BIG and OBVIOUS. I think the best
innovation for every farm is to examine how it views profit, growth, and wealth.

Direct Questions

How do you view profit, growth, and wealth? I define each as,

Wealth: – discretionary time.

Profit: – that what is required to fuel “wealth.”

Growth: – not necessarily “expansion.” Growth is innovation at any and all levels.
(Remember “always grow; grow all ways!”)

How can you bring about innovation in your management arsenal?

How does innovation make its way into your business? Do you invite it in, or does it have to force its way
in?

From the Home Quarter

I am a firm believer that change will continue to be rapid and drastic in the future. In terms of record
keeping and data management, it will one day be mandatory, so why not get on board before you’re
forced? Regarding my client’s issue on his grain sampling, I believe that future farmers will be forced to
manage their inventory similar to that of a food processor today. And if you have not heard the term
“social license” yet, then let this be the first. A farmer’s social license to farm could face scrutiny like
we’ve never seen before. All of this will require significant innovation. But, don’t fret over the big issues
yet. Start small with manageable innovations today.

Our proprietary Farm Profit Improvement Program™ includes analysis and advice on negotiating land
rental agreements. Please call or email for further details.

emotion

Performance Management: A Post-Harvest Checklist

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With harvest done, or nearly done, across the prairies, this is the time to engage in a little retrospect.
Recognizing the window is small (and shrinking) to get all the fall work done before freeze-up, this task
may end up a notch or two down the priority list. But nonetheless, it is important to go through this
exercise now that the crop is in the bin.

1. Evaluate actual yields against expected yield
Determine why your yields did, or did not, meet expectations. Not meeting expectations could
be positive or negative, and knowing what you did to control the outcome is important to either
repeat the practice, or learn from the shortcoming.

2. Assign a value to your production
This will be a combination of the prices you’ve already contracted and the current street price
on unpriced grain. Be accurate here; it does you no good to overstate the value or quantity of
your inventory.

3. Determine your current Working Capital
Once you’ve got a value for your total grain on hand, consider the rest of your current assets
and current liabilities to determine your working capital. This is the point in each operating year
(right after harvest) where working capital should be strongest. If it currently is not, seek help.

4. Production Cost and Fixed Cost Review
Looking at your whole operation as one figure does not provide sufficient information to afford
opportunity to increase management and profits. Break it down by crop and by acre. Where are
your positive points? Where are your stress points? What was your equipment cost per acre on
your cereal crops in 2015? What is your unit cost of production on that new land you rented this
year?

5. Field and Crop Analysis
Which fields were profitable? Which crops were profitable? Did you have significant variability
in some fields and/or crops? If so, how are you managing that?

6. Cash Flow Projection
Working capital versus future cash obligations gives you a clear understanding of what your cash
flow will look like over the next several months. Consider your expected cash flow in the near
term with your projections for 2016 (you will be working on those, right?) Does this affect your
expectations for next year?

7. Current Year Tax Analysis
There are less than 10 weeks remaining in the calendar year, and if your year-end matches the
calendar, you’ve got a small window of time remaining to determine what your tax situation will
look like and enact prudent business decisions accordingly.

8. Accrual Financial Statements
Whether you are incorporated or not, you should be having your accountant prepare financial
statements. If those statements have not been accrued in the past, please start now. Accrued
financial statements are the only way to truly gauge your business performance for the fiscal
year. (HINT: old statements can be accrued and presented again for management purposes.)

From the Home Quarter

One of my favorite adages is “If you don’t measure it, how can you manage it?” You’ll notice that the
essence of the points in the check list above is heavily weighted on measuring results. Any advancement
towards innovation in your business is lost if results are not accurately measured. Take the time now
that you’ve got the time to collect your data, analyze the results, and manage your performance.

blindside

Bad Timing

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I recently spoke with a farm ownership team that needs help. They need help in labor and marketing,
but especially in management. They readily describe all that has gone against them, and quickly list off
all the reasons why they don’t have time to work on the tasks that I propose they tackle. They know I
could help them, but they’re too busy to hire me.

Years ago when I was a bank branch manager, one of the lessons I shared with my staff was “there is a
difference between business and busy-ness.” One will make you money, advance your career, and grow
your wealth. The other just kills the day, eats up precious time, and leaves you feeling empty.
This farm team I speak of is multi-generational. The party with the most at risk has the least control. The
debt has almost become unmanageable. The record keeping is minimal. Management decisions are
fragmented and lacking sufficient foresight. These are not my observations, these are their own
admissions.

The first time we spoke, their financial statements weren’t ready, so it wasn’t the right time. When the
statements were ready, they were seeding, so it wasn’t the right time. Recent follow up finds them with
about a third of their acres left to harvest, so (SURPRISE) it wasn’t the right time.

If we all allowed that thinking to be the rule of law in our lives, we’d never accomplish anything. I would
have never went back to school (attended college at age 25;) I would have never pursued career
advancement; I would have never made the leap from employment to entrepreneurship because there
could always have been an excuse to render it “not the right time.”

Guess what…it’s never “the right time.”

At least that is what we allow ourselves to believe when faced with a task, or an issue that we would
rather not deal with. None of us go shopping for a new canola seed variety in mid-May; we secure that
over the winter. Yet we rarely make a discussion with our accountant a priority until April…because
we’re just too busy?

Managing our respective businesses requires great priority. We take far too much risk in operating a
modern farm to allow our management to be an afterthought, or something that can be put off because
there’s something else to do.

Direct Questions

How often do you permit yourself to be mired in daily tasks and other work to the extent that you
essentially “avoid” the administration and management functions of your business?
How could your business be better if you begin to “make it the right time” to focus on management and
administration?

Is the fear of admitting that help is needed in management your reason for never making it the right
time?

From the Home Quarter

The right time is not when things get tough. The right time is not when the banker is forcing the issue.
The right time is not when there are problems to fix, or a wreck to repair. Preventing a fire is much
easier than fighting one. The right time is now.

When making management a priority it can be daunting to figure out where to look first. Our
proprietary Farm Profit Improvement Program™ takes the guess work out of figuring out where to start
by first providing you with a detailed financial analysis that identifies your danger areas and offers
solutions to mitigate the risks. Call me or email for further details.

doit

Soil Testing

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It’s soil sampling season. Hundreds of thousands of fields are yielding to the soil probe as farmers,
agrologists, and retailers are pulling cores as fast as they can before freeze up. The soil test is a crucial
decision making tool in planning the next year’s crop. Understanding each field’s organic matter,
residual nutrient levels, and pH levels are but a few of many factors that all come together in a soil test
report to allow you to make an informed decision on what it will take to produce a crop that meets your
expectations. Soil experts suggest that every field be soil tested every year. They surmise that each field
should be treated as unique and that using a whole-farm, or even crop specific, fertility management
strategy is not financially efficient. To paraphrase, how can one make decisions about fertility without
knowing what is currently available in the soil?

Despite some arguments that the unused nutrient can remain in the soil for future crops
(notwithstanding the varying disagreements over nitrogen losses,) over-fertilizing will use up working
capital in the current year. Under-fertilizing can limit your yield potential. Both are manageable risks.
So the question begs, “Why don’t all farms soil test all fields every year?”

“Labor” is part of the answer, so is “time.” If “cost” forms part of the reply, I have to seriously consider
mindset. What is the cost of a soil test on one field when measured against the risk of over, or under,
fertilizing? (Not to mention the value in being able to validate changes in your soil over the years.)
I would connect the same mindset to understanding a farm’s financial position before making business
decisions. Many farmers still do not make knowledge of their financial situation enough of a priority and
continue to make substantial business decisions based on emotion, or gut feeling. Pulling together your
net worth, income/expense, and cash flow statements provide you the same informed principles when
making financial business decisions as does the soil test when making crop and fertility decisions.
Understanding your farm’s financial position is crucial to making business decisions. Identifying how
your profitability, your equity, and your cash flow will be affected allows you to make informed choices.
These effects, once appreciated, can be measured against your business and personal goals to allow for
prudent and strategic business resolutions.

This leads directly into the heated debate over Big Data or Ag Data or whatever buzz word you prefer to
use. Without stepping onto that stage, the basis of the argument is the same:

  • Knowledge is power.
  • Uninformed decisions increase risk.
  • You can’t manage what you don’t measure.

While managing ALL you farm data is critical to the future of your success in the industry, I’m not
insisting that getting on the data train be 100% completed by everyone this winter. Like with anything
new, there are innovators & early adopters, and there are laggards, but the majority of us are
somewhere in between. Get over the mindset that the soil test is an excuse for retailers to sell you more
inputs; get over the mindset that “big data” will one day . This is about your business and how you can make
the most informed decision possible. Remember, you can only make informed decisions with quality
information.

Direct Questions

Would you write a cheque without knowing your bank balance? Would you accept regular information
from your bank that was “close,” or do you demand accurate reports each month?

Your soil test creates your “soil balance sheet.” Are you investing adequate time and effort into your
“financial balance sheet?”

The appropriate time for soil testing is after harvest but before seeding; once per year. How often are
you measuring your financial status? (HINT: it should be much more than once per year.)

From the Home Quarter

The parallels that can be made between doing a soil test and doing a financial review are many. While
there are subtle differences as well, the analogy is somewhat uncanny. Mindset comes up in this
discussion, as does data. In the end, it’s up to each business owner to decide how he/she will make
management decisions: with quality information leading to knowledgeable decisions, or by intuition
relying on emotion and gut-feeling. They’re almost as different as “black and white.”

Our Farm Financial Analysis service is akin to a report card, or a soil test report, of you farm financial
status. You get a clear and direct summary of strengths and weaknesses. It will also act as an indication
of the quality of your information (two benefits in one!) Post-harvest is probably the best time for a
Farm Financial Analysis so that you’re afforded opportunity to make changes (if necessary) before your
fiscal year end. Call or email for details.

GFP FI 2

Managed Risk – Part 5: Inaction

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While there could be many more “parts” to the list of topics that would fall under “Managed Risk,” I’ll
end it this week with one that I believe many people, maybe all people, face each day.
The list of reasons (excuses) we provide to support our decision not to act is virtually endless. They can
be found in the 7 Deadly Sins (pride, envy, sloth) or in almost any self-help book (communication issues,
inequality, stress) or even from psychological therapy (apathy, self-esteem issues, narcissism.)
Here are a few of the most monumental farm issues that are affected by inaction:

Business Structure

I recently took a call from a young man looking for guidance on how to manage the complexity of his
current farm arrangement. He farms with his dad and his brother; all three men have their own
corporation and their own land; one brother farms full time with the dad, the other is part time with offfarm
work. Tracking financial contributions and division of labor are a nightmare, and yet both look like
a cakewalk compared to managing “whose inventory is whose?” They are not happy with the increased
efforts needed to deal with these issues, they all know that there is likely a better way, but no one has
taken a step until the day I spoke with one of the brothers.

In this case, the inaction stems from unawareness: none of the men involved in this family farm had the
knowledge of what, if any, options were available, what questions to ask, or who to even ask for help.
It’s also common for inaction to stem from fear – fear of appearing incompetent by asking a “dumb
question,” fear of making the wrong decision, fear of rocking the boat and hurting the family dynamic.

Family Issues

Family issues challenge most intergenerational farms. There are many varieties, and most are worthy of
a book being written on the topic. Elaine Froese wrote Farming’s In-Law Factor. There should be books
written on “How to Fire Your Father” and “Decoding Motivation: How to Translate Boomers, Gen X’ers,
and Millennials.” If only…

The most common reason for inaction on family issues is “I don’t want to blow up the farm.” The
problem is that inaction can blow up the farm with greater odds than if action was taken! Unless the
family member you’re dealing with has truly sinister motivations, the likelihood of a successful dialogue
is quite positive. No one wants to destroy the farm or the family, so with the appropriate approach,
success can be had. The inaction for family issues predominantly stems from fear. Coaching is available
to help families deal with these types of issues.

Transition

Considering the average age of a Canadian prairie farmer today, the volume of farm transitions to take
place over the next 10 years is staggering. The cumulative value of assets that will change ownership
would dwarf the GDP of some small nations. With so much at stake, why does every farm not have a
succession plan already in place (or at least in progress?)
Inaction on this front increases the risk of the following:

  • Future family fighting
  • Colossal tax obligations
  • Destroy the farm business
  • Your legacy lost

Excuses (reasons) for inaction here are unacceptable. It is nothing short of reckless and irresponsible to
leave undone a function with such enormous impact. There is no shame in not having all the answers, or
any answers for that matter. Farm transition is a process, not a result. The process becomes a path of
discovery, but if you insist on keeping your blinders on, don’t be surprised to one day deal with any or all
of the 4 bullet points above.

Direct Questions

What is your main reason for inaction? “No Time” is an excuse. “Fear” is a real reason, but only you can
conquer it.

What have your accountant and lawyer provided you for advice regarding your future transfer (sale) of
assets?

In a family business, inaction increases the probability of irreparable family dysfunction. What is getting
higher priority: family harmony or fear of perceived conflict?

From the Home Quarter

What must happen to make an issue a priority? Is it an immediate tangible loss/damage, like an
equipment breakdown in season? Is it emotional goal, like a new pickup truck? Is it perceived (assumed)
risk, like assuming your employee will quit unless he’s granted a wage increase?

Making an issue a priority is the best way to beat the risk of inaction. The fear of the perceived
outcomes or the fear of not knowing how to proceed gives us permission to keep urgent issues down
low on the priority list. But at what point does reality and rational reasoning take over so that we
recognize that the risk of inaction has more negative potential than that of any perceived outcome?
In retrospect, “inaction” is not so much a managed risk, but an unmanaged risk. Managing our
“inaction” actually reduces, or even eliminates, the risk.

If you struggle with inaction…
For a no charge consultation on where you are best to replace “fear” with “priority,” please call or email
me anytime.

information

Managed Risk – Part 4: Liquidity

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We’ve all heard the saying “Cash is King.” In my opinion, “cash isn’t king, it’s the
ACE!” Whatever metaphor you prefer, the point is that cash levels and cash flow are both critically
important to your business. So, let’s get right to four points that affect your liquidity:

1. Your view of cash.
When I was still farming, I asked dad when he wanted to receive his rent payment, now (at the
time it was late November) or after January 1. He replied, “Well, I wouldn’t mind seeing a bump
in my bank account now, but I’ll wait until January for income tax purposes. Why?” When I
admitted that at that time we had no cash and would be dipping into our operating line of
credit, he said, “I thought you said your farm was profitable.” Our farm was profitable. He
couldn’t wrap his head around the fact that a profitable farm might not have cash always at the
ready, especially a small farm still in its youth. He equated profit with cash in the bank. After
arguing the point for 5 minutes, he just shook his head saying, “I guess that why I’m not farming
any more, I just can’t take that much risk.”

What he was getting at with his final comment was how we very quickly allocated our cash that
year. With harvest sales, we cleared up all accounts payable, pre-bought some fertilizer, and
paid down our supplier credit. The bins were still full, and with more grain sales scheduled for
the weeks and months ahead, our working capital was strong.

What is the difference between cash on hand and working capital? (HINT: if your answer is
“nothing,” then think again, a little deeper this time.)

2. Your use of cash.
Over the last few years, how many new pickup trucks were paid for out of working cash or put
on the operating line of credit? This is one example of a poor use of cash. A business that is flush
with cash can be a dangerous thing in the wrong hands, but don’t fret because the laundry list of
vendors all clamoring for your money will offer plenty of opportunity for you to part with it.
Do you justify some of these types of expenditures as part of a “tax plan?”

3. Your timing of cash.
One of the major challenges for manufacturing companies is the “cash conversion cycle.” This is
the time it takes to convert raw materials into cash. This cycle happens frequently in a
manufacturing firms operating period, often several times each month or quarter (depending on
what they are manufacturing.) Your challenge in the business of farming is that you only get one
cash conversion cycle per year. You invest in inputs early, manage through a long production
cycle, only getting one chance at producing the crop that will be sold for cash, and eventually
selling it sometimes as late as half way through your next production cycle. It is this long cash
conversion cycle that makes cash management vitally important on your farm.

How long is your farm’s cash conversion cycle? (HINT: it is measured in days.)

4. Managing your liquidity.
Working capital is a component of your liquidity. Measured as the difference between current
assets and current liabilities, your level of working capital is a direct indication of your business’
ability to fund its current operations. This, or course, is critically important to your lenders.
The desire to utilize easy credit and therefore finance everything from combine belts to
hydraulic oil may sound like a simple way to keep the wheels turning. If your farm is without
cash due to poor crops/pricing/etc. from the previous year, then available credit is a lifesaver to
help you keep operating. Just remember, such a scenario is a short term solution, and by no
means can it be considered a long term strategy. Sooner or later, your creditors will tire of
holding all the risk of funding your operations. Your working capital must be built and
maintained.

How much working capital is appropriate for your farm? (HINT: it’s probably more than you
think.)

Direct Questions

How do you view cash? Does it only have value when allocated (spent,) or is it an essential asset on the
balance sheet?

If you believe cash in the bank is an indication of profitability, can you not save your way to increased
profit?

How would you describe the financing cost to your business relative to the long cash conversion cycle
and the cost of credit?

From the Home Quarter

I had heard a seasoned old banker years ago say how “farmers don’t like to have money in the bank,
because as soon as it gets there, they spend it!” When there is cash in the bank, we feel profitable, and
often the decision is to allocate that cash to another asset. Will that other asset help repay liabilities?
For as long as I can recall, this industry has always dubbed itself “asset rich & cash poor;” the push
among players has been to build equity. And while the chase for equity is noble, equity does not pay the
bills, nor does it make loan payments, nor does it meet payroll. Cash does.

We must make cash management an utmost priority. If we are relying on financing for most/all of our
daily operations (operating credit,) what will happen if/when a lender does not renew those lines of
credit? Do you recall the ruckus out of the US each time they need to “raise the debt ceiling?”
Potentially, all government operations would get shut down. Same goes for your farm. If you have no
cash, and your credit lines get called, what are your options? I can tell you, they aren’t pretty.

It does not matter whether you believe “Cash is King,” or “Cash is the Ace.” If you have neither, you
might be forced to fold.

life

Managed Risk – Part 3: Credit

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You’ve read how I am a fan of Seth Godin’s daily blog. His entry on Thursday September 17 was titled
Serving Size. He writes about how it is “our instinct to fill the bowl” with “bowl” being a metaphor that
could apply to anything and everything from our homes to our egos. For now, let’s consider the “bowl”
to be thought of as “debt.”

If you’re like most farm businesses, you’ve been getting a bigger debt bowl over the last 5-7 years. In
fact, I would bet that if you looked back at your statements from 2005, you would wonder how you even
managed to operate with such little debt (relative to what you’re carrying today.) This is not unique, and
considering western Canadian agriculture (especially grains) has been in a boom for the last 7 years or
so, it is of little surprise that debt levels have also increased.

The question then begs, “How big can the bowls get?”

Lenders love to see strong cash flow and increasing equity. Record cash receipts and appreciating land
values have bolstered lenders’ appetite to lend into agriculture. With money being as cheap as it is (low
interest rates,) farms’ debt bowls have been easy to grow.

What’s been filling all those bowls? Primarily it has been rapidly appreciating land and an insatiable
thirst for more and newer equipment. You’ve read here in the past that there is a distinct difference
between “good debt” and “bad debt.” I challenge everyone to evaluate what is in their “bowls” and
identify the “bad debt.” What percentage of your total debt could be considered “bad?”

Generally speaking, bad debt is the unnecessary debt. Often poorly structured, it eats up cash flow like a
game of Hungry-Hungry Hippos chomps marbles, and it uses up the finite space in your bowl. Yes, there
will come a time when a bigger bowl cannot be had, and it is then that many will wish they had managed
their credit a little closer.

We talked about interest rates in last week’s article, and it spawned more reader feedback than I’ve
received in a while (I’ll credit that to harvest being a greater focus than commenting back to me.) Gerry
Bourgeois, Scotiabank’s Director of Agriculture Banking for Saskatchewan & Manitoba, offered an
interesting strategy in his reader feedback: “With interest rates at an all-time low, farmers with a lot of
debt on their balance sheet should be taking advantage of these current rates to consider locking in 5, 7,
or even 10 year money.” Acknowledging that rates are still going to go up, even if it will be later than
many had expected, Bourgeois says, “I view the current low rates as a compressed spring. Once they
start moving up, they will move up quickly.” He goes on to suggest “locking in rates and using derivatives
to hedge interest rate risk” as a sound strategy many farms could consider.

“Similar to how a farmer would use commodity derivatives in a trading account to hedge his commodity
pricing, we use financial derivatives to hedge interest rates on larger transactions,” Bourgeois says.
Using what are called Banker’s Acceptances, he describes how a “swap” works as a hedge against rate
increases, and alternatively can even goes so far as to structure a “cap” on potential future interest rate
increases, functioning like interest rate increase insurance. “Utilizing these market instruments can
provide greater flexibility in your hedges down the road,” he concludes.

To put more emphasis on managing your credit, here are some focal points to get you started:

  1. Understand how your lender views your business. Are you seen as risky? Are you considered
    highly leveraged? (IE. Can you get a bigger bowl, and if not, is it right full?)
  2. Recognize how your cash flow matches up with your debt obligations? More specifically can you
    meet your debt obligations should your cash flow decrease?
  3. Eliminate bad debt, and keep it out of your operation. Just because you can afford the payments
    today doesn’t mean you should buy, and it certainly doesn’t mean you can afford the payments
    next year either.
  4. Look back at the worst year you’ve had profit wise in the last 10 years. How much debt could
    you service if that was your profit for the next 3 years? Let this be your guide.
  5. If your bowl is full, what is your strategy in case of an emergency (Eg. tractor needs an engine)
    or an opportunity (Eg. prime land unexpectedly hits the market)

Direct Questions

What are you doing to protect yourself from market changes? (Eg. interest rate moves, lender’s
adjustment to credit policy, etc.)

How can you strengthen your overall debt structure?

What happens if your lender instructs you to use a smaller bowl?

From the Home Quarter

Every business needs access to credit to facilitate growth. It is the reckless depletion of many farms’
credit capacity that will further heighten a potential cash flow crisis stemming from shrinking gross
margins. While we cannot change the decisions of the past, we can learn from them. And there is no
time like the present to take steps to improve your debt situation if it’s not currently ideal. There is no
time like the present to strengthen your credit structure to protect what you’ve built considering the
current lending environment.

There are many circumstances where it is a smart decision to get a bigger bowl, but it is often smartest
to know when the bowl is big enough, or even when to get a smaller one