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dashboard view

Dashboard

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What’s on your dashboard?

If you’re thinking about your trucks & tractors, the answer might be anything from gloves to a coffee mug to a clip for the rifle.

What I mean is “what are you watching on your dashboard?”Truck Dashbaord

  • Oil pressure?
  • Coolant temperature?
  • Exhaust temperature?
  • Seeding Rate?

All of these are important, and no doubt they all get significant amounts of your attention.

What are the consequences if any of these go into the RED?

 

What about your BUSINESS dashboard?

  • Working Capital?Financial Dashboard
  • Debt:Asset or Debt:Equity Ratio?
  • Unit Cost of Production?
  • Gross Margin?

What are the consequences if any of these go into the RED?

 

Which set of gauges get most of your attention? A failure on which set would be catastrophic?

When I was still farming, the first day of seeding in 2014 had one of these go into the red, only I didn’t know it because the gauge failed. In short, the tractor needed an engine overhaul because of severe overheating. Did it break the farm? No. Did it make seeding extra costly, and take longer than otherwise would? Yes. Did we survive? You betcha.

To Plan for Prosperity

We tend to do what we do best, what we like to do, and what we understand. Understanding the safe range, the limits, and the consequences of oil pressure or coolant temperature running into the red is something that is ingrained into us as youngsters who were imploring that we be able to run equipment. Yet, if no one teaches business owners the safe range, the limits, and the consequences of running their working capital or gross margin “into the red,” how will they know what to watch, or to watch at all?

For an intensive strategy on setting up and monitoring your business dashboard, call or email me anytime.

inadequate working capital

Critical State – Maintaining Inadequate Working Captial

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I’ve gone on record many times saying that I believe that the lack of adequate working capital at the farmgate presents the greatest single risk to the future of many farm businesses.

Working Capital is calculated by subtracting your current liabilities from your current assets.

wrkgcap-graphic

It is important to calculate working capital correctly, not only to satisfy the requirements of your creditors, but for your own management information as well. Overstating your working capital will give false confidence. Understating your working capital could cause you to unnecessarily inject capital into the business, or to miss out on taking advantage of business opportunities.

Maintaining inadequate working capital carries many risks, both direct and indirect, such as:

  1. Relying on operating credit and trade (supplier) credit.
    Heavy, or total, reliance on outside credit to provide access to the capital necessary to run your farm is as great a danger as a reckless crop rotation. There is no guarantee that these credit vehicles will continue to be available in the future as they were in the past. How will the crop get seeded next year if there is no working capital, and no operating credit, available?
  2. Using debt to pay debt.
    Many businesses have plead their case by illustrating that the debt payments were always made on time. What they failed to recognize was that the debt payments made were sourced from an operating line of credit, and therefore using debt to pay debt.
  3. Loss of profit potential.
    By leaning on outside credit, many farmers are forced to sell grain when they need cash to make payments, revolve credit lines, etc. instead of selling grain at a point of opportune profit. Selling grain when you have to instead of when you want to can mean the difference between profit and loss.

In regards to building and protecting working capital, here are just a few of the tactics I offer:

  1. Know your Unit Cost of Production.
    This goes beyond crop inputs. It includes ALL costs to run the farm from fuel, to insurance premiums, to paperclips for the office. Knowing UnitCOP allows you to clearly understand where your profit is made.
  2. Stretch loan and lease amortization periods.
    Interest rates are low, and recently there are hints that it might go lower yet. Stretching your payback period allows you to enjoy making lower payments. This is especially helpful in a year when cash flow & profitability will be tight. Accelerate payments in years when cash is abundant.
  3. Plan with Strategy; Discipline in Tactics.
    Far too often, we see businesses that operate without a plan by simply focusing year over year on operations (getting the work done) and as such, most decisions are made in reaction to a need or want. By building a clear & well-thought out plan, decisions become proactive when employing discipline through the execution of the plan. Deviating from the plan (IE. a great deal on a new pickup!) can jeopardize working capital and future profitability.

Direct Questions

How often do you calculate your working capital? (HINT: it should be monthly at a minimum)

What is your minimum level of working capital to have available? (HINT: it should be 50%-100% of your annual cash costs)

What is your strategy to increase and maintain adequate working capital?

From the Home Quarter

Inadequate working capital causes business owners and managers to make decisions they otherwise wouldn’t. It forces their hand. It takes away their control.
Abundant working capital creates opportunity, allows flexibility, and puts control of the business in the owner’s and/or manager’s hands.
Critical State can be only a breath away when working capital is inadequate.

inadequate working capital

Eat to Live, or Live to Eat

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This week’s title is common phrasing when dealing with people who struggle with weight loss. While there are many factors that come into play for those who struggle with weight, a person’s caloric intake is often a major contributor. Making smart decisions about what to eat, when to eat, and how much to eat can be challenging for many people who are trying to do a better job of managing their health, not just those with weight issues. The question of “why” they eat gets into the psychology of the issue, which, coincidentally, leads into the real topic behind this week’s commentary.

Spending time at Canada’s Farm Progress Show in Regina each June has been something I’ve looked forward to for as long as I can recall. Remember, I knew I wanted to farm since I was less than 10 years old, so the Farm Progress Show was a more tantalizing buffet to the teenage me than even an actual buffet! (BTW, I still have an appetite like an 18 year old farm boy.)

The desire for more and new farm equipment seems almost insatiable, and begs the question:

Do we have all this equipment so we can farm, or do we farm so we can have all this equipment?

  • I recently met a young farmer who, while struggling to establish adequate cash flow, explained why another 4WD tractor on his 2,000ac farm will make him more efficient (he’s a sole operator with no hired help…how one man can drive more than one tractor at one time is something I can’t quite wrap my ahead around.)
  • You may recall from a few months ago the fictional story about “Fred” and how he NEEDED another combine. Despite his banker’s advice, he forged ahead.
  • Conversely, another farmer I speak with frequently is feverishly trying to rid himself of the over-abundance of iron on his farm.
  • Another is protecting his farm’s financial position by keeping the absolute bare minimum amount of equipment on his farm. Nowhere is there a “nice to have” piece of equipment on that farm; everything is “fully utilized.”

During the week of the June show in Regina, I read a tweet from an urban, non-farming young lady who was seeing the Farm Progress Show for the first time; it said (something along the lines of) “all this big beautiful equipment makes me want to go farming!”

Direct Questions

What circumstances must be present for you to consider additional equipment?

Does any equipment deal have to make for a sound business decision, or simply fill a desire?

Is your equipment a tool to operate your farm, or is it the reason you farm?

From the Home Quarter

In these weekly editorials, you have read about Mindset, about Strategy, and about Focus; these topics (and many of the others) challenge the conventional thinking in the industry today.

Those who bow to the mistress that is their farm equipment are only enjoying short term excitement. The mistress entices her suitor, subservient to the raucous cycle, and she soon becomes the one in charge.

Just ask anyone trying to get out of multiple leases…

cash is not king

Cash Isn’t King

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I think this phrase has gained such popularity because of alliteration. The hard “c” in cash just rolls with the word “king.”

Let me emphatically disagree with the ideology that cash is king.

One could argue that the king rules all, answers to no one, and has absolute power. While I’m sure that is what the king would have everyone believe, the truth is that kings have always been influenced by the likes of his queen, his advisors, other diplomats, etc. Is he, then, truly the top, unflappable, incontestable?

Since we live in a democracy and are no longer ruled by a king or queen, when I hear such terms I think of cards. The card games I enjoy the most are 3-Spot (also known as Kaiser) and Poker. In both games, the king is soundly trounced by one card that is even greater.

Yes, I’m saying it.

Cash is not King.

It’s the ACE!

If cash is king, then that means that something else is the Ace, something else is more important than cash. This is simply not so.

Cash is the ace, the pinnacle, the life blood of your farm.

Imagine how the decisions would be different, the decisions that are made every day and every year on your farm, imagine how they would be different if you had an abundance of cash:

  • Instead of gambling on trying to time the commodity market high, you could sell your production whenever was most convenient and/or at an appropriate profit point.
  • You would cease the need for operating credit, vendor credit, or cash advances.
  • “Cash management” would no longer be juggling between various creditors and hoping you can deliver grain in time to make payments, but instead it would be paying bills on time (ahead of time?) and selling grain when it made the most sense.
  • Risk management programs would be a non-issue.
  • Equity loans to recapitalize the business would be a completely foreign concept.
  • Acquisition decisions (land, buildings, equipment) would be easier, faster, and more empowering.
  • YOU’D HAVE LESS STRESS!
    (That is capitalized for a reason.)

Cash is the Ace. It ranks above precision planting, Group 2 resistance, or the latest technology trends. The Ace outranks the King; it outranks all the other cards.

Direct Questions

Has cash always been your Ace, or have other things become more important?

What are the top three benefits to you and your business if cash was abundant?

How confident would you be to have TWO Aces in your hand?

From the Home Quarter

We often regard agriculture as doing amazing things with scare resources. Cash does not have to be one of those scarce resources even though that has been the mantra for generations (a.k.a Asset Rich – Cash Poor). Assets do not pay bills, cash does. The desire to convert cash into assets needs to be squelched at a time when debts are high, cash flow is tight, and profit margins are narrow.

Since cash is the life blood of your business, and a critical contributor to your financial health, when is the last time you had a checkup?

With your year-end financial statements now done, you’re ready for a checkup. Email your financial statements to me and I’ll provide you with a financial health report card. Normally a $500 value, this service is free if booked by June 13, 2016.

 

trickledown effect of too much debt

The Trickle-Down Effect of Too Much Debt

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One would think we learned something from watching the US housing market collapse at the end of the previous decade. Yet, here we are, seven or so years later and many are making the same mistakes that were made by countless US homeowners.

Granted, the macro factors that helped to create the US housing crisis are not prevalent here in Canada. My favorite term from the US crisis was “NINJA” Mortgage: No Income? No Job? …APPROVED! Lending criteria in Canada isn’t quite that liberal.

What exacerbated the problem in the US was how homeowners were using their homes as a personal ABM, taking cash out whenever they wanted for whatever they wanted from the rapidly growing equity they had in their homes because the house values just kept increasing. They leveraged the “found” equity they had in their homes to feed their consumer appetite.

Here in Canada, and specifically farms on the Canadian Prairies, we’ve seen something similar. Rapidly appreciating farm land is being used to secure more borrowing, and often to secure the consolidation of other loans. The renaissance of farmland value appreciation, especially in Saskatchewan, added a dangerous amount of fuel to a fire of pent up demand. Land “equity” was used for the feverish acquisition of equipment, buildings, and more land.

In the US, while sub-prime mortgages kept payments low, everyone was happy to be ticking along with borrowing and spending to their heart’s content…until the sub-prime period ended and the piper needed to be paid. With a property fully leveraged and no ability to repay the debt, many homeowners resigned themselves to foreclosure. Those who may have had an ability to pay the debt saw the value of their fully leveraged property start to decline because of all the other foreclosures, so when they found themselves underwater, they too went the route of foreclosure.

No one is arguing that things are different here. True. Borrowing criteria is more stringent in Canada. What is similar, however, is the experience of a rapid appreciation in the value of real estate and the leverage of said appreciation to support more (other) debt.

I was talking with a 17,000ac farmer recently who was very aggressive in expansion over the last several years. He has increased the size and scale of his farm in every way: land, equipment, labor, and debt. He made no bones about continuing to leverage all assets, including the appreciating land and his depreciating equipment, to the fullest extent in an effort to facilitate further expansion. The scourge of his actions over these last few years was the incredible drain on his cash flow to service all this debt. This came to light for him when recently he needed land equity to source an operating line of credit so that he could meet his debt payments.

Direct Questions

Have most of the increases to equity on your balance sheet come from appreciation of asset values or have they come from building your retained earnings?

How has your Debt to Net Worth changed over the last few years?

Are you drawing on your operating line of credit to make loan payments?

From the Home Quarter

It amazes me how what was ingrained into our long term memory for so long was so quickly forgotten. The memories of the indescribable hardships of the 1980s and 1990s have seemingly been overtaken by the boom years of 2007-2013. The willingness to replace the history lessons of tight margins and poor cash flow with the euphoria of big profits and cash to burn has led to many farms now facing a debt and cash crisis similar to what was common in the final 20 years of the last century.

The trickle-down effect of debt stems from when debt levels increase as fast as, or faster than, the borrower’s long term cash flow and net income. While asset levels increase, sometimes very rapidly, tremendous growth in debt levels eat away at potential equity and use up available cash flow. While the land base has expanded and late model equipment efficiently farms all the acres, while the bins may be full and the employees are busy, it all trickles down to cash.

When the demands on your cash are a raging river, it is pretty hard to live on a trickle.

 

 

asset rich cash poor

Asset Rich, Cash Poor (Kim Quoted in the News)

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A tweet led to an email, which led to a phone call…

It was back in March that I tweeted the following:

This, and the short Twitter conversation that followed it, garnered an email, and then a telephone interview with Jennifer Blair from Alberta Farmer Express.

Below is an excerpt of what she wrote. For the article in its entirety, click here.

” ‘The funny thing about prosperity and successive years of prosperity is it allows people to form some really bad habits,’…

…And for those producers, being ‘asset rich and cash poor’ isn’t going to cut it anymore.

‘When you look back over the last two generations, it seems like the mantra has been that farmers are ‘asset rich and cash poor.’ It’s almost worn like a badge of honour,’ said Gerencser… ”

Direct Questions

What do you think? Have assets, especially equipment, been increased too fast to the detriment of cash holdings and future cash flow?

What is a reasonable level of investment in assets relative to your net profit? Are you earning an adequate return on your investment?

From the Home Quarter

Bad habits can form easily, but like any habit, bad ones can be broken. Chasing equity is something we’ve always done and that may have worked a generation ago, when the risks were as they are today but the volumes of cash at risk each year were far less. We cannot do what we’ve always done and expect a result different from what we’ve always gotten.

Asset rich and cash poor will not suffice through the next business cycle.

I’d like to hear your thoughts; leave a Reply below.

ROI and ROA equipment

Farm Acronym Challenge: ROI and ROA

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ROI (return on investment) is a metric I lean on heavily when working with clients to illustrate an expectation of profit. Each farm deploys (what feels like) unprecedented volumes of capital every year in an effort to grow a crop; there should be an expectation of profit for doing so, and I expect my clients to demand an ROI that reflects the risk they take. Accepting lesser returns is insufficient and could be realized with less risk by deploying said capital elsewhere.

We can break down ROI by measuring a return on various aspects: crop inputs, investment in equipment, annual cash costs, etc. Some of the many options against which we can measure ROI are highly useful, others less so. We try to decide which metrics to measure based on which gives us the most useful information. Of course, the ability to have an accurate measurement of ROI depends entirely on quality information and your ability to collect it.

ROA (return on assets) is a measurement I will be using more in the future than I have in the past. More and more I am finding that there are excess assets on farms, especially equipment, that are using good capital yet providing an inadequate return.  Here is what I mean.

ROA is defined as a company’s net earnings relative to total assets. By dividing net earnings by total assets, we see how efficient management is at using assets to generate profit. A company that generates $1,000,000 in net earnings on $5,000,000 in assets has a 20% ROA. A similar company generating $1,000,000 profits with $10,000,000 in assets has a 10% ROA. It’s simple math. And the question begs: if you had invested $10,000,000 elsewhere, could you get better than a 10% return on those assets?

Before the argument about land values is thrown out there, let’s just curb it right away. Yes, ROA can be manipulated (as can ROE – return on equity) by owning fewer assets. Banks do it all the time: they sell their owned real estate such as stand alone bank branches and ivory office towers in order to lower their total assets, thereby making their profitability (when measured as ROA) look fantastic.

Today, let’s focus on the asset that gets much love: farm equipment.

How would we measure ROA when it comes to farm equipment? I prefer to use Fair Market Value (FMV) because that figure represents both what it would cost you to acquire said asset and what you could reap should you sell said asset; it is arguably the asset’s intrinsic value. Online searches and blue book values are great ways to validate FMV. I summarize it as “when the auctioneer’s gavel drops, what would you get for that piece of equipment?”

Focusing on ROA as it pertains to equipment only, and excluding land, levels the playing field so to speak. All things being equal, this approach will clarify which farm management team is efficient with how it invests in equipment, and which is not.

Direct Questions

How do you measure the effectiveness of your investment in assets, specifically equipment?

Are you over-invested or under-invested in equipment? What evaluation methods do you use to validate your position?

If you were to invest your capital elsewhere, what return would you expect? What return do you expect from your farm? Is there a difference? Why?

From the Home Quarter

When calculating ROA, consider multiple criteria: all assets (land, buildings, equipment;) land and equipment only; equipment only. The ROA will obviously be much lower when including more assets, but don’t let that sway you into selling land to improve your ROA. Land ownership has been, and will continue to be, the anchor of a farm’s wealth.

What is a target ROA? The jury is still out. Simply put, there isn’t a large enough sample with adequate accurate information available to draw from.

So let’s find out!

With the utmost confidence and maintaining your privacy always, I am proposing an experiment: Email to me your net earnings, your cultivated acres, and your fair market value for each of land, buildings, and equipment for 2015. I will compile the data with no identifying criteria so that you maintain privacy. The compiled data will be available only to those who take part in the experiment. Include 2014 and 2013 as well if you’d like to see how you are trending.

As a thank you for taking part, Growing Farm Profits will offer an analysis with feedback on your ROA  and ROI calculations and trends at NO CHARGE! (Normally a $470 value!)  – Offer expires April 20

 

 

Shaking Hands

The Farmer-Banker Dating Game

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When I went back to college in my mid-20’s, a mature student by definition, it was because I found a course and career path that would allow me to bridge my passion for agriculture & farming with my finance minded brain. My goal, as my friends and family will attest, was to be the kind of ag-banker that was a partner, not a foe, of the farmer.  My view at that time, which was a time that we were in the depths of a very real farm crisis at the end of the 1990’s, was that farmers “generally” had a poor view of bankers. I aimed to change that perception.

Now as a management advisor, I still aim to bridge that gap. I invest myself into building good relationships with bankers so as to have a list of qualified partners whom I can refer in to my clients for financing requirements. Here are the top 3 points to remember when considering a new bank relationship.

 1. Perfection is Not Required on the First Date

The initial meeting is a first date. Think about it: you’ve met someone you’re interested, you’ve had an interesting conversation that identifies some common interests, and you eagerly and excitedly agree to go on a date. On that first date, it’s a lot of “what do you do for fun?” and “what kind of music do you like?” If you’re really getting into it, you might discuss your date’s political views! You aren’t deciding on the first date if you will or will not marry this person; you’re just hoping to learn enough about him/her to decide if you want a second date.
The initial meeting with a new prospective banker is a first date. You’re getting to know each other. The banker wants to know how your farm is doing financially, how you manage & make decisions, and what you vision is of the future. You want to know how the banker manages his/her client relationships, how the bank would deal with a farm like yours, and how everyone would expect to work together should you take your relationship “to the next level.” On a first date, no one expects perfection. Each person on a first date easily overlooks the little nuances that may, or may not, become an issue later on. No one needs to be perfect on a first date with a banker.

 2. Be Aware of Where You Are At, Where You Have Been, and Where You Are Going

The greatest risk to derailing any chance of a second date is for you, as the borrower, to not have an adequate grasp on the effects to your business from past issues & business decisions. Bankers appreciate accountability when it comes to “what happened” in the past. Own your choices, both the good one and bad ones. Describe what you are doing to rectify your poor decisions from the past and what you are doing to ensure those same choices aren’t repeated. Have an idea (at least) of a vision for what you want your business to look like in 5 years, recognize what it will take to get there, and understand what you need to do in the near term to take positive steps towards that vision.

 3. A “Partnership” Mindset

While taking your relationship with your banker to the next level has been described by some as a “marriage, I agree in figurative terms only. Your relationship with your lender is a partnership, however, and proactive & productive efforts must be initiated by both parties.
While I believe that your banker relationship is akin to marriage figuratively, I do believe that it is a partnership literally. In almost every presentation I’ve made through the winter and spring, I have described the partnership as follows:

“If you have a Debt to Net Worth figure of 1:1, that means your debts are level with your net worth. At that point your creditors have equal skin in the game as yo do; your lender’s ‘investment’ in your business is par with yours. You have a 50/50 partner.”

There are many farms with Debt to Net Worth figures that are 1:1 or higher. Where do you stack up? Do you have a “partner” by the definition of equal investment in your farm? It is only decent and respectful for both parties to behave in the relationship like a partnership.

Direct Questions

What is your mindset with it comes to your relationship with your lender? Is it friend or foe? Necessary evil or business partner?

How prepared are you, as the CEO of your company, to discuss your current situation and share your vision of your farm?

Are you excited for a dance or two on a first date, or are you expecting your date to be on bended knee by the end of the interaction?

From The Home Quarter

This is penned in large from the message that my old boss from my banking days used to lean on: early interactions between bankers and borrowers are like courtships; everyone spends time getting to know the other(s) and jostling for position to make the best impression. It takes time to build a trusting relationship, and like any first date, if either party pushes too hard too soon for too much, a second date is unlikely.

4 R's of Fertility

Easy, Efficient, Effective, or Expensive?

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Let’s get it right out of the way first: I am not an agronomist.

I do, however, have a solid base of understanding relating to agronomy. With tongue in cheek I like to say, “I know enough to be dangerous.” Nonetheless, I took great pride in the significant attention to detail I employed while being in charge of seeding when still part of the farm. I carefully measured TKW (thousand kernel weight) and calculated seed rates accordingly. I was diligent about what fertilizer, and volume of fertilizer went into the seed row (we only had a single shoot drill.) I always slowed down to 4mph or less when seeding canola and ensured to reduce the wind speed to the lowest possible rate to minimize the risk of canola seed coat damage.

I always had a long season in spring from having to cover the whole farm twice: once with a fertilizer blend to be banded, (all of the N and whatever PKS that couldn’t go in the seed row) usually at least 2″ deep; the second pass was with seed and an appropriate PKS blend that could be be in the seed row. It’s just what I did to respect what I’d learned about the importance of fertilizer rate and placement. It took more time in applying, hauling home, storing, etc. It created operational challenges during application (it seems there were never enough trucks and augers available.) It took more time to set the drill for the correct application rate. All of that didn’t matter to me because I only had once chance to get the crop in the ground and fertilizer properly applied (at least at that time, the equipment we had made it so that all fert was applied in spring) and I wasn’t going to leave anything to chance that I could easily control.

The key point in fertilizer management is “The 4 R’s.” Right source, right rate, right place, and right time of fertilizer application make for the best use of your investment. So why over the last number of years have we seen such a boom in spreading fertilizer on top of the soil?

This article was recently published by FCC. There is no ambiguity as to the best and most effective way to apply phosphorus. I’ll ask again, “What’s with the shortcuts?”

I know the answer: time. There isn’t time to incorporate adequate volumes of fertilizer into the soil. We can use a spinner that has a 100′ spread at 10mph (or more;) this permits more fertilizer to be applied in a shorter amount of time, and it permits fewer stops to fill the drill during seeding…all of it saving precious time. I get it.

But where is the trade off? Have The 4 R’s of Fertility been tossed aside completely? Where is the balance?

Casting aside the proven science of the 4 R’s in order to save time by broadcasting is easy and efficient, but is it effective? I suppose that depends on what effectiveness you are trying to accomplish. I’m suggesting effectiveness of the fertilizer you’ve paid dearly for.

Direct Questions

When making important management decisions like fertility, what methods are you employing to determine your best strategy?

Where is your balance between ease, efficiency, effectiveness, and expense when making critical management decisions?

How has your Unit Cost of Production projection changed if you decide to accept only 80-90% effectiveness from your fertility program?

From the Home Quarter

What is easy might seem efficient, we might believe it is effective, but it is most likely expensive. Historically, decisions were made with the goal of minimizing expense with little else given to consider ease, efficiency, or effectiveness. Management decisions that do not provide adequate emphasis on effectiveness will likely see higher expenses. Your focus with your agronomy must be to produce at the lowest Unit Cost of Production possible on your farm. Choosing a fertilizer application method that places more emphasis on that which is easy versus that which is most effective is likely to create a situation that is expensive. Management decisions that focus heavily on one aspect to the detriment of the others rarely achieve results that meet or exceed expectations.

Introducing the Growing Farm Profits 4E Management System™. Details to follow.

analyzing finances at the bin

Using Your Financial Information

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Last week, we described how compiling your financial information will be beneficial to you in being able to analyze your previous year’s results so as to equip yourself in making informed decisions in the current, and future, years. This week, we discuss how to use that info.

Critical Balance Sheet Metrics

  1. Your Current Assets should be greater than your Current Liabilities by an amount that at least matches your cost to put in next year’s crop.
    Ideally, the difference between current assets and current liabilities should at minimum match your entire costs to run your farm for one year.
  2. You want your Total Liabilities to be no more than your 125% of your equity after net worth adjustments have been made.
  3. ROE is an acronym for Return On Equity. It is your net income divided by your net equity. Are you happy with the returns you’ve earned in each of the last 5 years?

Critical Income Statement Metrics

  1. First and foremost, is your Income Statement accrued? You can tell if you find an adjustment, up or down, to your income that would be labelled “inventory adjustment.” If your income statement is not accrued, call me for a quick description on how to do it yourself. It’s easy.
    Accruing your income statement is the only way to truly measure your profitability from the crop produced in a specific year.
  2. Did you have a profit? EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) is a very important figure to know. It represents your profitability from operations; it shows you can generate profits. The calculation is Net Income + Interest Paid + Taxes Paid + Depreciation Expensed.
  3. Now that you’ve got EBITDA calculated, divide it by the following figures: Current Portion of Long Term Debt (found on balance sheet) + ALL interest paid (found on income statement) + ALL lease payments made (found on income statement). This is an important indicator for your lenders. This figure indicates to them your capacity to meet your financing obligations.

Critical Cash Flow Statement Metrics

  1. Cash Flow from Operations divided by Gross Sales indicates how many dollars in cash your business generates from every dollar in sales. The higher the figure, the better.
  2. Cash Flow from Operations divided by your “Property, Plant & Equipment” indicates how well your business uses its hard assets to generate cash.
  3. Cash from Financing divided by Cash from Operations indicates how dependent your business is on financing. The higher the figure, the more dependent on external money.

Solvency Calculations

Liquidity Calculations
Liabilities / net worth current assets / current liabilities
EBITDA / loan payments, interest & leases current assets – current liabilities

 

Direct Questions

Does the thought of doing such calculations overwhelm you, scare you, or just plain bore you? If the urgency of knowing these numbers doesn’t strike urgency into you, are you willing to ask for help?

How would you describe the benefit to your decision making if these figures were readily available?

From the Home Quarter

The comment has been made time and time again: “It’s easy to make money in the good times.” With tighter margins of late, more attention than ever before is being paid to management and finances. These calculations above are only a few of the measurements that you can take to gauge your financial strength or weakness.

And if you need a hand figuring out what to do next, contact me any time.