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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.

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

farm2

Prevention or Contingency?

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I read Alan Weiss regularly and one of his daily blog entries from early July gave me inspiration for this
week’s article.

Alan consults to Fortune 500 Companies and solo practitioners alike, and in the entry I refer to he asks
readers, “What are you doing with your clients, helping them to fight fires or to prevent them?”
Currently, I’m doing as much fire-fighting as I am fire prevention. I enjoy the latter far more, and I know
clients do to.

The challenge is that it is hard work to build and implement a prevention plan. It’s more fun to “give’r
while the going’s good” and figure out the rest later. For many farms, later has arrived and now it’s time
to fight fire.

The prevention plan will consider 3 metrics that must be maintained:

1. Working Capital
2. Debt to Equity
3. Cash Flow

graph15

 

 

 

 

 

 

 

 

 

 

Working Capital is simply the difference between your Current Assets and your Current Liabilities. To
complicate things, there is a process on how to include accurate figures for each; it’s not hard, but it
takes work. If your working capital is negative with little opportunity to return to positive, seek help
immediately.

Debt to Equity, usually represented as Debt:Equity or D:E, is a ratio of your total liabilities to your
equity. For realistic measurements, calculate your net worth for the equity figure. Net worth is fair
market value (FMV) of all “owned” assets less all liabilities. The difference is your net worth. If your
debts are $2million and your net worth is $1million, your D:E = 2:1. In some industries, a D:E of 2:1 is
acceptable; in agriculture, it is considered too high. Target your D:E at 1:1 or less.

Cash Flow is going to be the new-old buzz word. As it was the dominant focus of the 1990’s and early
2000’s, cash flow will once again be front and center. Total up you cash flow requirements for the year
and don’t leave anything out (like living expenses.) When compared to what expected gross production
revenues are going to be this year, are you happy with the result?

Direct Questions

Can you recognize and describe the importance of adequate working capital?

Debt to Equity is a measurement of “what you owe versus what you own.” Are you happy with how your
metric balances out?

Cash makes loan payments, equity does not. Are your financing obligations using up the cash you need
to pay bills, cover living expenses, or build adequate working capital?

From the Home Quarter

Your prevention plan needs to have these three metrics measured, tested, and measured again.
Strategies for how to manage your finite resources so as to build and maintain a prevention plan are
easier than fighting fires or trying to put together an emergency contingency plan when you first see
smoke. You might have excellent fire-fighting skills, and your contingency plan could be water tight, but
the fire still occurred. Isn’t it better to prevent what caused the fire then to fight it?

If you’d like help building your farm’s prevention plan, then call me or send an email.

GFP FI 2

The Drought Dilemma

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The smoky haze we started inhaling yesterday drives home more than ever just how dry it really is.
#Drought15 is the Twitter hashtag to learn about how bad it is beyond our respective back doors. By all
accounts, crops are suffering and market prices are starting to reflect it. Those who are in an area that
has been, and/or remains, too wet just might be coyly denying that they ever complained about the
rain.

While it is too early to get a handle on any semblance of accurate yield estimates, people I’ve been
talking with have tossed around phrases such as “July harvest” on lentils, and described wheat crops
that are ready to push heads despite only being approximately 2 feet tall. What might be in those heads
if another hot dry windy week prevails?

As a farmer, you are an optimist. Even the most pessimistic ornery old codger you can imagine is still an
optimist if he’s a farmer. If he wasn’t, he’d never put a crop in the ground each spring. But as optimistic
as “Well, if we get one good rain in the next 4-5 days” sounds, it’s not going to make it rain. Despite the
drizzle we’re seeing today, one rain does not make a crop. If you’ve got payments to make, payables to
cover, even payroll to meet, you might want to start thinking about how that will all get done if
#Drought15 persists.

  1. Speak with your creditors.
    They’re not clueless; they hear the weather forecasts and read the crop reports. But they also
    won’t assume; they won’t assume that you’ll have trouble making payments because your crop
    is not going to meet expectations. As far as they’re concerned, you’ll be fully capable of
    satisfying the obligations you promised to make when you signed the loan or lease
    documents…unless they hear otherwise.
    And remember, your lenders are not problem fixers, so coming to them after the trouble gets
    real makes it far more difficult. They have more opportunity to help when they can be proactive.
  2. Consider your options.
    Do you remember Growing Farm Profits Weekly Issue #9? “Life and business can often be like
    snowmobiling: when trouble is ahead sometimes you need to pull back and sometimes you
    need to stay on the throttle.” What is your best option considering your crop’s development to
    date? I recently read an article discussing the possibility of reseeding barley on fields that have
    been froze out or droughted out. Considering the dire need for feed this year, cattlemen will be
    interested in green feed or silage barley. Is it time to consider how that might pencil out?
  3. Change your plans.
    The decisions you made last year and the year before were based on the best information you
    had at the time. The current situation differs greatly and probably requires a new decision.
    Swallowing pride and allowing yourself to change/reverse/discard old decisions could be exactly
    what your business needs. Nay, it IS what your business needs because your business is
    constantly changing and so should your decisions. Knowing when to do so is just as important.

Direct Questions

How would you rate yourself as far as being agile to your financial obligations in light of poor crop
conditions?

How would your stress level decrease if you took 10% of the time and effort you spend on worrying
about the existing crop conditions and used it to contact your strategic partners and advisors to amend
2015 expectations?

Are you staunchly sticking to your past decisions or are you being flexible and responsive to the needs of
your business?

From the Home Quarter

About 17 or 18 months ago, I blogged about how we need to reset what our expectation of success
really is. After the record 2013 crop, the 2014 crop year was poised to be a real disappointment in
comparison. Considering so far this year we generally went from adequate or excessive moisture in
March to a drought by mid-May, I’d suggest we look at 2015 for what it is and be realistic about what
we can call success. To give you a glimpse of what I mean, in 2014 I was working with a farm that
projected an operating loss due to the excessive moisture, crop quality issues, dropping grain prices, and
high fixed costs. The comment during planning was “OK, so we’re expecting to lose only about $300,000
in 2014; that’s decent considering what it could be.” They reset their expectation of success based on
what they saw.

Take a good hard look at your current year, be realistic with expectations, and make changes as
required. We can help make sense of it, take the emotion out of it, and assist with establishing new
plans.

If you’d like help planning your farm for business and personal success, then call me or send an email.

farm

Accountant’s Work & Management Information

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In the last post, you read (again) about how important good accounting is to your business. If that wasn’t
enough, here’s more.

Do you ever find yourself tiring of all the financial hub-bub in the media? It seems like every 2 or 3
months the same banks, or automakers, or grocery chains are “reporting earnings.” Well, that’s because
they do. Every quarter, the publicly traded companies release an earnings report, financial statements
as it were, to the shareholders. The shareholders are the owners of the company, and they demand
information that is accurate and on time so they can make an informed decision about increasing their
investment, standing pat, or divesting. The company is in a constant state of flux, and owners want to
know by how much their risk profile has changed in the last 3 months. Accurate and timely information
is not only demanded by the shareholders, it is the law under securities regulations.

So why are farms OK to receive their info once per year, and often as late as 5-7 months past their year-end? If the answer is, “Because the owners (shareholders) aren’t demanding it,” then I have to ask,
“Why the ____ aren’t they?”

Does your lender put more emphasis on the timing and quality of your financial statements than you
do? If your answer is “Yes,” then please keep reading. Actually, print this off and read it weekly until
Christmas.

Quality accounting is more than just minimizing income tax and filing GST & Agri-Stability. Your
accountant should be tasked with generating precise and informative reports that give you, the owner, a
representation of the financial position of your business, and the changes year over year to your farm’s
overall financial health.

If the information in those reports is of little interest to you, or if you’re embarrassed to admit you don’t
understand what the contents really mean, please don’t fret. There are many people who are available
to help including your accountant, your lender, and your business advisor. All of them WANT to help, but
they won’t insult you by assuming you don’t know. For help, first you must ask.

As for all you wonderful accountants out there reading this, please note that I will be working with each
and every one of my clients to fully utilize the financial reports that you create. I will be helping each
farm CEO make informed decisions with help in part from your reports. That said we need reports that
are useful, readable, and easy to navigate. Combining several line items from client info into one line
item on the Review Engagement does not help management make informed decisions! For example, the
account we know as “repairs and maintenance” does not on its own distinguish between equipment
repairs or building repairs unless you break it down for us. When I work with clients to determine their
equipment cost per acre, we need to know just how much R&M is equipment and how much is
something else.

I encourage everyone to have a discussion with your accountant. It’s easy to just do what we do and not
take the time to talk about what we really want. Accountants need to know about your 3 year plan so
they can offer appropriate tax advice. They also need to know if the report they prepare for you is
meeting your expectations. Not everything is negotiable, but you don’t know unless you have the
conversation!

Direct Questions

How are you utilizing the financial reports that are prepared by your accountant?

Do you have questions when you’re exploring the contents, or do you even feel like you’re reading a
foreign language when reviewing your financial reports?

How do you make decisions about the future if you’re not taking the time to evaluate and understand
past performance?

Are you getting information to your accountant in a timely fashion?

From the Home Quarter

Management decisions, if they are to be informed decisions, need to be made with quality reporting and
realistic expectations; both are key components of a sound business plan. I recently witnessed a
financing deal go south because of the lack of quality information. The account manager aptly described
the financing request plan and supporting information as GIGO: garbage in, garbage out. Other factors
that are usually afforded consideration in a financing deal were never given a chance because the poor
quality information derailed the opportunity first.

It is up to you to work with your accountant, one of your key advisors, to put together the type and
quality of reporting that will not only serve you in making management decisions, but also support your
goals when seeking opportunities for growth.

If you’d like help planning your farm for business and personal success, then call me or send an email.

value

Valued Advisors = Service of Value

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I cannot stress enough the importance of good accounting:

  • I cannot stress with enough occurrences (frequency.)
  • I cannot stress with enough emphasis (urgency.)
  • I cannot stress with enough significance (magnitude.)

You’ve read how I feel about good accounting: you get what you pay for, and if you want to go cheap you’ll get that kind of service.

In early 2015, one of my clients had decided to move their accounting to a quality accounting firm that is
strong in ag. Previously, they were using a service that, while providing a nice financial statement (more
than just a tax preparer,) offered little in the way of consult or advice. As we are trying to move the
financial reporting to the new firm, the old service provider has been unable to clarify a “due to/due
from shareholders” line item in the statements that will have significant bearing on future tax planning.
This solidified to my clients the reasons they were moving from this “low-cost” provider to a quality
accountant in a reputable firm.

As the new firm was reconciling 2014 for my clients, it was discovered that their previous accountant
had not submitted the GST reports correctly for a number of years. The impact will be tens-of-thousands
of dollars. What other information is now suspect to scrutiny? What other ramifications might there be?
In this case, there will likely be a GST audit because the old accountant’s lack of quality work will
BENEFIT my clients to a GST REFUND of an estimated $56,000!

Direct Questions

How much more money was potentially left off the table (i.e Agri-Stability) for these clients? They’ve
come off of a string of tough years due to excess moisture.

How valuable is it to invest a few thousand more each year with a quality accountant to ensure you’re
getting accurate reporting?

Do you ask questions of your accountant, or do you accept what they say without further inquiry? Have
you discussed with your accountant your long term business plans?

From the Home Quarter

It took about 2 seconds during a phone call on Friday between my clients and their new accountants for
my clients to see that the new accountants just paid for themselves. And while a GST audit will be
uncomfortable, the future comfort (and confidence) that the reporting will be on spec and on time is of
great value. We’re all eager to see what else this new firm can find.

If you, as a businessperson, don’t value the financial reporting that your accountant creates, then you
will likely see accounting as an expense that you are trying to minimize. Accounting is one of those
services where you get what you pay for, and going on the cheap can be costly, as my clients will testify.
If you cheap out because you don’t value accounting, I expect your business results would reflect it.

If you’d like help planning your farm for business and personal success, then call me or send an email.

Cost of Production

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I got a little worked up last week when I saw a tweet that read “Cost of production matters in 2015 –
The Western Producer” and included a link to the article. Even though that wasn’t the article’s title, I still
had to sit down and scribe this.

Let me be very clear: cost of production matters every year. Period.

Cost of Production is the most basic principle that must be employed when making marketing decisions.
If you don’t have a clear understanding of your COP, then you are putting the survival of your business
at grave risk. Why? Because how would you know if you’re selling for a profit or not?

 

venne2

The WP article states, “A 38 bu. (canola) crop and a $9.45 price could yield $70 per acre before labour
and equipment costs.” That’s nice, but why would we not include our labor and equipment costs? Will
the crop magically seed and harvest itself?

COP only begins with your seed, chemical and fertilizer costs. It must also include all other operating
costs AND your fixed costs.

Now work back from your actual, or projected, yield and we come to the real figure that matters: unit
cost of production.

If you know that it costs your farm $6 to grow a bushel of canola, isn’t a $9/bu selling price a nice
target? By the way, that’s 50% ROI.

 

Direct Questions

What was your gross margin per acre in 2014?

Do you include your fixed costs when working out Cost of Production calculations? If no, why not?
How do you know what is a profitable selling price for your crop if you don’t know what it cost you to
grow it?

Do you discover whether or not you’re profitable only when you receive the accountant prepared
financial statements?

From the Home Quarter

In the simple calculation of “Revenue – Costs = Profit,” how can we be expected to make profitable
decisions without intimately knowing our costs? Every business that produces anything, from ocean
freighters to widgets, knows exactly what it costs to produce one item. Why doesn’t every farm know
their costs the same way?

As a special offer to the readers of this blog, I will conduct a Farm Financial
Review™ for up to 5 qualifying farm businesses at $475 (normally a $875 value.) This will include a
review of your 2014 financial results and a Cost of Production Analysis. Work must be booked by the end
of January and completed by the end of February. Please call or email for details.