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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.

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.

grain2

Knowing Your Costs

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My clients continually educate me on the regional anomalies relating to land prices, and specifically land
rents. The common opinion among most farmers I speak with is that some of their neighbors just don’t
understand how to measure costs, and this leaves many farmers (including some of those I speak with)
feeling left out in the cold as they watch land get snapped up by someone willing to pay a rental rate
that can appear astronomical.

Based on third party feedback, meaning info shared with me by a farmer from his/her conversation with
a friend/neighbor/competitor, most decisions to take on land are being justified under the guise of
“reducing equipment costs per acre” and/or “the drive to be bigger.”

Popular ag-economics has drilled in to everyone’s head that fixed costs, like equipment, need to be
spread out over more acres to reduce the fixed costs per acre. This is simple arithmetic, and is
mathematically correct if we stop there. Stopping there allows us to feel good about the decisions we’ve
made to increase our fixed costs because “over ‘X’ acres, we’re only spending ‘Y’ dollars per acre.”

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Of all the costs that farmers face, the costs they have most control over seem to be the costs that are
least controlled. MNP has coined the term LPM, and what I’ll call “operations” are a farm’s labor, power,
and machinery costs which have ballooned in recent years. Next in line is Land, Buildings, and Finance
costs, or what I’ll call “facilities,” which have also grown significantly. Increase land costs (rent) to justify
increased equipment costs: think about it, we’re increasing costs to validate increased costs…
We expect to make a profit from taking risk. The more risk we take, the more profit we expect. My
concern comes from witnessing decisions that magnify risk and leave the expectation of profit as a
secondary, or even tertiary, consideration.

Direct Questions

Take a look at your expected gross margin this harvest. How much gross margin will you have available
to contribute to “operations,” “facilities,” administration costs, and PROFIT?

What is your “operations” cost? What are your target costs for “operations?” Did you know the most
profitable farmers keep their “operations” cost below $100/ac?

Have you traced your line from gross revenue and gross margin through to costs and down to profit?
Where can you improve?

From the Home Quarter

We cannot eliminate risk, we can only manage it. We cannot eliminate expenses, we can only manage
them. We cannot manage what we do not measure. If the purpose of your business is to increase profits
and grow your wealth, should you not ensure that the risks you take and the expenses you incur fit into a plan
for profit?

 

Understanding Costs – a graphical simulation

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In the example above, which illustrates a generic but common scenario on average grain farms in 2015,
a net loss of $9/ac is expected. But the top 10% of farms with a similar gross margin could show a net
profit of $40/ac, simply from excellent management of their controllable expenses: operations, facilities,
and admin.

grass

Information Management – Healthcare vs Your Farm

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Of all of the places one can imagine, our health care system is the preeminent entity that I believe
should be leaps and bounds ahead of everyone when it comes to managing data.

Over the last year or so, I’ve listened to my father-in-law’s observations about our healthcare system as
he led the charge relating to the changing needs of his disabled sister. He described how one nurse
would come into the hospital room, ask a series of questions, make some observations, take some
notes, and then leave. Shortly afterwards, another nurse would come into the hospital room, ask a
series of similar questions (getting similar answers,) make some observations, take some notes, and
then leave. At some point, a doctor would come into the hospital room, ask a series of similar questions
(and get similar answers,) make some observations, take some notes, and then leave. Usually these
notes where made on a chart that hung outside the hospital room door.

Some thoughts:

  • The cost incurred to have 3 highly paid and very intelligent individuals gathering similar
    information would likely astound me;
  • All of the information gatherers collected similar information, and compiled it into one paper-based record;
    Could anyone walking by a hospital room with malicious intent grab someone’s chart and leave
    that patient’s caregivers without access to critical information? Why isn’t this electronically
    secure yet (it’s only 2015 already!)
  • Patients get tired of answering the same question over and over;
  • Why wouldn’t the health regions equip each caregiver with a tablet computer that brings up a
    patient’s entire health history with the scan of a QR code that could be found on the patient’s
    wrist band?

Why am I writing about this? How is this important to you? First off, our healthcare should be of great
importance to everyone. But specifically as it relates to this blog, consider the
paragraph and bullet points above, but this time let the patient be your farm and the caregivers be your
business advisor, your lender, and your marketing advisor.

Direct Questions

How much better would it be to have all of your critical business information readily available for your
strategic partners to help you more effectively and efficiently manage your business?

How inefficient is it for each party to have to ask you for the same info? Your time is worth something
too, so wouldn’t you be better off not having to run through the same routine 3 times over?

How much risk is your business at if you were to lose, accidentally or maliciously, your historical business
information?

We’re a decade-and-a-half into the 21st century, and technology is awesome. When are we going to start
trusting it and using it to its full potential?

From the Home Quarter

I believe we have the best healthcare system in the western hemisphere, and I am by no means
criticizing any of our hard working health-care providers. But I do question the bureaucracy and
inefficiency that plagues the system (at least in the eyes of this layman.) I think we could do so much
better, which would then allow those on the front lines to spend more time providing healthcare rather
than administering information.

I believe that Western Canadian farmers are of the most efficient producers in the world, and I am by no
means criticizing any of your advancements and dedication to improving your production. But I do
question the lack of urgency and the failure to recognize the importance of having up to date critical
business information readily at your fingertips. You aren’t making the same type of “life and death”
decisions that are made daily by our health-care providers, but the decisions you make for your business
will effectively set in motion the cause and effect that can lead to life or death of your business.

Call to Action – Rate your current information management practices:

1. Can you produce your working capital figure within 2-3 minutes at your computer?

2. Can you advise what your total fertilizer cost per acre is by field? By crop?

3. Can you produce a current list of all farm assets with market values?

4. Do you keep a rolling list of cash requirements for the next 18 months? (i.e. loan payments,
property taxes, insurance premiums, etc.)

5. If you’re not willing to compile this critical information, are you willing (or can you) hire
someone to do it for you?

If you’ve answered YES to at least 4/5, congratulations, you’re ahead of the curve.
If you’ve answered YES to 3/5 or fewer, then please pick up the phone and ask for help.
(Hint: I always return voice mail messages.)

Growing Farm FI

Farm Shows – Is Something Left Off the Table?

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Who doesn’t love to attend the farm shows that scatter the prairie? From the latest equipment
advancements to distinctive new tools to cutting-edge technology, the exhibitors’ wares are tantalizing.
This isn’t unique to farmers; it’s human nature. There are tech shows, auto shows, fashion shows…the
list is endless. But I challenge any other industry’s show to match the diversity that you find at a farm
show.

Last week was the 2015 edition of Canada’s Farm Progress Show in Regina. I typically invest time there
and at the Western Canadian Crop Production Show in Saskatoon. Both are elite events. Both generate
millions and millions of dollars in economic benefits from immediate sales and future trade. And both
are primarily focused on production. (This also applies to Farm Tech, Manitoba Ag Days, Agri-Trade, Ag
In Motion, etc.)

What if we held a 3-day show that focused on management of your business:

  • Would we get 50,000 people coming through the turnstiles?
  • Would we see 500 exhibitors?
  • Would attendees mark their calendar a year out to ensure they didn’t miss next year’s show?

I would suggest the answers are: hell no, not even close, and that’s about as likely as a snowman getting
a sun tan. We all know why: management is BORING! Production is sexy! Grain marketing can be a thrill
ride! Managing and evaluating data…? Yuck!

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Business cannot operate without strong management. Lenders will not offer credit to poor managers.
Vendors will become less interested in doing business with poor managers. Employees won’t want to
work for poor managers. Imagine trying to operate your business without those three critical
factors…never mind trying to GROW your business!

Some farm shows have a smattering of business management features in their schedules by offering a
part day to focused speakers and/or topics around management. There are a number of players at these
shows who offer, or specialize in providing, management advisory services to farm businesses.

Direct Questions

Would you attend a farm show that focused primarily on managing your business?
Do you put as much focus on management as you do on production or marketing? If not, why not?

From the Home Quarter

I’m not picking on the farm shows as they are. I’m just using them as an example to contrast between
what is and what isn’t drawing crowds. What I am doing here is challenging the perception of the
players in the industry to increase their interest and their efforts towards management, so that it might
one day get as much attention as production.
If you’d like help planning your farm for business and personal success, then call me or send an email.

roi

New Tech and its ROI

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“It wasn’t until 1954 that tractors finally outnumbered horses on prairie farms.”

I learned this interesting factoid from Steve Leibel from FCC’s Management Software division when he
spoke to our local CAFA chapter in Regina earlier this spring. The presentation was on technology, not
economics, so we didn’t examine why it took so long.

Maybe that wasn’t a long time for farmers to adopt the technology of mechanized horsepower versus
literal horse power, but I think it was.

Today, it’s a little different; we adopt technology almost as fast as it can be released. I find that even my
head sometimes spins at the advances of new technology, so I can’t imagine what my grandfather, who
broke land behind a team of oxen, might think.

Much of this technology provides an incredible economic benefit. Others only provide marginal
economic benefit. Who has done the math before investing?

Shouldn’t any investment provide positive return to your farm? Of course it should, but not only should
it provide a positive return, there should be a threshold for that return to meet as well. Surely anything
that provides less than 2% ROI is better off staying on the shelf in favour of a risk free investment. This,
of course, is an extreme example notwithstanding those investment that provide negative ROI.

This winter I listened to Lance Stockbrugger say, “I love technology as much as anyone, but if it doesn’t
make me more money, what’s the point?” How much money do you need to make to invest in new
tech?

For some, there is no concern to the economic benefit of new technology; they just need to have it! For
skeptics, any proof of economic benefit is cast aside as nothing more than salesmanship.

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ROI is a useful starting point for any investment. ROI is important to know because it not only indicates

the net benefit it will also offer insight into how long payback will take. Technology that offers 100% ROI
in the first year would “pay for itself”. Technology that offers an ROI greater than 100% in the first year
would pay for itself and provide positive cash flow above what would have been realized otherwise.
Technology with a 20% ROI would take 5 years to pay back your investment.

So let’s ask again, “How much money do you need to make to invest in new tech?” This also applies to
land, equipment, people, and professional services.

Direct Questions

How do you determine if an investment of your capital is worthwhile?

What is an appropriate ROI for different investment options?

How do you measure the success or failure of your decisions of how & where to invest your capital?

From the Home Quarter

Land investors want 3-7% annual ROI on their investment. Employees should be able to return 200% ROI
(their wage or salary times two) to their employer. What about iron, gizmos, gadgets, etc? Some of this
can be hard to measure: what was the ROI on hopper bins when they first came to market? While it can
be done, it’s not easy to put a financial value on efficiency, safety, and convenience, but those factors
certainly provide an intangible ROI.

I enjoy seeing the increase in confidence that my clients enjoy after we go through an ROI exercise as
they determine how to invest their capital. Reviewing realistic numbers to project the financial benefit
takes the emotion out of the decision.

I bet that early 20th century farmers didn’t do an ROI calculation on having a tractor on their farm versus
horses because if they did, I’d say that tractors would have outnumbered horses a lot earlier.

If you’d like help determining ROI opportunities on your farm, then call me or send an email.

interest

How Interesting is Interest?

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“The peak bank prime rate in the ‘80s was 22.75%…10x what it is now.” This was a tweet I read last
week from Lyndsey Smith while she attended the Smokey Lake Ag Conference. Interestingly, I heard
yesterday that there may be another rate cut ahead; we didn’t even see the last one coming.

Q.1 Take a look at the current amount you spend on annual interest, and multiply it by 10. How does
that number make you feel?

Q.2 If you faced interest rates that are 1000% higher than what you pay now, how much debt do you
think you’d have?

Is it accurate to say that we generally don’t give a lot of thought to interest costs? I mean for the cost of
about 600 gallons of diesel fuel, you could cover 2.75% annual interest (prime rate) on $100,000
principal debt. So for those who can burn 600 gallons of diesel fuel per day over 20 days of seeding, that
fuel cost matches the annual interest (at prime) on $2,000,000 principal debt.

What?

Yes, very few burn 600 gallons per day, and fewer yet can have prime rates on all their borrowing, but
you get the picture.

There are many farmers out there today that are still being held captive by the memory of paying 18-20% interest on their business debt. That nagging fear has likely lead to business decisions that are
overly conservative and risk averse, leading to missed growth opportunities and insufficient wealth.
Anyone who has loaded up on debt based on the low rate environment we currently enjoy may want to
take a look at things. If the business plan only works when grain prices are high and interest rates are
low, then it’s not a viable plan. We’ve already seen grain prices stumble significantly from a year ago…

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This just might be the best time ever to do an interest sensitivity test. What is the financial impact of
interest rate increases or decreases; use a few different values to compare. If you’re highly sensitive to
increases, your time to negotiate a favorable fixed rate is now.

Direct Questions

What is your borrowing strategy? Do you carry an appropriate ratio of fixed and floating rates?
How sensitive are you to changes in interest rates?

Are you able to determine how much of a spread you can weather if you were to move from floating to
fixed?

From the Home Quarter

Debt fuels growth. Growth (if you read last week’s issue of Growing Farm Profits Weekly) can be realized
many ways, but certain to say that growth fuels profits. Profits fuel wealth. The bridge between Growth,
Profit, and Wealth is built with the help of good debt; bad debt often leads to Retraction, Losses, and
Poverty.

horizon2

3 Planning Fails

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Have you managed to take a breather from all the trade-shows lately? Why is the trade show season
scheduled as such (Jan-Feb)? Because this is when we’re planning the new crop season that is merely 8-10 or so weeks away now. Exhibitors want to influence your thoughts for when you’re making planning
decisions.

We know what you are planning, but what aren’t you planning? Here are the 3 biggest issues that
farmers tend to not plan, based on nearly a decade of my experience in the banking and financial
corporate world:

1. Anticipating Cash and Operating Credit Requirements
What is worse than running out of cash when you need to make a purchase? Running out of
credit when you need to make a purchase! With the incredible highs and lows of a farm’s cash
position through a one year cycle, this is a CRITICAL planning process to undertake. And once
that’s done, work with your banker so he/she is not getting a 5-alarm phone call begging them
to extend your limit.

2. Creating a realistic capital expenditure plan
CapEx drives as many urgent financing requests as anything else. “Hello, Banker? I just bought a
sprayer at the auction. Can you make sure the cheque clears? I’ll be in tomorrow to apply for a
loan.” CapEx should be part of the overall business plan, not a knee-jerk reaction in response to
that hair-trigger you pull when the auctioneer is looking your way.

3. Being Unaware of Family Aspirations
Can you picture what a combination of fear and obligation look like? It’s what a banker sees in
the face of a client who just came in advising that his/her son/daughter wants to farm, so “we
need to add land and equipment.” Fear over the volume of debt that is needed (likely requiring
the parents to co-sign.) Obligation because “the kid needs to get a start somehow.”

I wasn’t a family negotiator then, and I’m not one now. If you need that kind of help, speak to a
family coaching or mediation expert (I know some good ones, so I can help.) But for crying out
loud, please start talking to your family early about their intentions. A farm is more akin to a
barge than a ski-boat: it’s not highly responsive, takes time (and room) to maneuver, and can’t
hit top speed without a whole lot of things going according to plan!

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Direct Questions

Do you know how much operating credit you’ll need this year? Will you just rely on cash advances when
your line of credit is at limit?

When you acquire assets, is it “because it seemed like a good deal at the time” or because it fits your
overall business plan?

Do you assume you know what your family wants, or have you sat everyone down to talk? Don’t know
how to have that talk? Pick up the phone and get some help; your legacy (meaning your family and your
farm) are too important to let this slide.

From the Home Quarter

There are many factors that can affect your plans for the new crop year and if trade show exhibitors can
provide some of that influence, then they’ve succeeded in their plan. I’m suggesting that you have your
own plan in place, and whether you’re at the show or at your kitchen table, seek out the advice that
provides the most value to your business based on your plan.