It’s an excellent time of year for farmers to evaluate the financial status of their businesses.
By updating financial and production records through the end of June, producers are able to analyze the financial performance of their business compared to previous years. The first place to start in the analysis is the creation of a balance sheet.
A June 30 balance sheet provides a snapshot of the financial status of the business.
The first area to look at is accounts payable. Are there accounts payable for livestock and crop expenses, e.g. seed, fertilizer, herbicides, fuel, equipment repairs and feed? What are the reasons that the expenses have not been paid?
Are input costs higher than expected? Have input costs exceeded the line of credit? Is projected dairy, livestock and/or crop income lower than expected?
Lenders understand that input costs and commodity prices have become extremely volatile. Likewise, they do not like “surprises.” If there are operating expenses (seed, fertilizer, fuel, feed etc.) which have not been paid, I would suggest that the producer request a loan from their lender to pay these expenses.
Crop input suppliers and feed companies are not lenders. Many of these suppliers charge interest rates of one and a half to two percent per month, which correlates to annual interest rates of 18-24 percent. Significant interest payments are saved with a bank loan which will have an annual interest rate of four and a half to seven percent.
The next step in analysis of the business is to look at the assets on the balance sheet. An analysis of intermediate and current assets on a balance sheet provides producers with a snapshot of the income producing assets of their businesses.
Has herd size increased or decreased? If herd size has decreased by more than 10 percent, why has this happened? What changes need to be made to prevent further declines in herd numbers?
What is the amount of cash in the farm checking account? What are the crop inventories, e.g. hay and grain that will be sold as cash crops. etc.?
What are forage inventories? What was the yield for first cutting hay crop since the first cutting provides approximately 50 percent of annual hay yield? If the first cutting crop was lower than normal and there is dry weather through July and August, will there be sufficient hay to cover annual forage needs for dairy and livestock producers?
If a dairyman or livestock producer expects that hay will need to be purchased, many times it is cheaper to purchase the hay before winter when prices are usually higher. How will the hay be paid for?
Crop prices have been extremely volatile in the past year; what is the plan for marketing the current year’s crop?
Have prices been locked in for a portion of the 2011 crops? Are additional sales of 2011 crops warranted prior to the 2011 harvest?
Likewise, dairy and livestock producers who purchase feed inputs (corn, soybean meal etc.) should start to develop a plan to purchase these inputs based on nationally projected yields and international supply and demand estimates.
Analyze production records
An analysis of updated production records will enable producers to determine if production and profitability goals (milk sold per cow, daily rate of gains, culling rates and grain yields) that were set at the beginning of the year have been met.
What is the net profit per unit of product sold, e.g. pound of milk, bushel, and beef calf?
If production and profit goals are not being met are there factors within the control of the manager (e.g. change timing of harvesting of forages, increase utilization of grass as feed source in rations etc.)?
By answering these questions, the manager can implement changes that will help the farm maximize profits. High production yields do not always equate to maximizing profits. Remember, maximizing net profit pays the bills.
Many times the owner’s labor management skills are ignored in the analysis of farm profitability.
Are the employees viewed as individuals who have “strong backs and weak minds” needed to complete tasks or are employees viewed as an integral part of the financial success of the farm?
What is the employee turnover rate? If employees have left the business in the past six months, what were the reasons? The owner’s attitude toward hired labor can have a major impact on farm productivity and profitability.
As the former owner-operator of a dairy farm, I believe a farm’s employees are the business’s most important asset. Staff meetings provide a forum where the owner and employees can air concerns about management of the farm.
Employees can be recognized for making decisions that contributed to the success of the farm (e.g. quickly repairing broken equipment, taking care of the herd with a limited amount of help, etc.).
Discussion may be focused around the following questions:
What has worked well? What changes should be made? Prioritize the changes. The owner and employees need to reach a consensus when the changes should be implemented. Then the owner makes the changes.
Employees relish the opportunity to work for a business where the owner acknowledges and implements employees’ suggestions that will improve productivity and profitability.
Finally, an area that can have a significant impact on farm productivity and profitability is the farm’s policy towards vacations for the owners and employees.
Employees and owners should be encouraged to schedule vacation time during slower times between planting and harvesting seasons. Vacations allow people to get rested and recharged.
Taking time off will help owners and employees gain a new perspective. Owners and employees who are well rested will be able to address the production and financial challenges with a clear mind in a year that has had numerous weather and financial challenges.
A mid-year review can help producers understand current financial status of their businesses. Then producers can make changes which can help maximize farm profitability during the last half of the year.
Best wishes for a safe and profitable 2011.