Dr. David Kohl is professor emeritus at Virginia Tech and travels the U.S. speaking about ag finances, trends and outlooks. He also is a partner in a dairy and creamery, where he has put his academic training to work to make Homestead Creamery a financial success. The article below is based on end-of-year financial practices that Dr. Kohl shared while in Omaha this past summer, where he helped lead our annual Side by Side conference for young and beginning producers.
Farm life, for many, slows down in November and December, giving producers the time they need to focus on good financial management. This would be a good time for you to assess where you stand financially as you wind down one year and start developing projections for the next.
At Homestead Creamery, the Friday after Thanksgiving marks the start of a financial planning process that culminates in a “Groundhog Day Game Plan.” The process looks like this:
Update your balance sheet
If you are consistent in how and when you capture your assets and liabilities, it is easy to see your operation’s financial progression from one year to the next. The dairy strives to have an up-to-date balance sheet as of January 1, and then compares the resulting income statement against projections for the year to see how much — and why — the numbers varied. Were the deviations caused by macroeconomics, such as cheaper fuel? Or was it microeconomics at work — pewrhaps something management did right or wrong?
Develop cash flow projections
Calculate income minus expenses to determine whether your business will cash flow. Take the exercise a step further and use your projections for a baseline from which to develop several what-if scenarios for the coming year. If corn prices were to fall below $3.50 a bushel, could you pay your bills? This exercise allows you to develop a focused plan so you understand what adjustments might need to be made in your operation.
“If you can have your goals articulated, your balance sheet updated and your cash flow planned by Groundhog Day, you will be well-positioned to make sound business decisions and well-prepared for discussions with your lender for the upcoming year.”
– Dr. David Kohl
Review and discuss
After the partners in Homestead Creamery finish thinking through their what-ifs, the management team critiques the budget to identify potential holes. Having another set of eyes is critical to stepping back and considering additional possibilities or alternative ways of looking at potential challenges. If you don’t have a management team, turn to your outside experts, such as a lender, to review your projections. Good lenders will offer thoughtful suggestions and ideas to consider.
Commit your goals to writing
This includes business, family and personal goals in one-, three- and five-year increments. Every person involved in running your operation should be asked to complete this exercise. When each person shares his or her goals, it becomes easier to prepare for and make changes in a business. If you can have your goals articulated, your balance sheet updated and your cash flow planned by Groundhog Day, you will be well-positioned to make sound business decisions and well-prepared for discussions with your lender in 2017.