Many operators have made tremendous progress in using technology and precision to boost their yield or cut input costs. In recent years, many operations have grown in size. However, I wonder if those same operations have made a similar level of growth and improvement in their financial management and records. Simply just working harder, or operating more acres, doesn’t guarantee more profit. Commodity prices have dropped in recent years, resulting in reduced profit margins and for some, negative earnings spread across several years. Does your operation have the financial information necessary to be successful in these challenging times?
Are you able to answer questions such as these?
- How do you know if you were profitable in 2019? Your checking account balance is down, but do you have more grain in storage, or expect to receive a crop insurance settlement?
- Do you need to make changes to your business to reduce losses which eat up equity? Can you turn a negative enterprise into a profit center?
- Can you move forward with a planned expansion or major capital purchase? What will it do to your financial position?
- Have you held off on some necessary capital replacement because of the crop prices; and if so, can you afford to make that purchase now?
- Does your farm unit currently support bringing a daughter or son into the business?
- Can you demonstrate to your trusted lending partner that approving your operating loan for next year is an easy, positive decision?
- What is your earnings breakeven, or what price do you need for your grain sales to cash flow expenses and debt service? What is available for your family to live on?
- How do you compare to your peers? Can you compete with them in the future?
Strong financial management is based on accurate, easily analyzed financial information. What do strong financial records and information look like?
Top level management reporting includes a fiscal year-end balance sheet with supporting schedules — the foundation of your annual analysis. An accrual income statement ties the cash income and expense information to the balance sheet changes to calculate a true earnings number for the operation.
A reconciliation of owner equity change to the accrual income statement accounts for depreciation of assets and weeds out revaluation to give true earnings. When reconciled, it gives confidence in the results. A statement of cash flow accounts for all dollars moving in and out of the unit — including asset purchases and sales, in addition to family living draw. A projected cash flow for the next year is necessary to determine operating loans, marketing decisions and asset purchases.
Comprise an enterprise analysis based on yields, cost per bushel and cost per acre. Knowing your break-even is necessary to decide on land rent or purchases, grain marketing and input decisions. A best practice is to have a marketing plan in writing to aide you in marketing and risk management decisions.
You might look at this list and feel overwhelmed. Moving to a top level of financial information will take several years, so take the first step in the journey. Year-end is a great time to make that move as the balance sheet is the base for all other reporting. You can build on that foundation going forward.
Complete your balance sheet as of your business at year-end date. Many operations defer income or prepay expenses at year-end. To have a correct statement, the year-end transactions need to be placed in the correct year to match the income statement.
Your balance sheet should include accurate inventories valued at current price, plus accurate lists for account payable and receivables. It should also provide details which would be included on the debt schedule: Interest rates, accrued interest due and payment terms.
Provide correct balances of your checking account. Outstanding checks can skew the results greatly. Be sure to account for them.
Be sure your asset list reflects the capital purchases and sales made during the year. Proper handling of CCC grain loans is vital. Remain consistent on treating them as income or loans. Again, be aware of transactions occurring near year-end.
In future years, this report can be laid out side-by-side with historical statements for easy analysis of year-over-year change.
When you start with a well-completed balance sheet, the next steps to determine accrual earnings and reconciling the two statements should flow well. I urge you to take the time to complete the entire balance sheet in a timely manner. Then I encourage you to make this an annual year-end event. By making these steps a priority, you will be well on your way to better financial management.
Bob Augustin is a Team Leader-Scorecard Credit at Compeer Financial. For more insights from Augustin and the rest of the Compeer credit team, visit Compeer.com.