If you compare operating a dairy farm to driving a truck, ask yourself where your eyes are focused when you’re behind the wheel. Are you looking ahead, scanning for information both near and distant? Or are you looking in the rearview mirror? For that matter, are you doing all you can to make sure your vehicle is in optimal condition?
We’ve found when it comes to farm financial management, too many operators are paying too much attention to what’s already behind them, when they should be looking at the road ahead.
It used to be that strong production parameters, taking care of the crops and hard work were the primary factors to a successful operation. Today, that’s simply the minimum requirement to be in business. When it comes to long-term success, operators who make efficient use of capital and manage risk will be the sustainable models.
The past few years have been challenging on several fronts. Fortunately, though, milk prices began improving in mid-2019, so now, it’s time to strengthen your management processes by using key financial and production information to guide your decision making.
The long view
When learning to drive, you’re taught not to focus on a point directly in front you. You need to look further down the road, scanning across the view, taking in multiple points of information at once. The same concept applies to financial management.
The financial and production information at your disposal – your most recent balance sheet or milk production numbers, for example – are part of the landscape you’ve already seen. The most successful operations translate that information to help them move forward. Just as your truck’s dashboard provides key metrics for both near-term (speedometer, fuel gauge) and long-term planning (odometer), the same applies to your farm’s financial health. You can think of it in the following terms:
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Speedometer = Revenue, including milk, cull and calf sales
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Fuel gauge = Working capital and short-term borrowing capacity
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Check oil = Break-even cost of production
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Check engine = Core equity – if this is weak, you may need an overhaul, like an equity injection.
- Odometer = Earned net worth change, growth in equity from earnings (but not asset appreciation over time)
Many new vehicles come equipped with blind-spot indicators. When managing your operation’s finances, you need to devise your own indicators to help identify potential blind spots, such as:
- Winterkill in your hayfields. What are you going to do to make sure you cover your feed needs?
- A correction in milk prices
- A weather event that harms your ability to plant in the field or source feed
- An unexpected event – such as COVID-19 – that impacts export markets and drives prices down. What have you done to protect yourself? Have you used the Dairy Margin Coverage program or Dairy Revenue Protection? Have you forward contracted?
Just recognizing you have blind spots can be difficult. Scenario planning and stress-testing can help identify them and help you devise options for navigating those challenges.
Keep the engine humming
If you want your truck to run smoothly for as long as possible, regular maintenance is essential. Making sure your operation is running at top condition requires regular checkups as well. That could involve asking hard questions:
- Is there a family employee who isn’t getting the job done?
- Do you have areas in which you’re resistant to change, even though a better alternative is available?
Finally, pay attention to the traffic and road conditions ahead of you. Your truck may be humming along when you suddenly come upon a traffic jam or a road closure. In dairy farm terms, sometimes it’s not about what you’re doing right or wrong. It’s about what the market or your competitors are doing that can affect your bottom line.
The information in the rearview is mostly the concern of others (such as your accountant or banker). When you’re looking through the windshield, you’re taking control of the information available by:
- Using financial data and farm records to make decisions and facilitate change
- Reviewing the financial reports on a regular basis to ensure detail and data are accurate while monitoring performance to plan
- Producing financial reports on a regular basis, not just at tax time
- Knowing your break-even costs, as well as what’s impacting it
- Knowing your key financial ratios (current ratio, equity-to-asset ratio, operating expense ratio, return on assets, debt coverage ratio), as well as what’s causing them to change in the last quarter and year
- Using financial data to manage margins by implementing appropriate risk-management procedures
- Following the plan and executing, evaluating and improving the cycle on a regular basis
Farm financial management is not why you got into this business. In a tighter margin environment, however, you need to keep your focus on what’s ahead of your operation for it to be sustainable.
Note: The opinions, estimates and projections, if any, contained in this article are those of the author. BMO Harris Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the author and BMO Harris Bank take no responsibility for any errors or omissions and accepts no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this article or its contents. This article is for informational purposes only.
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