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Dr. David M. KohlBy Dr. David M. Kohl

What is the status of producers’ use of financial records? I was asked this question during a recent webcast broadcast nationwide and to Canada. The answer is extremely variable, based upon a number of factors. While interacting with countless producers each year, I have found that those who have sound financial management systems tend to be positioned for success.

Let us first examine the history. Over the years, the most intense use of farm financial records has occurred in the Midwest and upper Midwest of the United States. Pioneers in the field include one of my mentors, Dr. Tom Frey, of the University of Illinois, who co-authored with Dr. Danny Klinefelter, of Texas A&M University, Coordinated Financial Statements for Agriculture. Dick Hawkins, of the University of Minnesota, the developer of FINPACK, established the gold standard concerning farm financial records.

Evolving out of the financial crisis of the 1980s, the Farm Financial Standards Taskforce and Council (FFSC) established another watermark for the use of financial records by identifying uniform guidelines, benchmarks, and suggestions for data summaries. The FFSC’s mission today still involves creating and promoting uniformity and integrity in financial reporting and analysis for agricultural producers.

[rich-callout title="Rates Remain Stable" image_id="2856"] The 30-day vs. 15-Year Farm Credit Bond chart below illustrates that 30 day issues have remained at historically low levels for the last two years. Since the last issue of HeartBeat, the 15-year issues have hit the lows seen in 2010 decreasing the gap between short-term rates and long-term fixed rates. [/rich-callout]Today, I find that the top 20 percent of producers economically, not necessarily the biggest, have very sound financial management systems. That is, they complete annual, and sometimes quarterly, balance sheets on a cost and market value basis. They will compile accrual-adjusted income or profit and loss statements, and develop projected cash flow statements.

The elite of the group develop a business plan, including vision, mission, and goals. A marketing, operational, and finance plan are included and updated annually. Latest data finds that approximately 15 percent of peak performing producers carry out the development of a business plan.

What makes this group of producers exceptional is not that they compile the financial records, but they use them in strategic and day-to-day decision-making. Often producers have accountant-prepared financial records, but these documents are only used for tax strategies instead of daily decision making.

Many of the top echelon of producers benchmark their operations to others in their industry, or in some cases, by enterprise. Key financial measures such as profitability, equity gains, working capital, and margins are useful “yardsticks” to provide guidance and trend analysis, not only to their peers, but also to their own businesses.

One young producer in a recent panel at a lenders school monitors performance by comparing projected to actual results. He makes notes to his lender and wife, who is his business partner, about positive and negative deviations. He also notes whether deviations are the result of macroeconomic conditions or microeconomic management strategies, which helps to ascertain tactics for future decision-making.

One danger on the horizon is that some producers have given up on developing good financial records and projections because of uncertain times. Others make decisions based only upon tax records without proper accrual adjustments in inventory, payables, and prepaid expenses. These practices are recipes for economic disaster, particularly if the current economic super cycle subsides.

In today’s world of inflating farmland values, there are many who are millionaires on paper but who have never earned a dollar. The true measure of success is how much of the earnings are captured on the balance sheet in the form of earned net worth, instead of appreciated net worth. A sound financial record system that is analyzed and used in strategic decision making is a powerful tool for taking your business from good to great.
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