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July 2013 Archive for Fiscal Fitness

RSS By: Dairy Today: Fiscal Fitness, Dairy Today

Financial management experts, lenders and accountants share ways for dairy producers to improve money and credit management. Look for help on budgets, taxes, loans, financial performance and even bankruptcy.

Back in the Black? Don’t Just Sprinkle the Money Around

Jul 19, 2013

10 smart ways to prioritize spending of your dairy’s excess cash.

p7 Fiscally Fit Riley WalterBy Riley Walter, attorney

Recent reports on declining corn prices and possible increased prices are giving distressed dairymen some hope. They realize they may soon have some excess cash remaining after paying the operating expenses and debt service.

So, what does this mean? Does it mean distressed dairymen should just resume business as usual? Having been through these crises in the past, I know that the typical response is to "sprinkle" the excess revenues around over the various, long patient vendors, with a little bit going here and a little bit going there.

Because it is my view that this "sprinkling" is not the best approach, I thought I would elaborate on some things that you might think about as this excess cash becomes available.

The crisis has been long and deep. It is not likely that distressed dairymen are going to be restored to perfect health in the short term. This means that the wise distressed dairyman will prioritize how this excess cash might be best used.

Below are a series of things that you might think about.

1. First, look at your list of payables and figure out which ones really helped you get through the crisis. It might be a vet, CPA, lawyer, feed supplier, harvesting company, etc. Consider rewarding your "friends" before paying those who cut you off. Don’t just "sprinkle" the cash.

2. Look around to see if you have deferred maintenance. Of course you do. Maybe that excess cash should be used to get your place back into proper condition.

3. In most financial crises, the first people to be let go are the bookkeeping types. Most of the time, people emerge from the crisis with records in shoddy condition. Now would be a good time to figure out how to get the records in proper order. Get all tax returns on file. Get all environmental reports up to date. Work on financials.

4. You have probably deferred investment in technology. This might be a time to get caught up.

5. Look at your legal structure. You probably saw how painful it can be to be organized as a partnership when things are going south. Should you now look at alternative structures?

6. You need to look hard at your list of payables. There will be many people on the list that have been very patient. Many creditors have not sued to collect on the debt because they knew it would not be worthwhile. However, now that there may be light at the end of the tunnel, you really should expect that the number of collection lawsuits will pick up. Are you prepared for this?

7. During the crisis, did you become lax on keeping titles to assets correct? Do you need to re-title anything and get it on the appropriate set of books?

8. Is there any possibility of building a reserve or cushion? Do your loan documents require that you keep every bank account at your primary lender? Can you open an account at another bank?

9. Consider whether you can use excess cash to go to vendors and offer to settle debts at a discount. Be careful about cancellation of indebtedness being treated as income.

10. If organized as an entity, can you pay the debts that have been personally guaranteed?

The point of this is to urge you not to revert to the "old ways." This crisis has been brutal. Hard lessons have been learned. Don’t revert to doing things the way they were done during the flush times. While distressed dairymen may be emerging from a long nightmare, it is not entirely over yet. Use the welcome excess cash to strengthen the operation and don’t just sprinkle the money around. Prioritize.

Riley Walter is an attorney and founder of the Central Valley-based Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at 559-435-9800 or RileyWalter@W2LG.com.

'Top Line' Management Impacts Bottom Line

Jul 12, 2013

When the checkbook gets tight, try evaluating your income rather than your expenses.

p7 Fiscally Fit Bob MatlickBy Bob Matlick, Partner, Frazer, LLP

When the checkbook gets tight, I have seen many of my dairy farmer clients negotiate hard on feed and supply purchases—sometimes down to what seems like pennies. They have squeezed, skimped, or just plain dropped many expense items.

Rarely, however, do I have a client react to the ‘top line’ of the income statement when finances are a struggle. By ‘top line’ I am referring to income/inflows (milk proceeds, culling income, and calf income). Most dairy farmers feel they can only control the expenses of the operation, but that is not always the case.

While many dairy farmers participate in risk management to limit the volatile price risk in both milk and feed prices, there’s more that can be done. They need to evaluate where they receive efficiencies within their operation. When meeting with a new client I often begin with two questions:

1) How much milk does the dairy ship daily (not how much milk per cow)?

2) What kind of components are you producing?

The answer to these two questions will give me a good idea of the monthly income of the dairy.
In order to avoid being a price-taker, I ask my clients to look at total milk production and what makes up that production. Is it the number of cows milking or production per cow? Is the production being influenced by breeding or feed programs? If so, what is the impact of those programs? Is the herd being influenced by the climate (heat or cold) and what effect is it having on the overall production? Is the dairy using Posilac? If so, what are the protocols and expenses?

Most expenses on a dairy operation tend to fit more in a fixed expense category than a variable expense category with the exception of feed. Labor, electricity, supplies, accounting, and principal and interest do not vary much if a 2,000-cow herd produces 140,000 lbs. per day or 160,000 lbs. per day. These expenses will not vary if the protein component is 2.9% or 3.2%.

My point is that the 160,000 lb. herd with a 3.2% protein will most likely produce more income than the 140,000 lb. herd with 2.9% protein. This extra income can help cover the fixed expenses mentioned above. (Note: I use the words "most likely" due to the fact that, occasionally, I have seen milk and components "bought." In other words, the variable costs [usually feed] outweigh the income increase.)

But if better ration balancing, bunk management and dry matter intake can yield more milk and higher components, income differences can be dramatic. When milk protein was $3/lb. or more this spring, those differences added up to more than $3,000 per day in more income in the example above.

With the tight and volatile financial times we are in, it is imperative for a dairy farmer to create monthly budgets and evaluate various scenarios while also tracking actual performance. Special attention in the budgeting/evaluating process must be given to the income and costs related to various levels of milk production, component makeup, ability to receive volume of milk, quality premiums, etc.

You can reach Bob Matlick at Bmatlick@frazerllp.com.

 

Need Vs. Want: When to Make That Big Purchase

Jul 08, 2013

A few simple tactics that can help you better organize your dairy’s capital budgeting.

Matt LangeBy Matthew Lange, AgStar Financial Services

Consider the last capital purchase you made on your dairy. Was it necessary? Did you buy at the best price and at the right time? How do you know?

Land, buildings, and equipment all make up major capital purchases, and it’s important to understand their impact on the operation before pulling the trigger.

Capital purchases are filled with many variables, making decisions surrounding them sometimes feel chaotic and discomforting. Major projects, such as a new feed pad, get put on hold for another year because of unplanned engine overhauls and worn out equipment in the parlor taking up the money. Sometimes producers feel compelled to make a decision today in order to get a "good deal" on a new piece of equipment, even though the purchase is not a necessity at that point in time.

First of all, when considering a capital purchase, it’s important to identify the impact it will have on your business. This is the basis for any capital decision. Any new investment in your dairy operation must meet at least one of these major criteria:

• Is the purchase a replacement for poor performing, existing equipment?
• Will the purchase increase efficiency within the operation?
• Or, is this purchase part of an expansion project enabling you to meet growing needs?

Needs-based purchases take priority over wants, but given the right circumstances, wants that meet one of the three criteria can also be beneficial to the business.

Employing a few simple tactics can help you better organize the many questions surrounding capital budgeting.

1. Identify and prioritize needs and wants. Begin by developing a list of capital expenditures that are:
A.) urgent,
B.) important but not urgent, and
C.) those that you need more time to consider.

Urgent expenditures, such as buying new fans for the barn or getting a new manure pump, become priorities for the next 12 months. Important, but not urgent, expenses will be made within the next three years. Anything beyond this point is an idea of a possible purchase, but has no immediacy. By prioritizing, you are helping identify the "needs" vs. the "wants," while planning for both. Be sure to include a buffer for unexpected purchases that may occur as well as a cost overrun on building projects — approximately 10% of the total overall cost.

2. Determine when the purchase will be made. Timing your capital purchases is critical to managing cash flow, taking advantage of special offers from dealers, and knowing definitively how an unplanned purchase may impact the rest of your planned purchases. Pull out the calendar and your urgent purchase list and decide when the purchase will occur. This may be based on availability on a line of credit or when construction of a particular project can commence or on a whole host of other issues. Getting the urgent purchase on the calendar sets a time frame and helps your business stay on track with its budget.

3. Evaluate financing options. It is critical to manage your purchasing power and provide yourself with financial and decision-making flexibility for future purchases. While you might have your sights set on building a transition barn or making major upgrades to the parlor, will it limit your ability to purchase that 160-acre tract down the road your neighbor is thinking about selling in the next two years? Knowing how you intend to finance each of your capital expenditures (cash, revolving line of credit) will improve your ability to maximize buying power and take advantage of opportunities. Above all, discuss these items with your lender to better understand how they will impact your business, cash flow and ability to be flexible and nimble when opportunity knocks.

4. Managing the asset. Lastly, consider how you will manage the asset to obtain its greatest value. For example, repair costs, hours of use, and job functions all impact how you will manage a skid steer, impacting when it will be time for its replacement or upgrade.

There’s a lot that goes into determining whether or not a capital purchase makes sense. What’s right for one producer at any given time may not be right for another. Taking emotions out of the equation and objectively analyzing the pros and cons for your specific situation will help alleviate some of the confusion. Likewise, utilizing the strategies outlined above and budgeting for capital expenditures will enable you to plan better and get the most of your purchase.

Matt Lange is a business consultant providing dairy and financial management expertise to dairy producers and managers. He holds an M.S. in Agricultural Economics from Purdue University and a MBA from Indiana University. Contact him at Matt.Lange@agstar.com.For more information and other content like this, check out AgStar’s Dairy Blogs and educational offerings on AgStarEdge.com.

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