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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.

Are Your Finances Progressive Enough to Survive a Tough Market?

Feb 26, 2012

The new requirements pushed on dairymen are abnormal business practices for dairies but standard for all other industries. Dairy operators need to implement these tools into permanent practice. They are invaluable.

 
Mark BradyBy Mark A. Brady, CPA, CVA, Cooper Norman Certified Public Accountants
 
We all know times have changed, and gone are the days when we were able to call our banker, ask for more money and have the money in the account by the time we hung up the phone.
 
The approach to doing business today is evolving and involving more financial players actively at the table. Multiple years of low milk prices, high feed costs, or both simultaneously have drained generations of equity from our balance sheet and called for critical changes in business practices.
 
The past few years have been a wake-up call to many dairies who weren’t intimately engaged in the financial side of their operation. Accounting was done for compliance work only and if financial statements were prepared, they weren’t reviewed or discussed but tucked nicely into a filing cabinet. No other multi-million dollar business operation in other industries ever had as much financial latitude as dairies previously had.
 
Due to the large reduction in equity and borrowing base (herd and feed values less the amount owed for the herd and feed) with the bank, dairies have been and still are facing uncertain times. Dairy owners are being required to do more financial work than they’ve ever done before. For most operations, credit is the biggest hurdle right now.
 
This increases the level of stress and questions in the daily operations. This is not only where your accountant comes into play as an active advisor, but also your banker and attorney in assisting with negotiating loan terms, developing and agreeing to operation budgets, and creating a plan to return to compliance with loan covenants when needed. 
 
Most businesses have operating budgets that are developed by the business and reviewed on a frequent basis throughout the year. Clients we work with in other industries review their profit and loss statement with us each month. The actual results are compared to budgeted results. Variances are analyzed and changes are made mid-stream if appropriate for the business to meet its desired result – profitability.
 
In the past, many dairy operator/owners would approve, half-heartedly, budgets prepared by the banks and only look at it as they were signing the annual loan extension. The dairymen weren’t vested in the budget and once it was put in the file, it was never looked at again. 
 
Today, banks are requiring budgets and borrowing base reports monthly rather than quarterly, annually, or on an as-needed basis. There has also been an increase in the level of CPA-prepared financial statements in order to provide the bank with more assurance that the financials accurately reflect the records of the dairy.
 
The new requirements pushed on dairymen are abnormal business practices for dairies but standard for all other industries. Dairy operators need to implement these tools into permanent practice. They are invaluable.
 
We know as CPAs we cannot tell you how to milk cows and operate your dairy. That is your expertise, not ours. However, we do work with many different dairymen and prepare a significant amount of financial statements. From that, we can help you see where your financial statement and operations may be different from the average (whether above or below).
 
This is a critical tool in order for a dairyman to plug the holes in the ship. Doing this on a quarterly or monthly basis allows you to actively check and find the right balance for your operation.
 
Business today is a different ballgame, and it doesn’t appear it will ever change back to the previous way of business. It is going to take a progressive change to the mindset of most dairymen in order to adapt and accept higher financial standards. Ask the hard questions of your financial team. You should see your accountant, banker and attorney as your advisory board, not your adversary.
                                                                                                                                             
By doing this, you will create a business environment in which you can make timely, informed and strategic business choices.
 
Based in Idaho, Mark Brady is a partner with the firm of Cooper Norman Certified Public Accountants. Brady is a Certified Public Accountant (CPA) and a Certified Valuation Analyst (CVA). He grew up on a Montana dairy. Contact him at 208-733-6581 or mbrady@coopernorman.com.
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