Three experts share what dairies must do to survive
For the past year, dairy management advisory specialist Robert Matlick, CPA Mark Brady and attorney Riley Walter have blogged these messages for Dairy Today eUpdate’s "Fiscal Fitness" column:
Financial management is critical to managing your dairy today.
- - Volatility in milk and feed prices has heightened the need to focus on the business side of dairying.
- - The financial distress of many dairies shares common threads that likely could have been avoided.
At Dairy Today’s Elite Producer Business Conference in Las Vegas, Nev., in November, the three experts reiterated their call for better financial management. They also recounted painful observations of distressed dairies they’ve worked with.
Here are a few of their financial management observations.
|Robert Matlick is a partner in the accounting firm of Frazer LLP, based in Visalia, Calif.
Matlick: "We want to see the dairy operator become more of a businessperson. Take a 4,000- to 5,000-cow dairy. That’s $20 million in gross revenue. Most businesses of that size have a full accounting department. You don’t see that on these dairies.
"I’ve got one client who wants to get outside with the cows because he says it’s his therapy. I tell him to get back in the office.
"I know we’re all subject to these volatile times, but planning is so important. When you sit down with producers in bankruptcy situations, some don’t have a clue where to start. Is that any indication why they end up in bankruptcy court?
"Dairying has become a business, where you have to plan. Every producer should have cash-flow projections for six to 12 months into the future. These are developed from historical data as well as input from the nutritionist, commodity brokers, veterinarians and perhaps business consultants.
"They should include all cash outflows and inflows, including capital improvements, living expenses, risk management strategies, principal reduction and multi-month feed inventory purchases (silage and hay). These should be updated monthly with actual numbers and variances in excess of an established amount researched.
"The last step is to add one month to the projection and make any alterations to upcoming months with new information that has been learned in the recent past. You should also have an inventory management system in place to measure feed that comes into the business (whether purchased and/or grown), and feed actually fed and consumed. Remember, more than 50% of your cost structure is feed."
|Mark Brady is a partner in the Idaho-based firm of Cooper Norman Certified Public Accountants.
Brady: "We all know the dairy industry has changed. It used to be that you could expect a volatility range of $2 per cwt. in your milk price. Now that range has expanded to $4 to $6
per cwt. From 2009 to the present, we’ve seen 30-plus years of dairy equity erode and disappear.
"The past few years have been a wake-up call for many dairymen who weren’t intimately engaged in the financial side of their operation. Now dairy owners are being required to do more financial work than ever before. That’s increased the level of stress and questions in daily operations.
"Today, banks are requiring budgets and borrowing base reports monthly rather than on a quarterly, annually or as-needed basis. There has also been an increase in the level of CPA-prepared financial statements 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’s 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.
"Business today is a different ball game, and it doesn’t appear it will ever change back. It’s going to take a progressive change in the mindset of most dairymen 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."
|Riley Walter is an attorney with the California-based Walter & Wilhelm Law Group, which specializes in agribusiness reorganization and bankruptcy.
Walter: "I am an insol-vency lawyer, and over the last 18 months, I’ve met with roughly 60 dairies, most in Central California. The No. 1 problem among troubled dairies is the tendency to skimp on financial help. At the very time you need to be staffing up in those areas, dairymen let go of controllers, bookkeepers and financial advisers. Big mistake.
"Another problem is so many dairies lack financial controls. They may or may not have the same person handling the money coming in as going out—a huge potential for
embezzlement. They don’t have controls on feed, medicine and fuel. Who knows how many dairymen are being charged for feed that is never delivered to the dairy?
"There also seems to be a relatively low level of financial understanding and a high concentration of poor accounting and record keeping. An inability to budget adequately has
occurred in every case I’ve had.
"Too many dairymen don’t understand their lien structure. They don’t know what a security agreement or what a UCC [Uniform Commercial Code] lien is.
"Also, when times are tight, some producers often ‘borrow’ from the federal or state government by not paying payroll taxes. Another big mistake. While this may be appealing in the short run, in the long run it’s deadly because of the nondischargeability of such tax obligations in the event of a bankruptcy.
"Deteriorating communications with lenders and vendors is a common problem. It only makes matters worse and leaves a distressed dairy more deeply in trouble."
- December 2012