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June 2012 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.

Solar Offers Stability for Dairy Operations

Jun 24, 2012

Recognizing its popularity and economic sense, many banks now offer easy financing for operations interested in installing solar.

Rabobank   Greg Aguilar PhotoBy Greg Aguilar, VP of Renewable Energy Finance & Leasing – Rabobank, N.A.

As any dairy owner knows, milk prices aren’t the only unstable financial factor for their business. Fluctuating feed costs, fuel prices and a host of other items all play a role in how the end of the month will pencil out on the accounting books.

Among these variable costs is electricity, an integral part of any dairy operation -- from powering the milk parlor all the way to the last barn fan. Such power usage is vital, but as some dairy owners are discovering, electricity offers a benefit beyond keeping the lights on and the machines running. The true value of solar power may very well lie within its ability to make a traditionally variable cost one that is relatively fixed.


Kees de Jong 10 10 036   Copy

Read how solar power generates electricity for two Western dairies in Dairy Today’s “Power from the Sun.”


As recent as a decade ago, harnessing the power of the sun through solar panels was an expensive undertaking, one that often did not provide a strong return on investment. Today, however, solar technologies have come a long way, and those advances, coupled with rising grid electricity costs, have made the move to solar much more attractive.

Make no mistake, though -– the initial investment for a solar power system installation is one that requires a hefty amount of capital. Recognizing the popularity and economic sense solar provides, many banks and lending institutions, including Rabobank, now offer easy financing for operations interested in installing solar but just don’t have the cash on hand.

With loan terms up to 10 years and historically low interest rates, many business owners, including dairy farmers, are finding that a fixed loan cost on a solar setup combined with the dramatic utility cost decrease helps them to plan accordingly from month to month. A qualified lending professional will be able to determine what kind of loan is best for a particular operation, given a variety of factors that include the size of the project.

With a solar system that’s powering part or all of a dairy business, there’s less guesswork about what the end-of-the-month bill electricity bill will look like, especially in the summer months when energy demand is at its peak. Essentially, the more fixed costs a dairy can have, the better it can plan its finances accordingly. That kind of long-term hedging is also looked upon favorably by banks that are establishing or renewing lines of credit or other financing for a dairy operation.

While leasing options for solar systems are available, ownership may be the best route for dairies. Such ownership offers the ability to depreciate the investment for tax purposes and take advantage of a 30 percent investment tax credit from the U.S. government.

Most importantly, owning a solar power system should be looked at as a long-term investment – no different than building a new free stall barn. Today’s systems have life expectancies that well exceed 25 years, offering more than two decades of not having to be at the mercy of rising electricity costs. However, if a dairy operation finds itself not able to take on the debt of solar ownership and/or has no ability to monetize the investment tax credit because of losses, then leasing could be a viable option that allows more flexibility.

Many different solar energy companies exist, and banks/lending institutions may have a list of preferred vendors they work with, making the installation and financing of a system a smooth process. If you're a dairy owner and are seriously considering installing a solar system, be sure to reach out to your banker to find out if they finance solar projects. They may or may not have a solution. Either way, don't be afraid to venture out and consider all of your options.

Rabobank, N.A. is a California community bank and a leading provider of agricultural financing and full-service banking products to California consumers, businesses and the agriculture industry. To learn more visit: www.rabobankamerica.com. Contact Greg Aguilar at Greg.Aguilar@rabobank.com.

 

Expand Your Thinking, Expand Your Business

Jun 08, 2012

Growing your dairy might mean transitioning your management style.

 
Mark Brady
By Mark A. Brady, CPA, CVA, Partner
Cooper Norman Certified Public Accountants
 
One of the most enjoyable and outstanding characteristics one will notice when working with dairy operations is they generally are not afraid of taking risks to be successful.
 
This has been demonstrated numerous times over the years as different operations have completed major expansions. It is worth noting that the success of these expansions was largely successful due to the strength of the operations management. This has generally been limited to the dominant characteristics of the operations owner/operator.

 


Mark Brady will speak at Dairy Today’s 2012 Elite Producer Business Conference Nov. 6 in Las Vegas. Click here to learn more.


 
Given today’s dairy environment, we believe it makes sense to address the thought of expansion and planning from a different angle than from what the traditional expansion of adding cows, land, and facilities would entail. Instead, let’s look at it from a management perspective. 
 
As stated earlier, the old approach to management consisted of one person making all the decisions. The owner/operator was this person, and we like to term this approach to management the “superstar model.” This model depends heavily on the key “superstar” having extraordinary capabilities, commitment, aggressiveness, entrepreneurship and stamina.
 
We would like to introduce what we call the “operator model,” which is quite different from the standard model seen being used. This model depends heavily on extraordinary systems, processes, procedures and methodology (infrastructure) of the operation to maximize the potential of the people working within it. Having confidence in the incoming leadership is less about finding the right people and more about the structure these new leaders will inherit.
 
When trying to identify the current model being used in an operation so one can determine the changes needing to be strengthened, start by reviewing the current leadership philosophies. If management believe the success of the operation is highly dependent on having a natural leader, it is the “superstar model.” If management believes the success of the operation is less about the leader and more about a strong infrastructure, it is the “operator model.
 
The value of the “operator model” in today’s dairy business environment is the ability for management to rely on defined roles and responsibilities in dealing with financial, legal and tax issues. One of the key points of this model relates the fact that the more people working toward a common goal, the greater the likelihood of its achievement. These people would include owners, operators (herdsmen), bankers, attorneys, consultants and accountants.
 
Dairy operations today are required to have business plans, forecasts and other related reports that are written, continuously monitored and frequently adjusted. With each passing day, the environment is changing and may change dramatically in an extremely short period of time, requiring continual adjustments to more accurately match approximate outcomes.  Being an operation that functions using the “operator model” rather than the “superstar model” will result in processes being in place that can react and respond to market changes in a systematic, more responsive, real-time manner.
 
The only constant that currently exists in the dairy industry is that of change. With all the potential for change in an operation today, the more reliance placed on processes, procedures and value-adding systems, the more likelihood of success. The change from the older, more traditional "superstar model" to the "operator model" will allow management to meet the higher level of financial requirements and also make more timely, informed, strategic decisions.
 
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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