(Menomonee Falls, WI — November 1, 2017) Never have the financial stakes been higher in agriculture, yet few producers have the accounting training to effectively monitor and control their expanding operations. In direct response to the Farm Crisis of the ‘80s the Farm Financial Standards Council (the Council) developed its Financial Guidelines for Agriculture. This document is designed to assist in developing sound financial statements on agricultural operations. However, direct adoption of the Guidelines by farmers has been hampered by two obstacles – understanding financial terms and not being accountants.

For that reason the Council has developed and now released a 17-page Implementation Guide to assist non-accounting individuals in developing sound financial reports. It is available free of charge and is designed to be used in tandem with the Financial Guidelines and Management Accounting Guidelines documents available through the Council.

This is according to Jeff Bushey, CPA, a managing partner with Nietzke & Faupel, PC, an accounting firm in Pigeon, MI. As chair and a long-time member of the Technical Committee for the Council., he and fellow committee members are charged with keeping the Guidelines documents current and publishing revisions to them when deemed necessary.

“The first obstacle to adoption is often expressed as the question, ‘How do I get started moving beyond basic, mandatory tax records to meaningful financial reporting’?” Bushey says. “Most agricultural producers and lenders are already using some system to collect and report financial information with farm record books or record keeping software programs which are designed to provide information for two purposes: reporting federal income taxes, and; securing a loan from a financial institution.”

That information is required, at least annually, he explains. “With some additional information, the result can be a vastly-improved financial reporting program.”

This is compounded by a second obstacle: farmers and ranchers are great producers but generally are not accountants. “In a cost-versus-benefit framework, the cost is often considered too high to fully implement the Guidelines,” Bushey says.

“The new Implementation Guide is a simple way to learn how to use the Financial Guidelines. It’s written for a farmer using everyday terms,” Bushey explains. “The Financial Guidelines explain how to produce useful financial information. The Implementation Guide is a road map of how to get there.”This publication leads non-accountants in an abbreviated implementation of the Guidelines by applying a checklist approach and discussion of implementation issues. This checklist enables users to assess the information needed at the various stages of implementation and the benefits and costs associated with moving to each successive stage.

“Once they categorize their current level of farm records users can then begin advancing at their own pace through up to four stages of implementation,” he states. “For example, Stage I only requires a cash basis tax return, Stage II adds a market value balance sheet, Stage III incorporates cost basis valuation and Stage IV completes the process with double-entry accounting records.”

“The Implementation Guide suggests that producers don’t have to go all-in to benefit from partially implementing the fundamental financial reporting concepts discussed in the Financial Guidelines and that the recommendations are likely to be implemented in stages,” notes retired Purdue University Extension Specialist and CPA Alan Miller. He is also a long-time member of the Council’s Technical Committee.

He explains that as in any do-it-yourself project, a level of commitment will be required to achieve meaningful results. These commitments will often require changes in daily, or at minimum weekly, operating procedures.

“Family members and employees must also be committed to the timeliness, accuracy and discipline in gathering information and coding transactions to lay the groundwork for improved financial control and decisions,” Miller explains.

“Each producer must ultimately determine to what extent they will receive additional net benefits from adopting more of the recommendations.”

As farmers implement the Guidelines they can begin benefitting in these areas:
• Improve management decision-making and enhanced profitability
• Better lender relationships and access to capital
• Enhance production as well as financial understanding of their business
• Focus on strengths that set them apart from their peers
• Determine cost of production (through the Council’s Managerial Accounting Guidelines)
• Gain a better understanding of standard financial measures

“A fundamental concept of financial reporting is that accounting period profitability can only be measured accurately on an accrual basis. Cash basis income tax returns are not indicative of farm profitability,” Miller stresses.

“The net benefit of moving to the next stage — accrual-adjusted financial reports to assess farm profitability and financial condition — will be a huge improvement in the quality of information available for decision-making.”

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By Tim Ohlde, President of Elk State Bank

People often joke about how much they detest public speaking. But for many, it isn’t a joke, they truly dread the thought of it. And, at least for some people right up there with public speaking is writing. Recently regulators have elevated the importance of loan write-ups; the financials will always be important, but the narrative is receiving increased review. Unfortunately, a fair number of loan officers dread writing. So, let’s discuss a few key aspects of the presentation content and how to elevate it to a highly effective level.

Make sure your Loan Presentation does Its Job – A good loan presentation provides a frame of reference for the borrower’s business, the current request and the relationship that the borrower has with your institution. It should set the stage for how this request fits into the broader scope of the operation and the long-term business plan. This might include referencing the complexity of the request and its size relative to the overall operation, the borrower’s management capacity and any competitive advantage that the business has in regard to product or service. At a minimum, it summarizes the request itself and makes a recommendation.

Remember Who Your Audience is – Typically the loan presentation is prepared for three different audiences. First, it is used by the lender to capture information and rationale for the decision on the credit request. Second, there is likely an internal or external loan committee or Board of Directors that will use it. Third, regulators will review at least a sample of loan presentations during exams. When studying a file, they will go to the loan presentation first and often review it offsite, so they read the loan write-up without bank staff available to answer questions. Make sure that what is written and the financial information included will be meaningful to all three groups. And one final audience that is hopefully avoided; a judge in a courtroom. Loan presentations may be requested by the court in the case of a dispute with a borrower.

Capture Context – If there is anything happening outside the borrower’s sphere of influence that may be impacting their business, make sure to reference it. Examples might be a significant change in their specific industry or the loss of a significant competitor.

Require Consistency – Having the same information, in the same format, presented in an organized and orderly fashion helps all audiences track key data. This is particularly powerful when external loan committee members and regulators are wanting to become familiar with the credit.

Develop a Format – Adopting a template for loan presentations that everyone within the institution will use builds commitment to improving credit file content. A presentation model is a tool that makes success in this area more likely. Having this agreed upon template is especially helpful when training a new lender. The model also allows for lenders to easily replicate static information that appears in each loan request. This would include the history of the operation and the background of key managers/owners.

Master a Writing Style – Strive for being succinct but thorough, focused and meaningful. Use words, tables, and formats that draw attention to key items and that lead the reader logically through the loan presentation. Use underlining, bold or italics to highlight key aspects of the financial information and demonstrate understanding of what they mean. The narrative should not restate financial data; it should expand on why and how financials have or will change. This is where a lender demonstrates depth of analysis. Less is more; extra words or uncommon words are undesirable; keep it clear and straightforward so the reader is focused on content, not extensive vocabulary.

Identify Financial Detail – Typical items to include, usually in charts or tables are; Balance Sheet trend analysis, Income Statement trend analysis, collateral coverage, ratio trends and repayment capacity. The repayment analysis will include sensitivity testing as well as timing of repayment based on a cash flow projection. These items usually culminate in credit scoring and/or grading and a summary of the overall credit risk based on the proposed request. Information about a guarantor, if there is one or if one is needed to recommend the loan, will be included because the guarantor’s financials will be reviewed as well.

Expand on Financials – Regulators and Loan Review Committee members are looking for the explanation behind the numbers as proof that the analysis was performed and understood. Back up the recommendation with the facts first, but evaluate context and add interpretations of the financial information.

Make a Recommendation – A summary section with the recommended action and rationale is a basic requirement so make sure that is prominent. This should include how the request scores within your risk rating system and any exceptions that might be necessary. Some institutions summarize the request and the recommendation at the beginning while others leave the recommendation to the end following the financial overview.

Find a Mentor – Look for a colleague who likes to write and organize information. This is the person to create the loan presentation template and to help review the final product for flow as well as missing information. It is hard to objectively review one’s own work; what may be apparent to someone with a long relationship with a borrower may not be obvious to someone taking a first look. After gaining experience, most lenders will outgrow the need for a mentor.

A commitment to exceptional Loan Presentations gets easier over time and reaps immense benefits when reviewing requests. It is also a great opportunity to deepen understanding of a borrower’s business and hopefully the bank’s relationship with them. As a lender strives to explain financial information an opportunity is created for rich and meaningful dialogue with the customer. Most lenders will always prefer numbers to words. But, the numbers alone can’t tell the whole story, the challenge of expressing what the numbers mean creates a better lender and a stronger loan.

Tim Ohlde is President of Elk State Bank based in Clyde Kansas and Founder and CEO of Country Banker Systems LLC, a Loan Analysis Software Product for Ag, Commercial and Consumer Lenders. Tim can be reached at HYPERLINK “mailto:timo@countrybanker.com” timo@countrybanker.com or 1-800-780-5479.

This article originally appeared in the Third Quarter 2017 issue of Ag Banking, a BankNews Media publication.  Copyright 2017 BankNews Media. All rights reserved.

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Elizabeth A. Yeager and Freddie L. Barnard write about evaluating the effectiveness of operating strategies for firms with different levels of financial leverage. Article re-printed with permission of BankNews Media:

Ag Banking: Measure Repayment Capacity

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