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FFSC Releases Free Implementation Guide

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(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.

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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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Purposeful Loan Presentations; What You Say and How You Say It Really Does Matter

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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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Using Computers in ”The Future Farm”

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By Scott Sartor

In my last three blogs I wrote about the basics of modern technology, how to use data, and how to choose the software that best fits your farm business. So, what does the future look like for farms on the cutting edge?

The “Internet of Things” or “IoT”, is hardware that automatically collects and sends data from machines straight to a database in the cloud. This technology already exists and is used to track performance, costs of operation, and to troubleshoot mechanical issues. Agronomic software is getting to be even more precise… in fact, nailing down profitability to a field or management zone will not just be the standard, it will be necessary in the very near future. Of course, UAV’s AKA “drones” are going to be fully adopted by crop consultants, and will change the way they scout your fields. Robotic machinery will also be available.

There are some good cloud based farm management applications out there, and a few accounting tools are being developed to work with these apps. In the future, these agronomic and business tools will integrate for automated reporting so that you and your advisors can make quick decisions, while being confident in the accuracy of the data. This will shape how you market your crops, as cost data will be updated in a more expedient and accurate manner.

Right now, smart phones and computers are the primary access point for data consumption. The future will see more sophisticated smart phone use, then progress to cloud access via “smart windshields” on your equipment (IF you are driving), or a “smart desk” at your office, which are wired to the internet. According to the USDA Farm Computer Usage and Ownership report, U.S. Farmers are increasingly using the internet for business. Rural broadband initiatives are being funded by the federal government, so more reliable internet access will enable better cloud access. The future for farming looks very bright for those that adapt to technology.

Scott Sartor is a manager at K•Coe Isom. Scott developed Croptell, a web-based application that provides financial reporting and farm business intelligence to farmers, enabling time savings and better business decisions. Scott has worked with farmers and their financials – in risk management or finance for over 17 years — and stays passionate about technology because it makes operations more efficient. Follow him on Twitter @croptellScott.

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Comparing Owner Equity

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By Alan Miller

One of the simplest ways to monitor farm financial progress is to compare the owner’s equity (or net worth) reported on the balance sheet at the end of one year to the equity reported a year earlier. If the amount of equity is larger, the farm made financial progress. Right? Perhaps! The farm manager should first determine the sources of the equity change.

One source of owner’s equity is contributed or “paid-in” capital. An increase in paid-in capital may indicate an increase in the farm owner’s wealth, but not an increase attributable to a farm business’ financial performance.

Gifts and inheritances are one potential source of paid-in capital, but they are not typically recurring. The farm owner cannot count on such increases year after year as a basis for building equity.

Another source of paid-in capital is nonfarm income and it may or may not be a recurring source of revenue used by a farm business. The implications for future farm equity growth are different depending on the likelihood of future infusions of paid-in capital. A key distinguishing characteristic of paid-in capital is that it wasn’t earned by the farm business.

It is important to separately recognize the contribution of paid-in capital to the total equity growth reported on the farm balance sheet. Usually items of paid-in capital are readily identifiable in the year they occur. Thus, they are usually relatively easy to sort out from the total change in owner equity.

Reporting a farm’s accumulated paid-in capital in its own separate balance sheet account is a good accounting practice. Tracking changes in each source of owner’s equity is a desirable alternative to lumping together equity from all sources. Lumping increases in paid-in capital together with other changes in owner’s equity can hide important management information.

Alan Miller retired recently from Purdue University after serving 36 years as an Extension Specialist in Farm Business Management in Kentucky, Alabama, and Indiana. He has been a Certified Public Accountant since 1991. At Purdue he taught an undergraduate course for agriculture students titled “Accounting for Farm Business Planning.”

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“Windshield Metrics” blog 2 of two-blog series

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By Alan Miller

Let’s consider one windshield metric that I first learned to appreciate in the early years of the farm financial crisis of the 1980s. That financial measure is capital debt repayment margin (CDRM). This windshield metric can help provide direction where the farm balance sheet still looks great, but net incomes are likely to drop. For example, should you go ahead and restructure existing farm liabilities now in anticipation of tighter finances ahead? But, is it right for your farm?

If forecasted CDRM is a negative amount, loan restructuring will typically be easier to accomplish now rather than later. The larger the shortfall, or the longer it appears to you it might last, the more incentive you have to adjust now. The 1980s proved how quickly financial reserves reported on today’s balance sheet can erode if asset values soften, interest rates rise, or other financial adversity strikes.

CDRM forecasted for next year compares the sources of income expected to be available for repayment with the demands for repayment. These demands not only include interest and principal due on term debts, but also family living needs and planned expenditures to maintain farm capital assets.

In the 1980s even farms that started with little or no debt could end up having capital debt repayment problems because of these additional demands on repayment capacity. Estimating accrual-adjusted net farm income from operations for the year ahead is the starting point for computing CDRM.

The rest of my story is that I first started forecasting CDRM because a farm lending organization started requiring it in the early 1980s. I don’t remember it being a particularly popular requirement with my farm clientele, initially. However, those forward-looking estimates of CDRM really served the farmers well as the financial crisis of the 1980s deepened.

Could analyzing forecasted CDRM help you avoid disaster in today’s ag environment?

Alan Miller retired recently from Purdue University after serving 36 years as an Extension Specialist in Farm Business Management in Kentucky, Alabama, and Indiana. He has been a Certified Public Accountant since 1991. At Purdue he taught an undergraduate course for agriculture students titled “Accounting for Farm Business Planning.”

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“Windshield Metrics” blog 1 in two-blog series

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By Alan Miller

Future accounting information is inherently valuable for decision-making because it is so relevant to the decisions we need to make now. Forecasted, projected, budgeted, or whatever you want to call it, future accounting information is never more valuable than when the economics of farming are in transition.

Any metric for measuring financial performance or financial condition can be forecasted. Forecasted financial statements are used in many situations to provide insights about what is most likely to happen to a business in the near future. I like to think of forecasted metrics as windshield metrics because they are forward-looking.

With historic or past financial metrics we are looking in the rear view mirror, so to speak, to assess trends in business performance over time and to figure how we got to where we are now. Windshield metrics add a whole new dimension to our management. They provide insight on what direction the farm business is headed and how we should manage in response. Windshield metrics should reflect farm managers’ expectations about what is most likely to happen during the year to come. Occasionally, forecasted financial statements and metrics are prepared for more than one year into the future. This is often recommended when a major change in a farm operation is being considered.

Forecasted income statements need to be accrual-adjusted to produce useful information, just like the ones for previous years. The easiest time to prepare a forecasted income statement for next year is usually right after the income statement for the previous year is completed. Remember to think about using windshield metrics as you plan for next year. In my next blog I will describe one of my favorite windshield metrics for periods of economic belt-tightening on farms.

Future accounting information is inherently valuable for decision-making because it is so relevant to the decisions we need to make now. Forecasted, projected, budgeted, or whatever you want to call it, future accounting information is never more valuable than when the economics of farming are in transition.

Any metric for measuring financial performance or financial condition can be forecasted. Forecasted financial statements are used in many situations to provide insights about what is most likely to happen to a business in the near future. I like to think of forecasted metrics as windshield metrics because they are forward-looking.

With historic or past financial metrics we are looking in the rear view mirror, so to speak, to assess trends in business performance over time and to figure how we got to where we are now. Windshield metrics add a whole new dimension to our management. They provide insight on what direction the farm business is headed and how we should manage in response. Windshield metrics should reflect farm managers’ expectations about what is most likely to happen during the year to come. Occasionally, forecasted financial statements and metrics are prepared for more than one year into the future. This is often recommended when a major change in a farm operation is being considered.

Forecasted income statements need to be accrual-adjusted to produce useful information, just like the ones for previous years. The easiest time to prepare a forecasted income statement for next year is usually right after the income statement for the previous year is completed. Remember to think about using windshield metrics as you plan for next year. In my next blog I will describe one of my favorite windshield metrics for periods of economic belt-tightening on farms.\

Alan Miller retired recently from Purdue University after serving 36 years as an Extension Specialist in Farm Business Management in Kentucky, Alabama, and Indiana. He has been a Certified Public Accountant since 1991. At Purdue he taught an undergraduate course for agriculture students titled “Accounting for Farm Business Planning.”

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Financial Stress: How best to tell to your Lender

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By Scotty Elston

It is inevitable as a producer you will be faced with adversity, whether weather-related events, volatile markets, labor issues, regulatory burdens, or perhaps farm policy shifts. If you are faced with a substantial financial loss in your farming or ranching operation, what should you do when it comes to communicating this to your lender? Here are a few suggestions that, if followed, will empower and position you to have greater control of your situation when dealing with financial adversity.

1. Be pro-active. Schedule a time to meet with your lender to communicate the challenges you have encountered. While it’s not something anyone would relish, this early communication is a good step in building trust with your lender.

2. Be Prepared. Before the scheduled meeting, know where you are financially. Have your assessment of the financial loss both in terms of the actual $ amount and why it occurred. Whether it’s professionally prepared or done by you, have a current balance sheet and income statement that reflects the current situation. Having this information ready to share will provide your lender with what is needed to understand the impact to your business.

3. Have a Plan. Have a solution ready to offer that addresses the financial loss you have encountered. The plan itself will depend on many factors including the severity of the losses and more than likely may require lender approval. By exploring options ahead of time, you will be better equipped to develop an effective and realistic plan together.

4. Be professional and be patient. The reality of a financial loss is very stressful and can become emotionally charged as you must deal with its impact across many fronts. Your lender may need more time than normal to respond to your needs and that can add to the stress. Understanding more time may be required for resolution and maintaining a calm, reasoned approach in your conversations can provide the basis for reaching the level of communication necessary to arrive at a mutually agreeable solution.

Scotty Elston is chief credit officer with AgTexas Farm Credit Services in Lubbock, Texas. The lending cooperative serves 23 counties west of the Dallas/Ft. Worth metroplex and north to the panhandle of Texas. Cotton, dairy, beef cattle, and grains are the most prevalent commodities financed as well as a large number of part-time farms and ranches and rural homes.

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It’s the First Day of Schoool, Boys.

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By Carroll Merry

In the motion picture Close Encounters of the Third Kind, there’s a scene near the end where the humans are using sound and lights to communicate with the alien mother ship. When the alien craft takes over total control of the computers, one of the scientists comments “It’s the first day of school, boys.” There is obviously a lot to be learned from the advanced intelligence.

I can’t help but think that many of today’s farmers and ranchers as well as their lenders and financial advisers are facing their first day of school.

We are now a complete generation-plus removed from the Farm Crisis of the 80s when we saw a near complete collapse of American agriculture. The industry had been through land and commodity price booms with corresponding expansion of farms and ranches AND debt. Then came droughts in 1983 and 1988,  commodity prices crashed and the mountains of debt drove thousands to quit farming and many to commit suicide. Banks failed.

Those who survived vowed to never let it happen again. The Farm Financial Standards Task Force was organized and set out to develop uniform financial reporting procedures, formulas, critical ratios and guidelines. Ag Banking schools were established and classes were filled to overflowing. Credit policies were tightened with greater oversight by regulators.

Good times returned.

In the past 2 decades U.S. agriculture has again seen times of great boom with record high prices being paid for both land and commodities. Expansion has been great with neighbors buying neighbor’s land. Young farm couples have had money like their parents and grandparents never imagined. And they’ve used it to buy the best – for him the best and shiniest equipment with all the latest technological toys….for her the half-million-dollar home.

But the storm clouds were gathering.

A few years ago I was involved with an intimate meeting that included Dr. David Kohl from Virginia Tech, Freddie Barnard from Purdue and Tim Ohlde from the Ag Lending School. On the conference phoneline was Dr. Danny Klinefelter of Texas A&M. You won’t find a more powerful and influential group to discuss agricultural finance programs! The topic was financial management education for ranchers and farmers and it was stressed that a time of reckoning was coming. The  ‘go-go’ years of the early 2000s could not last.

They also noted that the need for education must also involve ag lenders. Today’s lenders, they observed, are also a generation removed from the 80s and have been through years of relatively easy skating in terms of ag lending. Most have never felt real pain.

Since that meeting in 2011 commodity prices have nose-dived, land values have ‘softened,’ farm profitability is skidding downward and signs of shakiness are being seen all across the ag community. If they haven’t already done so, every producer, lender, and financial advisor is urged to sign up for any and all programs that become available that may help them stay on top of their financial management skills.

It very well may be that for many that ‘first day of school’ has arrived.  

Carroll Merry is president of Countryside Marketing, Inc. While he is neither an ag lender nor a financial advisor, he has served as administrator of the Farm Financial Standards Council since 1993 and has been involved with the ABA’s National Agricultural Bankers Conference since 1988, roles that give  him a unique perspective as an industry observer.

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Ag Finance Boot Camps are Great Refreshers

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By Kieth Raynor

On January 21, 2016 the Farm Financial Standards Council will once again team up with the staff from Farm Futures magazine and host an Ag Finance Boot Camp in St. Louis. If you have not attended one of these in the past, I strongly encourage you to consider going to this one.
 
I’m a CPA of nearly 20 years and I found the Boot Camp of earlier this year to be a great refresher course! And I can’t imagine how much information was taken home by those who were there who are NOT financial people.
 
I work in Dunn, which is a sleepy community straight south of Raleigh in east-central North Carolina. (We also have offices in Fayetteville and Sanford.).  Dunn straddles the border of Harnett and Sampson Counties and in September 2005, Sampson was ranked first place as the Best Place To Farm in the U.S. by Farm Futures. Agriculture here is mostly row crops with a heavy concentration of swine and poultry.   The row crops are predominately tobacco (pronounced ta-bacca for you non-Carolinians!), cotton and sweet potatoes with a few producers who still rely on the corn, wheat and bean rotation. In other words, we’re fairly diverse and not concentrated on just one commodity. And maybe that’s what made attending this year’s Boot Camp so interesting….the information available and the folks who were there were even more diverse! The Boot Camp was a great refresher for me as I am sure it was for so many of the 100+ folks who were there.

We often get lost in our own little agribusiness worlds of and think that everyone else has the same problems and opportunities we have. We also get used to doing the same things year in and year out using the same formulas and routines.  I have never been exposed to dairy farming but had a long and interested conversation with a perfect stranger at the Boot Camp about that industry.  The subjects covered included many topics I’d not dealt with for many years and there were actually solutions offered for handling client questions and needs right here in Eastern North Carolina. 
 
The audience is a broad mix of accountants, ranchers and farmers, and financial advisors from across the country, literally, and I was both surprised and impressed with how many ‘younger’ producers were in the audience. This is the generation who will carry on the legacy of their fathers and grandfathers to feed the world and they truly want to make sure their generation has a solid understanding of the financial end of their business.
 
The discussion leaders were the folks who actually write and maintain the Financial Guidelines for Agriculture documents. The relationships that I developed by attending are available after the conference and I know that if I run into a situation I have not been exposed to before, someone I met at this conference will be more than willing to talk me through it. It just doesn’t get any better than that.
 
The event is not free — it will cost you to get there and attend — but the information is invaluable whether you are new to ag financial recordkeeping or a veteran like me, a CPA who needs the occasional refresher to stay on top of the game.
 
See you there?

Keith Raynor is a partner with TRP CPAs, a full service accounting firm serving clients in agribusiness, construction, real estate, health care and government contracting. The firm is working at hosting its own local “Boot Camp” early in 2016 and has already found great support from among its current ag customers.

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