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.

By Jim Casler

When considering benchmark data, the three important items to consider are accuracy, timeliness and applicability. The Benchmarking Part 2 article discussed accuracy of industry benchmarking data and the Benchmarking Part 3 article explored the timeliness of industry benchmarking data. The significance of using benchmark data that is relevant, or applicable, to your business and industry cannot be underestimated.

Different industries, different locations, different business models and different sized businesses have their own peculiarities and oddities that need to be considered when benchmarking your business operations. Different land costs, shipping costs, tax rates, length of growing season, number of degree days, etc all impact measures of performance.

For example, it might seem obvious that there isn’t much value in comparing the financial and operational performance of a 1,500 acre apple farm in New York to industry data for small manufacturers in Arizona. They’re totally different businesses, industries and location.

While the above is an exaggerated example, what about a 2,500-acre dry land row-crop producer in central Iowa comparing their business performance to industry data for specialty corn seed producers in Southern Michigan between 3,000 and 7,500 acres with 62 percent of their ground under water from 2013? Ah-ha, a little trickier, no? While this example certainly gets you much closer to an apples-to-apples comparison, it’s still not the most relevant information available. As an Iowa producer, you’d want to benchmark yourself against other Iowa producers, preferably to similar-sized operations in the same and neighboring counties.

To maximize the effectiveness of analyzing your business with benchmarking, the comparative industry data needs to closely correspond to your specific business – you know, apples-to-apples. Sometimes the data is readily available from a variety of sources. Other times, especially in small segment specialty ag markets, the data is much more difficult to obtain. The next installment in this series will look at how to obtain accurate, timely and relevant industry information followed up with discussion on what to measure.

Jim Casler is president of North Coast Ag Advisors helps family-owned farms with business planning, financial analysis and succession planning services.

By Joe Kessie

The Farm Financial Standards Council recommended using accrual earnings in 1991. Think about all the technology that has been adapted by farmers since that time. Even Round-Up-Ready soybeans were not introduced until 1996. That is why I am still amazed that after over 23 years of having the ability to calculate accrual earnings, so many farmers and their lenders are not using this tool to know how they really are performing financially.

I have been getting accrual statements from my clients since 1986. Accrual statements along with a simple trend sheet that calculates the “Sweet 16 Ratios” have been an invaluable tool for me, my bank, and especially my clients. All you need is an accurate balance sheet completed on the last day of your fiscal year-end (usually December 31st) and your tax return.

Think just averaging your schedule F income over several years gives you a good idea of how you are doing? If you can make decisions off of information that is 66 percent wrong then good luck. 66 percent was the difference between Schedule F versus accrual net income for a five-year period (2002-2006). This information came from a study done by F.L. Barnard, P.N. Ellinger and C. Wilson in 2010.

So if you are not already doing accrual earnings, take the steps this year to start. If you need help, all the resources you need can be found at www.ffsc.org.

By Todd A. Doehring

The Farm Financial Standards Council (FFSC) recommends 21 financial measures as part of its Financial Guidelines for Agriculture. A previous post looked at the Current Ratio (a measure of financial liquidity), and in this post we’re going to look at another measure of liquidity, “Working capital as a percent of gross revenues.”

The working capital to gross revenues measure (WC/GR) is a relative newcomer in financial analysis. Its primary benefit is measuring the amount of working capital needed, or to specify the size of working capital requirements. And, it helps determine this amount based on the total revenue (or sales) from an operation.

The FFSC defines liquidity as “…the ability of a farm business to meet financial obligations as they come due in the ordinary course of business, without disrupting the normal operations of the business.” Page III-2, Financial Guidelines for Agriculture, 2015. To paraphrase, liquidity is the ability to pay monthly bills, meet payroll, repay scheduled debt, etc. from current assets, without needing to sell business or investment assets to generate cash. This financial measure is used by many agricultural lenders as part of analyzing borrower creditworthiness.

WC/GR is computed by dividing working capital by gross revenues, and provides a percentage value that shows how large working capital is relative to gross (or total) revenue. Gross revenue is not the same as total cash receipts or gross income from a Schedule F. Rather, gross revenue is an accrual-based concept that measures the amount of revenue earned during a period, which is almost always different than the amount of cash received during a period.

A WC/GR measure of 20 percent or higher could probably be considered adequate, depending on the type of agriculture and the composition of current assets and liabilities. When price volatility is high, or revenue is expected to decline (as crop agriculture is experiencing presently), a higher percentage is obviously warranted. So, if an operation has revenue of $2,000,000, then the amount of working capital should be $400,000 ($2,000,000 X 20 percent) or higher, but even more (25 percent – 30 percent of gross revenues), would be advised when headed into a period of low income.

The WC/GR is relatively easy to compute and helps a business determine the amount of working capital they should be carrying. To learn more about this and other financial measures, you are encouraged to obtain a copy of the “Financial Guidelines for Agriculture” by visiting the FFSC web site at www.ffsc.org.

Todd A. Doehring is a Consultant and Director with Centrec Consulting Group, LLC, located in Savoy, IL, working within the food and ag sector. Todd works with producers and lenders in the ag finance, operations, and technology practice areas and also teaches a course at the University of Illinois on developing financial spreadsheet models and applications.

By Stephen Severe

Some of you who have a lot of gray in your hair will identify with this saying, the rest of you will wonder if the baby can actually go down the drain.

Enterprise accounting is an ideal way to understand the strength and weaknesses of your operation. For your enterprises to work ideally you need to understand the individual enterprises in depth. Especially those enterprises that are interrelated.

When I say interrelated, I mean those which in reality coexist together for the benefit of one or both. For example when I was growing up in southern Idaho we rotated potatoes, wheat, barley or oats. The enterprises were interrelated because we couldn’t plant potatoes after potatoes like we wanted to. So to grow potatoes we rotated a grain crop. The grain enterprise didn’t always make money. But, we would not stop using the grain enterprise because of the contribution to the potato enterprise.

Many agricultural operations have interrelated enterprises. Here at the Padlock Ranch we have a cow-calf enterprise, a grower yard enterprise, and crop enterprises. They are all interrelated. We raise most of our forage on our farm ground. The calves we background come from our own cow-calf enterprise. We have struggled with how to measure each enterprise’s contribution to the ranch. We don’t have local crops grown around us. If we did they could take the place of our farming enterprises. Therefore our crops are mostly grown to go through the grower yard and or the cow-calf enterprise. Because we have feed enterprises, we tend to background our own calves.
Because we have a cow-calf enterprise, we tend to grow forage crops. We continue to look at these interrelationships to determine if these enterprises are contributing individually and as a whole. We also evaluate them to see if another approach would be more beneficial.

Another factor to consider is what effect is there on your overhead and on your equipment pool if you discontinue one or several of your enterprises. We have to remember that unless you are willing to and can get rid of the overhead and equipment carried by an individual enterprise the other enterprises will have to bear that overhead cost.

By Jonathan D Shepherd

Basic business structures include sole proprietorships, partnerships, corporations (both C corporations and S corporations) and limited liability companies (LLC). LLCs are business structures recognized by state statutes that can be treated as a sole proprietorship, corporation, or partnership.

There are many factors that should influence a business owners’ decision regarding the best business structure to use. Liability and asset protection are often the reasons for forming a corporation or LLC and it is not uncommon to create one or more corporations or LLCs to separate land and building holdings from other assets. Usually, the desire is to protect the farm land from the risk of being lost in a lawsuit. Corporations and LLCs can help create a barrier between the operations of the farm and these assets. However, the recordkeeping practices and financial actions of the business owner can jeopardize this barrier.

When a corporation or LLC is formed, a separate legal entity is born. It is legally recognized as separate from any other business entity you had prior to the creation. You may still be the owner, but the newly created corporation or LLC is distinctly different. This is a very important distinction and an area where many business owners are putting themselves at risk of losing the protection they were seeking.

While it is strongly recommended that any business has its own bank accounts and financial records, it is required for corporations and LLCs. Corporations and LLCs do not have families or children so financial records should not include family living expenses. While the monies that are transacted in the corporation or LLC may seem to be yours, the way in which you access those funds determines whether or not the business is recognized as a separate legal entity, or as an extension of your personal affairs. There should never be money taken from the corporation or LLC to pay personal expenses directly. Monies from the corporation to the owner(s)/shareholders should be labor expenses, loans to shareholders, or distributions and if is recommended that salaries are established and dispensed on a regular basis from corporations.

Corporations also require other record keeping items including adherence to corporate bylaws that were created when the corporation was formed. Bylaws dictate how the business will be conducted, when director and shareholder meetings will be held, and how the corporate books will be maintained, among other items. Regular shareholder and director meetings need to be held and documented. This is especially important when making major changes or important decisions. These actions require meetings and documentation in corporate minutes which should be signed by directors or shareholders and kept for future reference.

LLCs are not required to have bylaws, but should have operating agreements, which are very similar to bylaws. An operating agreement explicitly states items such as ownership percentages, how profits will be distributed, voting rights, etc. While this is not required, establishment of and adherence to the agreement can be beneficial if the legal separation between business and personal affairs is ever questioned. Documentation concerning meetings and votes should be maintained within the LLC.

There are other factors that can affect the legal perception of your corporation or LLC as a separate legal entity as opposed to an extension of your personal affairs. The importance of treating your corporation or LLC as a separate legal entity cannot be overstated. This will maintain the integrity of its structure and help ensure that the protection you are seeking is legally recognized. It is suggested that you seek legal advice before determining which business structure is best for your operation.

By Scott Elston

When it comes to financing your farming or ranching needs why does your ag lender ask for so much information? Balance sheets, income statements, tax returns, K-1’s, and cash flow forecasts might seem a bit too much. Don’t they know me and my business by now? I’ve done business here for years.

There are several reasons why your lender might seem to have an insatiable appetite for your financials. Here are a few.

1. Your farming or ranching operation has grown. Oftentimes beginning operations’ loans may be relatively small and information needs in relation to your loans are small as well. As your operation and credit needs grow your lender needs more financial information to support increases in loan amounts that help you expand. Good financial information tells a story about you and your business in tangible ways that can make it easier to get you the credit you need.

2. You have experienced adversity. To be asked for more financial information in this situation can feel threatening when you are already feeling the stress of losses on the farm. Yet, providing your lender with detailed financial records for the current year (even though results aren’t favorable), historical records from the past, and your forecasts for the future serve as the foundation for you and your lender to develop a financing strategy to help you through these times.

3. Increased regulation. It is a reality that regulators are requiring financial institutions to obtain more information to support loans. Despite the fact that your credit history is spotless and nothing has changed in your operation, increased regulatory oversight may result in your lender asking for more.

Keep in mind just as good yields on the farm demonstrates your strength as a producer, having good financial information is reflective of your strength as a business manager.

When more information is requested, if it isn’t explained ask why. Understanding the basis for the requests will provide you with important insights and can help you build a long term relationship of trust with your ag lender.

Do you have questions about ag financial matters (non-tax related) and want to talk to a professional from the Farm Financial Standards Council?

A blog on ag financial management questions is now available at the link shown below. If you have a question you would like answered, please respond on the blog and we’ll see about getting a timely response for you. Remember, though…..we cannot answer specific accounting or tax questions, but can give general guidance.

Just click here and submit your question!

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This presentation gives a good overview of the work done by the Farm Financial Standards Council.

What is the FFSC?