How-to Become a CEO in agriculture and stay out of the red
Despite record-high prices in the agriculture industry, input costs continue to rise. The cost of feed, fuel and fertilizer, along with escalating land prices, have created the perfect storm for producers to get in over their heads. With no reprieve in sight for the rising costs related to production agriculture, Larry Martin, agriculture mentor, author and financial management practitioner, offered some advice on financial planning and management to stay out of the red, better managing debt and risk.
Martin teaches and coaches managers of farms, agribusiness and food companies in the U.S. and Canada. He also writes and consults widely on agri-food policy, commodity markets and strategy, as well as assists farm operators in developing sound business plans.
The first recommendation Martin suggested is to have an up-to-date balance sheet. On the assets side of the sheet, list current assets including cash and marketable securities, accounts receivable, inventory and prepaids, fixed assets including machinery, equipment, buildings and land, and other assets including investments, goodwill, patents, quota and taxes. On the liabilities, debt and equity side of the balance sheet, list current liabilities including bank indebtedness, advance payment and accrued expenses and taxes, long-term liabilities including debt, mortgages and taxes, and equity including preferred shares, common shares and retained earnings.
From the balance sheet, two sets of ratios can be created that could be useful to the operation. The first is the operating efficiency ratio.
“Basically from an interpretation perspective, the operating efficiency ratio is the net cash generated from operations before depreciation, interest and taxes,” said Martin. “It separates operations from financing. For most farms, this ratio should be north of 30-35 percent.”
The second thing to look at is the ratio of debt to operating income.
“Producers need to look at both short-term and long-term debts with the bank,” he advised. “How many years of net cash will it take to pay off debt? Answer this question ignoring expenses, taxes, interest, investment and profit. The result is leverage, with a good ratio of 2.5-3.0. Looking at farm operations, the ratios for the hog and beef industry have been well above 3.0”
From a borrower’s perspective, a leverage ratio can help determine cash flow and how much income needs to be generated to pay off debt.
“Clearly, the lower the operating efficiency and higher debt gives less available cash after interest to pay for capital and profits,” Martin explained. “This is why it’s so important to separate financing costs from operations.”
Keeping up-to-date records is only part of the picture. Producers are most successful in times of rising expenses are also proactive about their goals. One of the ways producers can be proactive is by getting involved in the Ag CEO program, offered by the South Dakota State University (SDSU) Extension Service.
Preparing producers for the challenges facing agriculture today, the Ag CEO program concentrates on understanding how production factors, along with fulfilling a leadership role, is critical to today’s active producers understanding risk management and ability to transition their operation for success. Through this program, SDSU Extension works with beginning farmers and ranchers by focusing on a systems approach to farm and ranch business planning with topics of study including: creating a vision for the operation, assessing resource inventory such as family, land, crops and livestock, and developing a sound financial records and budgeting system for long-term success.
The 2012 Ag CEO Program was held in February, with courses held in Rapid City, Faith, Winner, Redfield, Mitchell, Beresford and Watertown. While this program is complete for the year, the resources are still available for interested producers. Contact the closest SDSU Extension regional center for more information.
For additional profitability tips, make plans to attend SDSU’s upcoming AgXchange 2012 on June 28-29 in Sully County, SD. This 100-acre outdoor field conference offers a variety of strategies to incorporate into your operation. Continuing Education Units and Beef Quality Assurance certification credits are available at the event. Check out http://www.sdagxchange.com for more information.
Whether it’s attending conferences to polish up on business tips for the agriculture enterprise or committing some time to updating the record books, today’s agriculture requires producers to become more than managers of their operations; they must become CEOs. With proper planning, a proactive approach and a realistic outlook of the operation’s vision and goals, ranchers can find success in a turbulent agriculture market.