Are You Profitable?
Are You Profitable Enough?
How things have changed. I'm sure you can remember when equipment was much smaller and when tilling, planting or harvesting described most of your day-to-day work on the farm. A no-till farmer would have been a nice way to describe your behind-schedule neighbor. A yield monitor was that same guy who wanted to know "what your wheat made"? then reported his did 2 bushels better.
As agriculture continues to evolve into a mature industry understanding technology and managing the details of your operation is essential for survival, not to mention growth. The diverse nature and size of agriculture has slowed the process of mega-business entering the mix compared to other industries. Different climates, soils and crops give each region of the country it's own set of distinguishing features. Adding diversity through livestock further differentiates one farm from another. Even so, the big are getting bigger. This certainly isn't news to you. It's all around you. Real estate values continue to climb, fueled by strong interest from recreational buyers as well as producers with the means to expand their own operation. Without a doubt agriculture has become a more competitive, aggressive and thin-margined business.
In such a complex business environment, attention to detail is paramount; Especially financial detail. It is very common for today's producer to have a primary focus on production. Bushels, pounds, tons, acres and dollars per unit dominate most agricultural conversations. By nature, these numbers are the best measures of our daily efforts. It would be foolish to suggest that these numbers are not important to a successful producer. They are. Long-term trends however, are usually measured differently. Financial numbers and ratios are generally the best score card of the overall health of the operation. The successful producers in the long run are those willing to take the time to be a top producer of their commodity as well as a savvy manager of their finances.
Crop consultants, seed companies, herbicide manufacturers, and equipment manufacturers all provide critical, technological information that improves efficiency and production. Does your financial health get the same attention?
To get optimal returns on your efforts as a producer without encountering too much risk, a manager should be familiar with issues such as liquidity, profitability, debt service coverage and leverage to name a few.
Some producers choose to scout their own fields for insects, water requirements, herbicide needs etc. Most however use a professional service that has some testing equipment as well as level of knowledge and experience that comes from not only scouting one field but hundreds of others. As certain threats to a particular crop are evident on one field, the scout will be more aware of it's presence in others and may be able to identify it sooner on your farm.
In a similar way your Banker should be the same kind of help in your operation. In today's competitive lending environment money can be borrowed from numerous sources. But, finding a lender that wants to take the time to understand your unique operation and develop a plan that fits within your tolerance for risk may not be so easy to find.
For example; ARE YOU PROFITABLE ENOUGH? The question itself implies that there is more to long-term success than just being profitable. The simplified formula for this particular calculation is; NET INCOME + DEPRECIATION + TERM INTEREST PRINCIPAL AND INTEREREST ON TERM PAYMENTS (one year of p&I) + MANAGEMENT WITHDRAWAL + INCOME TAX. The result of this formula is called Debt Service Ratio. The result of the calculation must be 1.0 or greater in order to have "debt service" for that particular period.
As suggested above, it is entirely possible to be profitable and owe income tax on the profit but still be loosing ground (loosing earned net worth) when you complete your next balance sheet. Additionally, it is also possible for a tax liability to exist with no cash, crop, or line of credit with which to make payment.
Each number in the formula should be given adequate attention and be understood by the producer. As Lenders at Haviland State Bank we feel it is important to give our borrowers the information they need to make the best decisions possible. Are you profitable enough?