April- June 2002
Ron Hook , farm management field specialist
A farm business today handles a large volume of money in terms of income and asset values in the normal course of business. The process of determining the best course of action among the many various courses possible is a daunting task. Many of these farm operators are either experiencing financial difficulties and need to make a change in their operation in order to continue or they want to improve working conditions for themselves today and enhance the possibility that they will have a family member interested in succeeding them at some point in the future. Many farm business operators do not have the confidence in their own ability to determine the various options available and to evaluate those options impartially.
A significant portion of my time is spent in one on one financial consultations with farm operators facing one of the situations indicated above. They know there is a need for a change, but what change should they make and how will it impact them? During a consultation the first step is to find out what alternatives are being considered. The various possibilities are then narrowed down to 2-6 alternatives that the operator is interested in exploring in greater detail. Using the long range projection feature of FINPACK the long range results of each of these alternatives are examined to determine which is most feasible. Once an alternative is selected, a detailed cash flow plan is created to show the cash flow needs that will be incurred when implementing it. These analyses are most likely shared with the operator's lender and adjustments made to satisfy all parties involved.
In a typical year I meet with more than 24 farm operations that want help in examining the alternatives that exist for them. Following are two examples of operators that I have done financial analysis work for during the last few years. I recently visited with them to see what changes have been made.
Operator 1 is from Dickinson County and ran a 180 sow farrow-to-finish operation with 1020 acres of farmland. His operation was experiencing severe cash flow problems with excess debt. We explored six alternatives for his operation. The alternative that he chose was to down size to the point where he does not need a full time hired man. The result of selling off the breeding stock and cutting expenses has been to reduce his indebtedness to a manageable level and allow his net worth to double. His comments included:
"It was extremely helpful to have someone lay out the numbers for each of the alternatives and help me understand where my problems were. Seeing the net result of each alternative was really eye opening."
"When we first began to meet, you were the only one interested in helping me turn things around. Thanks for being there for me." "It was very helpful to have someone look at the situation from a neutral perspective."
Operator 2 is from Sioux County and had a 70 cow dairy operating in a stanchion barn. He was concerned that he would not be able to hold up physically under the demands of that type of setup. We examined two alternatives to his present situation. The first would install a modern parlor setup with the ability to milk about 100 cows. The second alternative would install the parlor with additional facilities to expand to 150 cows which would require hiring more help. The choice made was to do alternative one and keep the work at a level that the operator could handle with the addition of some part time help. The parlor is now being used to milk 70 cows with the capability to expand to 100 or even to 200 cows at some point in the future. His comments included:
"Without Extension's help to determine what alternatives were available to me, I don't know where I would have gone for help."
"Once we had laid out the alternatives it was surprising to me which alternative actually helped my bottom line the most. I thought more cows meant more profits which was the case, however, your analysis showed that the additional profit from more cows was not significant enough to make it worth borrowing the extra dollars."
"The cash flow information provided was exactly what my lender was looking for and made the decision to go ahead with the project much easier to make for both of us." "I am confident with this decision that I have laid the groundwork for my son to be part of the operation when he grows up, if that is what he wants to do."
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July 11, 2006
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