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Monday, October 17, 2016

Cash Flow Statement- Watch Where the Money Goes

By Betty Berning, Extension Educator        

This is it- the last of the financial statement articles.  I promised I would write three:  one for each of the commonly used financial statements on farms.  I am sure some of you are breathing a sigh of relief!
If you recall, I’ve written about balance sheets- first article- and income statements- second article.  A balance sheet tracks your assets (cash, land, machinery) and liabilities (loans, mortgages, accounts payable).  An income statement looks at your profitability over time.  For example, your Schedule F from your tax return is an informal income statement because it lists where you received and spent money. 
This article will focus on cash flow statement (CFS), the third financial statement.  CFS is precisely that:  a statement that explains the flow of cash in your business.  In other words, how did money move in and out of your business?  Where did your income come from?  What kind of expenses did you have?
                Imagine that you looked at your 2015 and 2016 balance sheets. (See Figure 1)   You notice there are changes.  Your assets have increased by $107,000 and your liabilities have increased by $54,900.  What happened?  With a little analysis, you can piece some of it together.  Long-term assets and long-term liabilities increased, so it would appear that land was purchased and a portion was financed.  You can see the basics, but don’t get the in-depth view. 
What about the current assets?  There was a change of $4,000 from 2015 to 2016.  What happened there?  That’s not as obvious by just looking at the balance sheet.  That is where CFS comes in.  CFS helps tie the balance sheet and income statement together. 

Figure 1:   2015 and 2016 Balance Sheets

                There are three components to CFS:  cash from operations, cash from investing activities, and cash from financing activities.  (Figure 2) Let’s define these terms a bit further.  Cash from operations is the gross cash income and total cash expense.  These items can be found by looking at your tax statement, which lists out your income and expenses.  Cash from investing activities consists of purchases and sales of equipment, machinery, or land.  Think about what you may have purchased in the last year or may have sold.  Cash from financing activities are loan payments and withdrawals.   It also includes your nonfarm income and family living expenses.  CFS is completed for a specified time period (usually annually at the end of the year).  It will help you understand where money was spent. 

Figure 2:  Cash Flow Statement
Beginning cash balance
Cash from operations
Cash from investing activities
Cash from financing activities
Ending cash balance

                How do you know if you have a strong CFS?  You’ll have positive cash from operations.  This means you have money for investing and financing activities.  Your money from operations can be used to buy a new piece of machinery or cover family living expenses.  Another good sign is if your ending cash balance is greater than your beginning cash balance.  This shows that you were profitable during the time period.
                Your lender will probably look at your term debt coverage ratio.  This helps determine your capacity to repay you debts.  It is calculated using the following equation:

                  Term Debt Coverage Ratio = Net Farm Income
                                                                 Debt payments

A ratio of greater than 1 indicates your operation is generating enough income to cover your debt payments.  A ratio of less than 1 indicates that there is not enough income to service debt.  Lenders like to see a term debt coverage ratio of 1.25 or greater.  In others words, for every $1.25 of income you generate, you can pay for a $1 of debt.  Don’t panic- many farms have less than desirable term debt coverage ratios right now.  If that’s you and you haven’t talked to your lender, you need to do so.  You need to develop a plan.  That could be selling an asset, generating additional income, or restructuring debt. 
                If you are feeling confused after reading all of this, that’s okay.  Re-read it and try to work through an example.  Review the cash flow statement your banker or financial software have produced for you.  What do you see happening in your business? 
                CFS is the most difficult statement to understand, but it is very important.  This is where you can identify if you have enough money to pay your bills.  Additionally, it is one of the first places where financial distress appears.  Learn how to utilize this statement and it will allow you to be a proactive financial manager.
                Times are tough right now.  Keep engaging with your lender and farm business manager instructor.  Have conversations early and know your options.  Understand your business and its finances.  If you are interested in learning more about financial statements, please consider using “Interpreting your Financial Statements and Measures”,  This is an on-line workshop series that will help you understand your financial statements to more effectively manage your farm.  It will go into greater depth than these articles and help you on your financial journey!

Thursday, October 6, 2016

MN Livestock Investment Grants Available

Funds for On-Farm Livestock Improvements 

Recently the MN Department of Agriculture (MDA) announced there are $2 million in grants available for improvement projects on MN livestock farms. These funds are available through the Agricultural Growth, Research, and Innovation (AGRI) Program.

Successful applicants are reimbursed 10 percent of the initial $500,000 of their investment. The maximum available per year for a producer is $25,000.

Applications are due by Dec. 16, 2016. Funded projects will need to be completed between Jan. 1, 2017 and June 30, 2018. Complete details of this program, including application documents, can be found on the MDA website.

Financial Help Available For Farmers Impacted By Floods

Updated Disaster Loan Program Available

The Minnesota Rural Finance Authority (RFA) has just released updated information regarding their Disaster Loan Program. Farmers who experienced losses as a result of recent flood conditions can qualify for a zero-interest loan through the RFA. This RFA loan is a participation (or essentially shared) loan with the producer's current lender. The RFA portion of the loan is limited to 45 percent of the principal balance, up to a maximum amount of $200,000. This loan can be used to "replace or repair items lost or damaged due to flooding and not covered by insurance" according to the MN Department of Agriculture News Release.

For more information, farmers should contact their local lender or the MN RFA at 651-201-6004.

Friday, September 30, 2016

Skills for Negotiating; Land Rents, Contracts, Purchases and Other Business Agreements

by Don Nitchie, Extension Educator

Over time, you can fall into a mind-set, especially with long-time landlords, lenders and other suppliers or vendors you may work with—that all they care about is the “bottom line”. This maybe true for some but, not necessarily for all. Now with the pressure caused by tight or negative profit margins, to reduce costs—good negotiating skills and practices can be a significant business advantage. This can be the case even with your long-term business relationships and certainly with new ones you are considering. As a decision-maker you have lots of good data at your disposal-from FINBIN and many other sources. While this data is very useful in business negotiations, “people skills” are required beyond just the use of or knowledge of data, to be successful in negotiating. The following are negotiation techniques highlighted in Katie Shonk’s Guidelines for “Getting to Yes” blog post, with examples that have been customized for specific farm business situations:

1. Separate the people from the problem or the deal. When negotiating, it’s easy to forget that our counterparts have feelings, opinions, values, and unique backgrounds that contribute to what they do and say during talks. When misunderstandings and conflict arise in negotiation, we need to deal with the “people problem” directly rather than trying to gloss over it with concessions. Strive to imagine the situation from your counterpart’s viewpoint. If someone is refusing to back down from a hardline position, ask them how they think things are going. Exploring each side’s perceptions openly and avoiding the tendency to blame are key negotiation skills.

2. Focus on interests, not positions. We tend to begin our negotiation by stating our positions. A farm tenant may start out by stating, “This rent is too high”. When we stake out firm positions, we set ourselves up for impasse. In our goal of getting to yes, we need to draw out the interests underlying our counterpart’s positions by asking questions, such as; “how do you feel the weed control is looking on your land—or the drainage, or erosion control’? By identifying what interests are motivating the other party, and sharing your own interests, you can open up opportunities to explore tradeoffs across issues and increase your odds of getting to yes.

3. Learn to manage emotions. Be sure that you and your counterpart have ample opportunities to express and discuss any strong emotions related to your negotiation. Allowing one another to speak your mind will benefit both sides. When you know that you will have your turn to express how you’re feeling, it will be easier for you to listen when your counterpart has his turn. A landlord may have strong feelings about the care and upkeep of their farm, the economy or their financial situation-for instance.

4. Express appreciation. Expressing appreciation can be a means of breaking through impasse. “No one likes to feel unappreciated, and this is particularly true in a negotiation,” Express appreciation by working to understand the other’s perspective, seeking merit in that perspective, and communicating understanding through words and actions—all critical negotiation skills.

5. Escape the cycle of action and reaction. “If the other side announces a firm position, you may be tempted to criticize and reject it. If they criticize your proposal, you may be tempted to defend it and dig yourself in . . . if they push you hard, you will tend to push back.” To head off this vicious cycle, avoid escalation by refusing to react. Instead, channel your resistance into more productive negotiation strategies, such as “exploring interests, inventing options for mutual gain, and searching for independent standards.”

Incorporating these methods into your negotiation tool kit could prove very helpful in your negotiations during these tight economic times in agriculture. They may not bear fruit in every case but, if they help in just a few situations it could add up across multiple landlords, suppliers and markets you sell to. Experiment and give some of these techniques a try.

Source: Harvard Law School Daily Blog, Six Guidelines for “Getting to Yes”, Katie Shonk, Oct. 2015

Monday, September 12, 2016

What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  For 2016 I heard many times that rents were down $20 to $25 per acre, although some rents went up and some remained the same.  In table 1 below I estimated a 10% decline in 2016 from 2015.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017

Use Your Income Statement to Understand Your Farm's Finances

by Betty Berning, Extension Educator

I’ve written a couple articles this year and all have been related to farm finances.  I am passionate about finance and economics, but I understand that finance isn’t the most glamorous topic for most people.  Would you believe that I’ve tried very hard to make these articles as exciting as possible?!  I know, I know, they’re not very exciting! 

Having said that, finances are very important.  They are critical to a farm’s success.  Without strong finances and a solid understanding of them, one’s operation will have a difficult time surviving.  Anyone can become better at understanding finances, it just takes time and practice (repetition).

I’ve written about understanding revenue and expenses and balance sheet.  If you recall, the balance sheet is one of four financial statements.  The other three are 1.  Income statement, 2.  Statement of cash flows, and 3.  Statement of retained earnings.  For this post, I’ll focus on what an income statement is and what it tells you.

An income statement measures profitability over time.  For example, your Schedule F from your tax return is an income statement of sorts.  Your Schedule F measures your income and expenses over the past year (a period of time) and calculates what is leftover (profit).  This is considered a cash-based income statement.  Table 1 below illustrates an accrual-based income statement.  You can see the types of items that are included as income and expenses and the net farm income for the year.  The table includes accrual adjustments which give you a better picture of how much money your farm actually earned.

Table 1  Accrual Based Income Statement

Crop sales
Crop inventory change
Livestock sales
Livestock inventory change
Government payments
Other cash farm income
Change in accounts receivable
Gain or loss on hedging accounts
Change in other assets
Gain or loss on breeding lvst
Gross farm income


Cash operating expenses
Change in prepaids and supplies
Change in growing crops
Change in accounts payable
Interest paid
Change in accrued interest
Total operating expense

Net farm income from operations
Gain or loss on capital sales
Net farm income
Source:  Center for Farm Financial Management, FinBin

By looking at your income statement, you can see where you are making and spending money.  Take some time to really analyze your statement.  Identify the areas where you spend the most money and the least money.  Ask yourself, where am I making the most money?  The least?  Are you surprised by your answers?  

I’d also suggest comparing your current income statement to a past income statement.  An easy way to do this is to compare your 2014 tax return to your 2015 tax return.  Or you could compare one month’s income statement to another.  For example, compare your June 2016 income statement to your May 2016 income statement.  Analyze what you see.  Notice where there are differences.  Did you spend more money on one particular expense?  Did you make more money in one time period than another?  Make sure you understand and can explain any variability you see in your income statements.

Remember the balance sheet that I wrote about last time?  Find that when you’re doing your analysis.  There are a few simple ratios you can calculate using your income statement and balance sheet.  These ratios will help you understand how efficiently your operation is running.

1.        Return on Assets (ROA):  This helps you understand how efficiently you are using your assets create profits.  Generally speaking, anything over 8% is very good.  Less than 4% indicates an opportunity to improve.  You can calculate ROA using this formula-

2.        Return on farm equity (ROE):  This ratio illustrates how much money you are making for each dollar of equity.  A ROE of over 10% is excellent; ROE of less than 3% suggests more work is needed.
The analysis described in the previous paragraphs might seem a little confusing and daunting.  I strongly encourage you to spend some time trying to do this analysis.  Dig into the numbers.  Sit with your banker or farm business management instructor.  Try to understand your numbers.

By doing this, you can begin to see where you might have opportunities to increase your revenue or decrease your expenses.  Additionally, you may be able to spot potential problem areas before they become problems and take steps to avoid them all together!  One of the keys to financial success is being proactive when opportunities and threats arise.  Finally, careful analysis of your income statement can help you budget for the future.  You can utilize your monthly or yearly income statement to estimate your revenues and expenses for the next month or year.  Again, this will allow you to be proactive in your finances.

I’ll go back to what I said at the beginning- finance isn’t the most glamorous topic, but it is critical to the success of a farm.  If you aren’t spending much time digging into your farm’s finances, start now.  Over time it will get easier and hopefully it will provide you with tools for even greater success.  

Monday, August 29, 2016

A Positive Attitude is an Asset -- Take Care of Yours and Watch Out for Others in These Challenging Economic Times

by Don Nitchie, Extension Educator

We believe the best asset that successful farm mangers have is a positive attitude – especially in the face of less profitable times.  We think a big part of this is due to fact that successful farmers are comfortable analyzing their finances and acknowledging their strengths and weaknesses. These producers recognize early warning signals from their records and analysis, so they are prepared for a potential downturn or negative situation.

Despite being proactive managers who maintain a positive attitude, everyone is experiencing some level of anxiety or stress under the current farm market conditions. As a result, you or your business partners may be more self-deprecating, critical of family members, self-doubting, or just generally feeling a higher than normal level of stress or anxiety. It is nothing to be ashamed of, but it also should not be ignored. It is important that you, as family members, friends and business partners, watch for any major attitude changes or signals of depression in both yourselves and your associates.

Having come from the historic profitability period of 2006-2012, there are more than a few folks who have not yet re-aligned their thinking to what many say is a return to the more typical, long-term competitive environment in agriculture.  Regardless, it probably feels like a dramatic decline, as the record profit period lasted longer and was higher than any in history. A positive outlook combined with a proactive management strategy will help you get through. Keep in mind that small improvements add up when dealing with some of the following stress-inducing situations associated with the current conditions:

Your Income Taxes are High. Some late career producers are trying to transition to retirement/to the next generation and are now paying some of the biggest income taxes of their lives, even in the face of low current year prices and profits. This occurs because over the years much of their profits were deferred forward and invested in farming capital assets, which now need to be liquidated or transferred. It is not fun but is a mathematical and accounting reality of a successful farming career. At best, it can be moderated by spreading the deferred tax burden over several years.

Your Financial Ratios Weakened. This is not ideal, but it is a key part of managing to have strong indicators to begin with — to serve as shock absorbers in rougher times. You, of course, need to recognize when they decline too much and determine what actions will put them back in balance. You need to measure, monitor and use these ratios to be prepared for action if needed. If you wait for someone else (your lender) to point out a problem, it might be too late and probably will limit your options to fix the problem.

Your Marketing Prices are Low. Welcome to the party. Some of the best marketers seldom get the highest price. They make numerous sales at less than the high price of the marketing year. Forget about waiting for one price and then selling it all. Everyone may luck out once in a career, but this approach leads to disaster too often. Today’s market, where prices are not often offered above breakeven, is very challenging. If you succeed in averaging a sales price in the upper half of the year, it would be extremely good. Try hard to sell increasing amounts as prices increase and do not decrease sales quantities as prices go higher — mathematically this will increase your odds of success for the year.

Your Costs are high. When prices were high, cost structures that were too high did not have as much of an impact. When prices are low, cost structures really make a difference. Can you make a difference on your cost structure? Yes, you can and our members have been adjusting. The average cost to produce an acre of corn and soybeans decreased in the SWMFBMA for both 2014 & 2015. This occurred as the result of small decreases in expenditures in each of the major inputs. If your expenditures are high in a certain category, you need to verify it is for very good reasons. You might identify expenditures where you need to reexamine if your standard practices are really paying off. Small changes can add up to big savings in average costs.

When facing today’s stressors, be mindful of your own attitude and outlook. Also, be mindful of business partners, family members and neighbors also. Encourage yourself and others to move on from past decisions or actions that were not ideal. Let it go. It is good to review and learn lessons from past experiences, but those past decisions/actions cannot be changed. Stay engaged with your family and community. Compliment yourself and others for small achievements. Take steps forward. While it is good to plan ahead, don’t over-plan or stress about the future. You can only live life and your farming career a day at a time.

If you or someone you are concerned about could use some additional help or at least some direction to available resources—the following U of M Extension Families program site has several resources listed at:

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