PRO-DAIRY: Take the financial pulse of your business

Editor’s note: The PRO-DAIRY section of the November 2009 edition of Eastern DairyBusiness deals with Farm Transfers. To read the four-part section, visit:

• Transferring a dairy…Getting started http://dairywebmall.com/dbcpress/?p=4769

• Information you need for farm transfers http://dairywebmall.com/dbcpress/?p=4771

• Take the financial pulse of your business http://dairywebmall.com/dbcpress/?p=4773

• Success isn’t guaranteed, but it is possible http://dairywebmall.com/dbcpress/?p=4775

Before you begin the transfer process, determine whether your dairy business is sound enough for the future of both generations

By Jason Karszes

Just because both generations on a dairy want to transfer the business doesn’t guarantee success. The dairy business may not be able to provide for the senior generation’s retirement and also support the next generation’s desired lifestyle.

When a family considers transferring its dairy business to the next generation, the first question to ask is, Should this farm be transferred? To answer that question, consider the following three areas. Answer the questions in each section to help with your decision making.

1. Current business situation. If your dairy isn’t generating sufficient returns today to support one generation, it’s unlikely it will be able to support both generations, at least without changes.

To access your business’ ability to generate a profit, answer these questions:

Do we have consolidated financial statements and analysis performed annually to determine profits and track changes?

Is net farm income increasing over time?

Is labor and management income per operator increasing over time?

Are cash withdrawals for family living and off-farm retirement increasing over time?

During this period of low milk prices, how have losses been absorbed? Has this impacted your business’ ability to perform in the future? (Consider multiple year trends.)

2. Business potential. Inflation, the general decrease in the dollar’s purchasing power, requires a business to increase its profit continually to maintain the owners’ desired lifestyle. If a business is relatively stagnate and has little potential to increase profits over time, what is its future?

Access your dairy’s business potential by answering these questions:

What changes can be made to increase revenue?

What new management, inputs or technology could be adopted to increase profits?

Can more land be acquired?

Does current and future management enjoy working with and developing coworkers and resource people associated with the business?

3. Family expectations. Family members, individually and together, must know what they expect from the dairy business. Whether its cash for family living or the amount of time off, both generations must discuss what they need, want and expect. If expectations can’t be – or are not – met, it may be impossible to transfer their business successfully.

As the owner moving towards retirement, what are your expectations for:

Retirement income from the dairy?

Time away from the dairy?

Day-to-day dairy activities and management?

As the incoming generation, what are your expectations for:

Family life, or balancing work and family time?

Cash for family living?

Day-to-day farm activities and management?

Time off?

To help you work through all these questions,  work with a team of people that may include an estate planner, Extension agent, business consultant, banker and accountant. Their input can help you see your situation more clearly.

Based on everyone’s expectations, does the dairy offer challenges and opportunities? And does it generate adequate cash and earnings to support what both parties want? If not, a family may decide not to transfer its business.

FYI

Jason Karszes is a dairy farm business management specialist with the PRO-DAIRY program. Reach him at 607.255.3809. Email: jk57@cornell.edu


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