By John Ellsworth
Producers are being asked to cash flow. I’ve observed a great deal of anxiety by most bankers concerning lending additional funds to dairy farmers. The challenges have carried over to many suppliers, also under lender pressure to remain profitable and keep accounts receivable as current as possible. At these milk prices, what can dairy farmers do?
Below are the “Top 10” steps that have worked well in my practice. Clients who adhere closely to them have been positioned to handle the downturn relatively well, several with a positive cash flow year-to-date. Positive results do not necessarily come from any one or two steps, but rather are a direct result of each step contributing to the others to have a positive and compounding effect.
‘Top 10’ steps
1.) Set annual goals. Goal-setting changes the focus from “problem-solving” to process improvement and objective achievement.
2.) Development of a disaster agenda. Think about the three worst things that could happen to your business. Then, outline best responses. Even if those items don’t occur, but something similar happens, you will be better prepared to respond successfully.
3.) Hold regular management team meetings. Involve your nutritionist, veterinarian and key management personnel, focusing on managerial changes that fit with your goals.
4.) Hold regular finance team meetings. Discuss forthcoming issues, such as capital expenditures, monthly and annual budgets, financing needs, and other items that can impact ongoing cash flow and profitability.
5.) Cash flow comparisons. Completed monthly, this monitors how we are doing in terms of ongoing cash flow vs. our annual budget. These comparisons are the quickest method to catch costs getting out of line vs. our plan. Make adjustments through the year.
6.) Use CPA-prepared financial statements. These are an absolute must for two reasons: 1) they are an excellent tool for the ongoing financial management; and 2) they help you and your lender understand what is going on, because accrual financial statements account for changes in inventories, prepaid amounts and accounts payable, not just the cash flows we watch monthly.
7.) Hold bank meetings two times per year. Your banker must be involved as part of your overall team, understanding our business strengths and areas for future improvement. They also appreciate being kept updated on your challenges, and any plans for expansion, managerial changes or incorporation of the next generation into your business – particularly if the changes require added financing.
8.) Develop a milk marketing plan. It’s an absolute must, particularly with increasing milk price volatility and fluctuation. Understanding your break-even price level and knowing how to position your business to achieve that price will be essential to your financial future. Work with an options broker you trust.
9.) Use a nutritionists. My personal preference is to use an independent nutritionist, but the most important item is to get advice from someone you trust. This can also be helpful in keeping up-to-date on commodity price and availability, as well as the outlook for current and projected costs of hay and silages.
10.) Track quarterly inventories. Valuable for your accountant to measure changes in your feed supply, they are also crucial to your overall feed management. Additionally, bank auditors are really zeroing in on feed lines that are out of compliance. Keeping close track of your inventories will help to keep you out of this painful situation.
I believe it is important that we establish a positive attitude. This year has tested mine. It is easy to become negative in this financial environment. However, these are the times when people are looking for positive leadership, whether in your business, your community or your family.
■ John Ellsworth of Modesto, Calif., is a consultant with the financial and strategic consulting firm Success Strategies. He can be reached at 209-988-8960, or by e-mail: email@example.com.