,

GOALS…WHO NEEDS THEM?!

The Business Confidence Maximizer™

August 2010 Issue

Published by John Ellsworth,

© Success Strategies, Inc.

Dan Sullivan, founder of The Strategic Coach organization stated that “people do strange things when they have no future.” Since this is undoubtedly true, I have attempted to keep my Clients on the leading edge by providing them with a system for setting regular business objectives and keeping them as far away as possible from the dangers often encountered in their industry. The purpose of this article is to demonstrate a working model for completing this process – one that we can revisit as often as needed.

It might be best to start by answering five basic questions. Why take the time to set these goals and develop a Disaster AgendaTM?

I often hear people refer to the goals they have set for themselves. When they do, they often say that they have them all firmly planted in their head. However, my experience has taught me that this just does not work as well. It is imperative that we get them down on paper since it makes us completely focused in our thinking about what we wish to accomplish. If you try to do this “just in your head,” you will find that it is too easy to get distracted by other issues, and we are all faced with distractions every day. Thus, commit them to writing, and your goals are much more likely to be reached. Even if you write them down and put them in a desk drawer, your subconscious mind will go to work on them.

How do you get started on this process? I believe that corporate America has done a great disservice in this area. During my time in corporate America, I constantly felt inundated with demands on my time. “Do this, do that, achieve the impossible! We know we didn’t provide you with your annual goals until April and they may be high, but you should have been planning for this type of production demand…” and so on. This is crazy! Why not set aside some quiet thinking time to establish new objectives for the next 12 months.

When to complete this is the best part. While it may be a “corporate sin” to set aside work time to do such planning, you will definitely be rewarded with better results. I cherish the two days each fall that I take to get away and set new goals and objectives for my business. Take advantage of this time to move your business forward.

What should your goals center on? Challenge yourself to set goals in areas that you can reasonably expect to make progress. Please note that I did not say “easily” expect to make progress. Your goals need to be challenging and set high enough to keep you excited about reaching them. However, they also need to be achievable. Otherwise, you will get frustrated with them and give up. You do not need that outcome!

I will leave the when and where part of the process up to you. As I stated earlier, I spend two days per year off site (to minimize distractions) planning my next year. Believe me; this really has paid off for my business. I normally complete this process in November of each year. This allows me to review what happened during the prior 10 months of the current year and also look ahead to what I want to accomplish in the next calendar year. I always do this off site, simply because I want to be able to focus on my objectives without any distractions. I believe the elimination of distractions is imperative to the success of this process, but you decide for yourself.

Now, let’s go one step further. I also work with Clients to develop a Disaster AgendaTM. What is a Disaster AgendaTM? It is a list of the three worst things that could happen in your business and how you would respond to them. When you complete this process, you accomplish several tasks:

1.)    You will be better prepared if one of these crises actually does occur.

2.)    You are more likely to avoid these crises, due to your increased awareness of their potentially occurring.

3.)    If one of these problems, or something similar, does occur, you will have a response or action plan ready to go, yielding a quicker turnaround and saving you both time and money.

Need some examples? Here are five that I previously wrote about in 2002. They still make sense today, but think of three that fit your experience and your operation.

1.)    Environmental Pressure – This is an area that is worthy of some serious review.  In the February 2002 issue of California Lawyer there was an article that focused on the CRPE organization and its mission in bringing all dairy expansion to a halt in California.  How will you respond if your dairy business is sued for potential damage to the environment, whether the claim is legitimate or not?  These types of lawsuits are not going away anytime soon!  Litigation is a costly process, particularly when you consider the legal costs and the expenses associated with capital projects “held hostage” in an unfinished state that does not lead to your intended increase in cash flows.  One solution might be to pursue the training that is available from various agencies.  This is time well spent.

2.)    Losing Financial Control – As the number of dairy operations in the US continues to decrease (76,630 in 2001) and average herd size keeps increasing, it is more critical than ever to maintain control over your operation’s finances.  Regardless of industry, businesses often run into trouble when they expand in a rapid, uncontrolled manner.  The primary reason is they run out of cash.  One of the best preventative measures against this problem, as covered in prior columns, is to work within the guidelines of an ongoing strategic plan with detailed financial projections.  Another helpful item is to know your costs/hundredweight on a historical basis and for future projections.  Increasing the size of your dairy is no excuse to lose control over costs/cwt.  In fact, the economies of scale you should enjoy with a larger operation will allow you to spend money for better accounting information, assuring that you know your break-even point.

3.)    Inability to locate financing – This has been the case for many producers across the US as they attempt to expand their operations.  This trend toward tighter lending standards actually began in late 2000.  In an effort to avoid a credit crunch, some borrowers have accepted excessive short-term financing when they should have focused on additional long-term financing.  Unfortunately, having the wrong loan structure always seems to “rear its ugly head” at the most inopportune times, e.g. during a period of low milk prices as we saw in 2002 to 2003.  A potential solution: Grow your business with better financial records to help you maintain a loan structure that yields Debt Service Coverage of at least 1.25 times the level required to make your loan payments.  Having good financial statements can go a long way toward avoiding unnecessary challenges in finding financing.

4.)    Loss of your Milk Market – Recently, I visited with a dairyman that had suffered the loss of his milk market due to a sudden change among the players in his area.  It literally cost him in excess of $30,000 monthly for six months before he was able to get the situation under control.  What would you do?  Eventually, he was able to negotiate a better contract with a new buyer of his milk.  However, his losses in the short term were enormous and help remind us of the vulnerability we face as a “price taker.”  This could also occur if your herd was suddenly faced with a major health problem.  These potential cash flow shortfalls further reinforce the need for cash or available credit at all times.

5.)    Sudden Loss of Key Personnel – Whenever a key worker departs, particularly on short notice, it is essential to have a plan in place to cover for them, at least in the short term.  These departures clearly illustrate the need for team development and the cross training of personnel at each key position. Attractive benefits, retirement plans, insurance and competitive pay help to avoid this type of crisis.  However, it still pays to have a backup plan in place.

This list of potential crises is far from exhaustive, but hopefully it will stimulate your thinking as you develop your own “Disaster AgendaTM.”

 

Financial Tips for Success

 

For an example of a format for this process, visit our “Tools” section at www.Success-Strategies.com.

Management Team Meetings (MTM) Future Topics:

 

As a regular part of our discussion on Management Team Meetings, I suggest that you include the following items at every meeting:

1.)    Herd Management Issues

2.)    Herd Health Update & Concerns

3.)    Herd Reproductive Performance

4.)    Nutrition Update

5.)    Financial Review, including what is happening within the dairy industry.

6.)    What are the three most important Goals that you should strive to attain during the next 12 months? What are the top three Disaster AgendaTM items that could occur in your operation? How would you respond if they do occur? Discuss these with your Management Team to develop the best plan for your dairy, your budget and your available financing. Remember, for a useful outline, go to www.success-strategies.com and look under the “Tools” section.

Monthly Reminders – W.I.N.

(What’s Important Now?)

 

As you move through the current year, do you have some challenges that you need specific assistance with? Is it something your Management Team can help you with to find a solution? If so, add it to your MTM list of topics.

Next month, I will discuss a process that I use with Clients to track their month-to-month cash flow. I call it their Cash Flow ComparisonsTM. This is a process we use to keep expenses in line with our plan and to ensure that we catch any problems before they even have their CPA prepared financial statements completed

As a reminder, every suggestion in this issue of The Business Confidence MaximizerTM is intended to keep you on the leading edge of your financial relationships. Remember, stay ahead of the game and deal with any new hurdles you may face in a timely manner. Always focus on your overall margin and the plan that will get you to the finish line.

 

“Plan for the future or you will have no future.”

Jim Taylor, Futurist and Author

 

 

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Getting Through Your Next Loan Renewal

May 2010 Issue

Published by John Ellsworth,

© Success Strategies, Inc.

This is the season when many annual loan renewals are completed in the dairy industry. Hence, it can tend to be a period of added anxiety for many producers, especially given the difficulties of the past 18 months. As if the woes of the industry and the additional debt load that many producers are carrying are not enough, most banks are under tremendous scrutiny from auditors and other regulators both inside and outside of the bank. Their anxiety can lead to terms that one might consider unusual. Some examples that come to mind include the following:

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1.)    New or increased levels of loan fees.

2.)    A requirement for added collateral to secure loans or lines of credit.

3.)    Additional loan covenants required.

Of course, these items are all occurring at the same time that there are fewer banks available for you to move your loans to. Part of this stems directly from the large losses that producers took in 2009. As a result, if they added your loans to their portfolio, they would have to place a fairly low grade on it (by federal banking standards). This would require them to set aside larger loan loss reserves and/or having to charge you higher interest rates than they might normally expect.

In spite of all the current challenges in the industry, there are some items that you can complete that will help you better prepare for the renewal process. However, before we go through those items in greater detail, keep in mind that the loan approval process has become more complicated than ever. This is primarily due to the overall financial crisis we encountered in late 2008 worldwide, combined with the federal bailout of many lending institutions that followed, and the dramatic 30% drop in milk prices during 2009.

Steps to take to improve your renewal process:

Throughout this process, everything you do should be designed to increase the confidence levels of your lender, that is to boost his or her belief that making you the necessary loan is the right step for the bank to take. The minimum steps that you should take include the following:

  1. Collect your CPA prepared financial statements and make certain that they are as up to date as possible. These will provide your loan officer with a number of vital items.
    1. It will clearly show the profitability of your operation, not just last year, but for the past three years, at a minimum.
    2. It will demonstrate what type of herd growth you have experienced in the past.
    3. If the financial statement is prepared by one of the leading dairy CPA firms, it will show the production levels you have actually achieved.
    4. It will also show the trends in the amount of debt you are carrying.
    5. Finally, it will show your overall equity position, which is of particular interest to all bankers these days. This will help him calculate your “Burn Rate.” This is the amount of time that it will take to use up all of your equity if we enter a period of extended low milk prices.
  2. Your financial statement should be based, in part, on the Inventory Reports you have submitted to both your banker and your accountant. It should include:
    1. How many cows, heifers and bulls you own.
    2. What types and amounts of roughages you have on your farm.
    3. How much grain do you have stored at your dairy?
    4. Do you have any prepaid credits with feed companies or other suppliers?
    5. On the acreage you have, what are the number of acres you have, what crops are they planted to and what is the estimated current investment in crops?
  3. At a minimum, you should provide your banker a detailed 12-month Cash Flow Projection that shows:
    1. All projected revenue sources and how much each of them will amount to.
    2. A line by line projection of what your monthly expenses will be.
    3. You will also want to estimate your Owners’ Draws or what you will need to live on each month.
    4. Finally, be sure to include what you expect to be paying for loan interest to your bank and others, as well as what you believe will be required for principal repayment on each of your loans.
    5. The combination of all these items will lead you to your Net Cash Flow.
  4. Your bank may also require you to submit your business and/or personal tax returns, even if you submit CPA Reviewed Financials.
  5. They will also want a detailed plan for at least the next 12 months that show:
    1. What your expected rate of business growth will be.
    2. What your needs may be for added capital, either from your own personal sources or from lenders.
    3. If you need financing, will it come from your bank, your local farm credit office or from other sources? This is an important item to think about because if you run short on funding part way through the year, it can put a real damper on the completion of your plans and the expected increase in profitability. This would clearly be detrimental. Additionally, you will likely want to provide your banker with a Best Case, Worst Case, and Most Likely Case Scenario to show him or her exactly what the potential outcomes may be regarding your plan for the next 12 months and beyond.

What to do if you cannot convince the bank to go forward?

  1. First, consider what needs to be altered. Why not ask your lender what he feels would make the bank more comfortable with your loan proposal. Are there specific actions that they would like to see? The primary reason that I like to ask their opinion is that I want them to commit to some points. Otherwise, you can get trapped in what I would describe as a “moving target” situation. In this, it will not matter what you do. They still will be unhappy.
  2. Once you decide what changes need to occur, develop your strategic plan, i.e. the steps you need to take to ensure your success. In what order will these steps need to be carried out?
  3. Again, this is why you have professional advisors on board. Use the expertise that they each have in their respective areas to see if the changes you are proposing make sense from a management and operational standpoint.
  4. Ultimately, be certain that you are pleased with the new financing plan. If not, consider some other possible sources of funding. It may be a different bank or, in some cases, it may be alternative financing from a manufacturer or another selling party.

Financial Tips for Success

Again, you should have completed your 3/31/10 Herd & Feed Inventory position report. It is helpful to set a date to complete each of the Inventories that are required quarterly. If you need a format for your Inventory Position Report, simply go our “Membership Area Files” on the “Success Tools” page to download an Excel file located there for such purposes. Why? This may sound repetitious. However, I believe it is worthy of being reviewed again.

a.)    Remember, your bank likely requires you to provide them with just such a position report. If not, they should. Regardless, giving them one will keep them and their auditors out of trouble by showing that you are in compliance in terms of Loan to Values ((e.g. Less than 65% on Herd and Less than 100% on Feed).

b.)    Your CPA will, undoubtedly, need this same information to complete your year end Financial Statements. It is necessary for him or her to have these numbers to generate an accrual set of statements. There is no other way!

c.)    Finally, you should also be interested in this information, because it tells you a lot about how you are running your business. If you have a higher feed loan balance than what you have in inventory, it shows that you are probably not cash flowing. If your cash flow is short (as it has been for most dairymen in 2009), you need to find the extra dollars needed somewhere. The only two sources I know of include a personal cash injection from you or a good friend or a draw on your feed line of credit. Of course, for most of us, this is the more likely source of funds. Thus, as you use up your feed inventory, and particularly if you can’t replenish it with new feed, your LTV % will start to exceed 100%. The best way to avoid this calamity is to always manage your LTV very closely. If you measure it often, you will be in a better position to facilitate this.

Management Team Meetings (MTM) Future Topics:

As a regular part of our discussion on Management Team Meetings, I suggest that you include the following items at every meeting:

1.)    Herd Management Issues

2.)    Herd Health Update & Concerns

3.)    Herd Reproductive Performance

4.)    Nutrition Update

5.)    Financial Review, including what is happening within the dairy industry.

6.)    Ask your Management Team for their opinions of your overall operation before you meet with your banker to complete your annual renewal of your lines of credit for 2010-2011. Remember, they see many other dairy businesses and can clearly point out what you are doing well and also the areas within which you can improve. That is their primary reason for being there – to assist you to become a better operator with greater profitability. As I stated last month, all lenders will be under closer scrutiny from bank regulators going forward. Be sure you are prepared to explain why it makes perfect sense for your loan officer to complete your renewal this year. Clearly outline your step-by-step “Success Plan.”

Monthly Reminders – W.I.N.

(What’s Important Now?)

Are there any significant challenges that you are currently facing as you approach your annual loan renewal? Can your Management Team assist you with them and/or help you to find solutions? If so, be certain to include it in your MTM list of topics.

Finally, given the greater levels of volatility on all dairy prices these past several years, expect most lenders to be interested in hearing what you have done to ensure that your profit margin is positive. Sometimes, we can develop a false sense of security when temporary price spikes occur. In spite of what milk prices are currently doing, you still want to focus on your overall margin, i.e. what is left at the bottom line when all your expenses are paid. That margin is what matters more than anything else, including how high per cwt your milk price was. Next month, I will spend more time on how you can use Milk Options to deliver a stronger margin in your business.

Every suggestion in this issue of The Business Confidence MaximizerTM is intended to keep you on the leading edge of your financial relationships. Remember, stay ahead of the game and deal with any new hurdles you may face. Always focus on your overall margin and the plan that will get you to the finish line.

“Yesterday’s answer has nothing to do with today’s problem.”

Bill Gates, Cofounder of Microsoft Corporation


,

Planning for your Feed Needs

April 2010 Issue

Published by John Ellsworth,

© Success Strategies, Inc.

Sounds like a given doesn’t it? However, it has been my observation that those producers who do the best job of mastering the feed acquisition game seem to be the ones that thrive financially, year in and year out. Since feed, as an expense, can consume 50-60% of your total revenue, it is crucial that you manage its cost as if your business depended on it because, in reality, it very well might. If there was one lesson we all learned in 2008, it was that we have entered a new world where speculation in the commodity markets can force a new trend that impacts every producer. In spite of having record high corn crops the past several years, the dairy industry was treated to a new and less than “user- friendly” corn market. Unfortunately, as corn goes, so goes the price levels of most other commodities and feed crops.

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Thus, whether you grow a lot of your forages or buy it all as some producers do on the west coast, we need to think it through in terms of what our needs will be, what our potential sources could be, and what our break-even feed costs are at various milk prices.

  1. While this planning process is critical for those who buy their feed, it has become increasingly important to even producers who grow a great deal of their forages. We must consider what factors can change the market prices for feed items: weather, the strength of the dollar, shortages in other parts of the world, and potential wars that may disrupt either supplies or deliveries.
  2. For those dairymen who grow their feed, fuel can also impact your production given its direct correlation with fertilizer prices, the number of trips you can afford to make across a field in one season, and indirectly through the effects of ethanol production. In some cases, you may find it beneficial to sell some of the feed you grow and replace it with lower priced alternatives.
  3. You may not know where to start. The following outline is an overview of how you can plan your feed needs and acquisition strategy for the next year.

Steps to take this year:

  1. Determine what your needs will be.
    1. With the assistance of your Nutritionist or other advisors, develop a plan.
    2. How many cows and heifers will you house, and what are their ages?
    3. What is your expected production level on cows?
    4. What rate of growth do you hope to achieve on heifers?
    5. What do you already have in your current feed inventory?
  2. Decide how much you can grow.
    1. How many acres do you own or currently rent?
    2. Is there more land available to you this year?
    3. If so, what will it cost & can you afford it in your annual budget? This goes back to our March 2010 issue.
    4. On the acreage you have, what are reasonable yields? Can you double or triple crop or is your growing season too short for that?
  3. What will you then need to buy?
    1. After you have determined what you can expect to grow and what you will need during the next 12 months, you can calculate what items you will have to buy, i.e. how much you will be short on roughages or grains.
  4. What do you expect the cost of what you grow and what you buy to be?
    1. Again, we need a budget to outline our needs for inputs and costs.
    2. How much will it cost for seed, fertilizer, water if you must irrigate, labor, cultivation, spraying, harvesting and other inputs.
    3. Can you do all of it yourself, or is it more cost effective to hire a custom operator to plant and/or harvest it, even if you own your own land?
  5. Develop a plan, including what you will need to contract for and when the most optimal time will be to set up these contracts.
    1. Will you need a line of credit to help finance these items?
    2. Can your ongoing cash flow cover this crop growing plan?
    3. If you need financing, will it come from your bank, your local farm credit office or from your vendors? This is an important item to think about because everyone wants to get paid on time, and nothing can disrupt a good crop plan more than one of your suppliers being unhappy.

What to do if you cannot complete your plan as set?

  1. First, change it! The goal here is optimization, not perfection. Perfection would require that nothing ever change, which is probably an unrealistic expectation. Optimization involves setting a plan to maximize what you have working for you and then adjusting course to stay on track as much as possible.
  2. Decide what needs to be altered. Are there controllable factors involved in having to deviate from your original plan or is it due to factors that are out of your control?
  3. This is why you have professional advisors on board. Your Nutritionist should be in a position to help you decide what the best options are at any given point. He will decide what to include in your various rations and thus should be a key player in determining what changes need to be made. He should also be well aware of what current prices are on both roughages and commodities.
  4. If an item becomes less available on the open market, is it something you can grow? In 2008, I saw corn grown in places that I did not think you could get grass to grow. Indeed, necessity is the mother of invention…

Action Items:

  1. Where do we begin? Develop a plan for what you expect your needs to be, what your potential sources might be for that production, and what you can do to keep your plan on track and don’t be afraid to “think outside the box” a little. Set up a time table for various action steps such as acquisition of your needed seed & fertilizer, ground preparation, and any additional labor you may need to plan for. Think about any factors that could turn against you and develop a contingency plan for dealing with them.
  2. Develop a plan to monitor your progress on each and every step of your process. Be sure to include your Crop Advisors and Nutritionist in this process. Having an extra set of eyes (or two) can prove very beneficial in staying on track. Include a Variance Analysis Chart in your system to make sure that you know when you are behind schedule or over your budget. When these incidents occur, you want to know it as soon as possible so you can get it corrected quickly. As I have stated previously, knowing where you stand on each expense area compared to your budget and on timing compared to your original plan will keep your operation moving forward in a positive manner. The key is to know what is really occurring in your business.

Financial Tips for Success

By this time, you should have completed your 3/31/10 Herd & Feed Inventory position report. It is helpful to set a date to complete each of the Inventories that are required quarterly. Again, if you need a format for your Inventory Position Report, simply go our “Membership Area Files” on the “Success Tools” page to download an Excel file located there for such purposes. Why? This may sound repetitious. However, I believe it is worthy of being reviewed again.

a.)    Remember, your bank likely requires you to provide them with just such a position report. If not, they should. Regardless, giving them one will keep them and their auditors out of trouble by showing that you are in compliance in terms of Loan to Values (e.g. Less than 65% on Herd and Less than 100% on Feed).

b.)    Your CPA will, undoubtedly, need this same information to complete your year end Financial Statements. It is necessary for him or her to have these numbers to generate an accrual set of statements. There is no other way!

c.)    Finally, you should also be interested in this information, because it tells you a lot about how you are running your business. If you have a higher feed loan balance than what you have in inventory, it shows that you are probably not cash flowing. If your cash flow is short (as it has been for most dairymen in 2009), you need to find the extra dollars needed somewhere. The only two sources I know of include a personal cash injection from you or a good friend or a draw on your feed line of credit. Of course, for most of us, this is the more likely source of funds. Thus, as you use up your feed inventory, and particularly if you can’t replenish it with new feed, your LTV % will start to exceed 100%. The best way to avoid this calamity is to always manage your LTV very closely. If you measure it often, you will be in a better position to facilitate this.

Management Team Meetings (MTM) Future Topics:

As a follow-up to our prior discussion on Management Team Meetings, I suggest that you include the following items at every meeting:

1.)    Herd Management Issues

2.)    Herd Health Update & Concerns

3.)    Herd Reproductive Performance

4.)    Nutrition Update

5.)    Financial Review, including what is happening within the dairy industry.

6.)    Additionally, be certain to begin collecting the information that your banker will need to complete your annual renewal of your lines of credit for 2010-2011. As we will discuss next month, loan renewals will undoubtedly be more challenging this year as a result of the industry downturn we have experienced the past 15 months. Thus, you will need to be very clear about what you wish to accomplish through your loan renewal and how you plan to cash flow in 2010. All lenders will be under closer scrutiny from regulators going forward. Thus, be prepared to explain why it makes perfect sense for your loan officer to complete your renewal on time. Show them your step-by-step “Success Plan.”

Monthly Reminders – W.I.N.

(What’s Important Now?)

Are there any significant challenges that you are currently facing as you approach your annual loan renewal? Can your Management Team assist you with them and/or help you to find solutions? If so, be certain to include it in your MTM list of topics.

Finally, with the recent upturn in cheese and butter prices, as well as the expected higher milk prices that may be ahead for us in 2010, many producers will lose sight of the factors that can greatly impact their bottom line. However, do not fall for the false sense of security that these temporary price spikes can deliver. Regardless of what milk prices are currently doing, you will want to focus on your overall margin, i.e. what is left at the bottom line when all your expenses are paid. That margin is what matters more than anything else, including how high per cwt your milk price was.

Every suggestion in this issue of The Business Confidence MaximizerTM is intended to keep you on the leading edge of your financial relationships. Remember, stay ahead of the game and deal with any new hurdles you may face. Always focus on your overall margin and the plan that will get you to the finish line.

“Plan for the future or you will have no future.”

Jim Taylor, Futurist and Business Management Expert

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March 2010 Issue

The Business Confidence Maximizer™ Online Newsletter
John Ellsworth & ©Success Strategies, Inc.

WHERE HAS ALL THE MONEY GONE?

Are you tracking your monthly cash flows? This probably sounds like a silly question, but there are some producers who, believe it or not, still don’t do this on a regular basis. The rationale behind this is questionable, but, for whatever reason, they just simply pay bills as best they can and move forward or, sometimes, backward.

Some possible reasons I believe people fail to do this include the following:

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  1. They may not feel that they have the time. For some, this can be a daunting task. It can also be overwhelming if you get done and realize that you’re going to run out of money before you run out of month. Of course, this has been happening to a lot of dairymen lately.
  2. They might not want to face reality, especially if it is indeed negative.
  3. They may not know where to start. That challenge I can deal with. Let’s talk about it and review the benefits of monitoring your cash flow regularly.

Matt and Diane had operated their 600 cow dairy for over 20 years and had been quite successful, both in terms of production where their herd averaged close to 80 pounds per cow per day and, as a result, in selling purebred Holstein bulls and heifers. Yet, they had an issue to confront.

They never really felt comfortable with the cash flow of their business. It often seemed like “feast or famine.” When milk prices were good, they had a lot of cash, and the IRS was always standing by waiting for their share. Additionally, it seemed that these good times also boosted their purebred sales and gave them even more cash to account for. However, when milk prices started to skid, Diane, who did most of the financial tasks at their dairy, was struggling just to keep their suppliers current. She was simply writing checks and hoping that this process would all work out for the best. What could she do? I’ll explain in a moment…

Reasons to consider this:

Most everyone has been watching and/or complaining about their monthly expenses, but are they really watching each and every expense item? Feed expense has been out of sight, and milk prices have been dropping like a rock since December 2008. What a nasty combination! While we have seen relief on fuel prices, they were a nightmare as well in 2008.

The justifications for tracking your cash flows are numerous. Currently, however, the biggest justification for this process is survival. The dairy industry is under pressure from vendors, banks and regulators. Our entire economy is in an upside down state like never before. Knowing where you stand in your cash flows can provide you with additional comfort because even if you are struggling, you will be more aware of your upcoming needs for cash and other financing, and also be able to answer questions that arise from your suppliers or banker.

Where do you begin?

How do you go about completing this process? My favorite starting point is to develop a budget for what you feel will occur during the next 12 months, preferably January to December. This can represent a different set of dates if you wish or if your operation is a corporation with a fiscal year end that is different. For a simple example, check out our “Success Tools” page on our website at www.success-strategies.com. There you will be able to acquire one.

Here is what we did with Matt and Diane’s dairy operation. We reviewed each and every expense item to see if the amounts they were paying made good financial sense. Often, particularly during periods of high milk prices, producers will add labor or other items that can be detrimental when prices go back down. Not surprisingly, we found several expense areas that had just simply gotten out of control and got them back in line with industry standards. We also set Diane up with QuickBooks Pro and allocated their various costs within categories that matched their Accountant’s Chart of Accounts. This will save them money down the road when their CPA is completing their annual tax return and developing CPA prepared financial statements, which will, in turn, help them to better manage their business going forward.

After you have your budget format down, project what levels of production and corresponding expenses you will encounter during the upcoming 12-month time period. When you have finished this task, you are ready to complete a comparison each month throughout the year. Your Cash Flow Comparison will equip you to examine how you are doing in comparison to your month-by-month plan, just as Matt and Diane were able to do.

In terms of tracking your actual results, why not do what most of my clients have been doing successfully for many years?

  1. QuickBooks Pro (QBP) is a good place to start. It allows you to input and print your checks as you pay you bills, categorize expenses into their correct categories and provides you with a Year-to-Date Profit and Loss Statement. You can print this out at the end of each month (e.g. 1/1/10 to 3/31/10) and use it for the comparisons process that we discussed above.
  2. As an alternative, you can also track items directly in Excel, but why not use QBP, especially when you have the capability to convert your QBP file into an Excel file if you want to.
  3. Others have their CPA track these items for them, although this can get expensive. Besides, he or she will probably also be using QBP.

Financial Advisors, like myself, often include a comparison of what is being spent each month vs. what you budgeted. This allows us to really evaluate where you are financially each month. If you are already doing this, great. If not, start it immediately. Comparison to your cash flow projection is so crucial.

Matt and Diane’s banker was thrilled with the progress that they made. Making your lender’s daily overdraft list is not something you want to strive for. Staying off of this daily list is far better for three reasons:

  1. It keeps you “out of the doghouse” with your loan officer.
  2. It saves her from having to advance funds unexpectedly to cover your excess checks written.
  3. It saves you money because whenever the bank covers an overdraft, they will charge you interest. Additionally, this “loan” is not usually priced the same as your other loans. Its pricing is normally at the prime rate plus 5% (or 8.25% today)!

Their banker was also pleased to see that they were executing business decisions with more confidence, simply because they were more aware of their current position, the potential issues they were facing (such as any future cash flow shortfalls), and what their potential options might be. As a result of these changes, she was able to lower the interest rate on their line of credit by ¼%, saving them several thousand dollars per year.

Eventually, we were able to refinance their real estate loan with an insurance company, which provided them with further improvement in their long term cash flows, a lower fixed rate of interest, and an opportunity to fund an expansion when their son returned from college. This then became part of their long-term succession plan.

What to do if you find negative variances?

  1. If you have expenses that are considerably over your projected levels, you have to take action. What are some possibilities? Are you using too much, e.g. supplies? Are any items disappearing? Do you track inventory closely? Are there products that have become too high priced to justify any longer? Are there less expensive alternatives available? Finally, do you even need the item? I know this sounds silly, but I have seen occasions where a producer has been using a product because his Dad had used it. However, he continued to use it even after he had also adapted a superior alternative product. Sounds like what we used to call the “belt & suspenders routine” in banking. We’ll save that concept for another time.
  2. Who is controlling the acquisition and delivery schedule of this item, if in fact, it is a product. Is the delivery schedule matching the rate of usage? Is it in line with what we would expect? Accountability and a degree of control over the process are imperative in this area.

Action Items:

  1. Where do you begin? Develop a Cash Flow Projection to provide you with a solid idea of what your cash flows are expected to look like during the next twelve months. This will allow you to plan for those months, if and when your bottom line may be negative. If you know those months are coming, you can plan for them by holding back some extra cash or plan to borrow more on your lines of credit.
  2. What should you do next? Decide how you will track your cash flows. As I explained above, I suggest that you use QuickBooks Pro to pay your expenses, track your revenue and costs, and complete your taxes with your accountant. Its Year-to-Date Profit and Loss Statements can be used to complete your comparisons process. Knowing what your strengths and weaknesses are compared with your monthly budget will help to keep you on track and avoid the age old problem of getting to a point beyond repair on particular expenses, whether it is on feed, labor, repairs & maintenance, or some other item. Knowing where we stand on each expense area compared to our budget and to industry standards will keep your operation moving forward in a positive manner. The key is to know what is really occurring in your business.

Financial Tips for Success

By the time you are reading this article, you should be thinking about when you will complete your 3/31/10 Herd & Feed Inventory position report. I find it helpful to set a date to complete each of the Inventories that I do quarterly. If you need a format for your Inventory Position Report, simply go our “Membership Area Files” on the “Success Tools” page to download an Excel file located there for such purposes. Why? This may sound repetitious.

a.)    Remember, your bank likely requires you to provide them with just such a position report. If not, they should. Regardless, giving them one will keep them and their auditors out of trouble by showing that you are in compliance in terms of Loan to Values ((e.g. Less than 65% on Herd and Less than 100% on Feed).

b.)    Your CPA will, undoubtedly, need this same information to complete your year end Financial Statements. It is necessary for him or her to have these numbers to generate an accrual set of statements. There is no other way!

c.)    Finally, you should also be interested in this information, because it tells you a lot about how you are running your business. If you have a higher feed loan balance than what you have in inventory, it shows that you are probably not cash flowing. If your cash flow is short (as it has been for most dairymen in 2009), you need to find the extra dollars needed somewhere. The only two sources I know of include a personal cash injection from you or a good friend or a draw on your feed line of credit. Of course, for most of us, this is the more likely source of funds. Thus, as you use up your feed inventory, and particularly if you can’t replenish it with new feed, your LTV % will start to exceed 100%. The best way to avoid this calamity is to always manage your LTV very closely. If you measure it often, you will be in a better position to facilitate this.

Management Team Meetings (MTM) Future Topics:

As a follow-up to last month’s discussion on Management Team Meetings, I suggest that you include the following items at every meeting:

1.)    Herd Management Issues

2.)    Herd Health Update & Concerns

3.)    Herd Reproductive Performance

4.)    Nutrition Update

5.)    Financial Review, including what is happening within the dairy industry.

6.)    Additionally, start thinking about what your 2010 roughage supply will look like. What will you be harvesting in April 2010 and what are your planting plans for 2010 corn? Have you developed a crop budget for this yet? Do you need a separate crop line of credit? Discuss this with your banker.

Monthly Reminders – W.I.N.

(What’s Important Now?)

Are there any significant challenges that you are currently facing that your Management Team can assist you with? If so, be certain to include it in your MTM list of topics.

Finally, have you scheduled your first of two meetings this year with your banker? This is a crucial time to increase your communication levels with him or her. With your annual renewal coming up (as many do in April to June each year), there is no better time than the present to get a meeting set up. Prior to that session, think about your results the past 12 months, progress you’ve made thus far in 2010, what you hope to accomplish this year, what your levels of milk and feed contracts currently are, a Cash Flow Projection for 2010 and an outline of what you will need for Capital Expenditures this year. This list may sound excessive. However, we are living in a different world in terms of bank financing and the scrutiny that they are currently undergoing.

Every suggestion in this issue of The Business Confidence MaximizerTM is intended to keep you on the leading edge of your financial relationships. Remember, the key is to stay ahead of the game and deal with challenges that arise. Jack Welch probably said it best:

“Face reality as it is, not as it was, nor as you wish it were.”

Jack Welch, Former CEO, General Electric Corporation

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February 2010 Issue

The Business Confidence Maximizer™ Online Newsletter
John Ellsworth & ©Success Strategies, Inc.

Maximizing Your Management Success

“I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles.”

Do you ever have that feeling that your neighbors or brother-in-law seem to be doing better than you in certain areas of their operation? I think everyone has felt that at some point. The more significant question, however, assuming that might be partly true is: “Why?” What is their advantage over the way you normally operate?

Here is one item that I have found very helpful to people in assisting them to reach their highest levels of success.
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That most important item is the implementation of Management Team Meetings. This is a concept that I introduced to my clients over ten years ago. As we have seen during that same time period, these sessions have guided many of our clients to achieve items that, had we asked them before, they would not have believed possible.

How do Management Team Meetings work?

The concept revolves around the benefits of solid communication, positive teamwork and accountability. When we meet as a group, usually every other month, we have a written agenda that we try to follow as closely as possible. The benefits of doing this are two-fold. First, it makes sure that we do not skip over any important topics we need to discuss. Second, it keeps us from getting off on tangents that almost always seem to revolve around insignificant items.

In the Tools section of the website, I have included a WORD file for your consideration and use. You may rename this file whatever you wish to and then use it for your own Management Team Meetings. (However, it is for your use only and neither the file, nor its format may be shared with others, particularly the non-subscribers to this newsletter, except in a printed format.) The primary benefit of keeping a set of written minutes during each meeting is that you will create greater accountability within your Management Team. At the end of each meeting, I send each and every Team Member a copy of the minutes (usually two pages). This is sound because it allows everyone to know what items are supposed to happen prior to our next meeting (e.g. changes in the breeding program, improved heat detection, getting some help on milking procedures or milk quality issues). It is also useful for their review prior to the next meeting.

Additionally, as the facilitator of these meetings, you will find these minutes very useful in setting your agenda for the next meeting and to make sure that you cover all the necessary items to keep you moving forward in your operation. For example, if you have discussed the need for improved heat detection at your last meeting and then established a set of steps to take to make improvements, having this in the minutes will remind you to revisit the current situation to see if you are indeed seeing positive results. Otherwise, it can end up on the “back burner” and not really get resolved. Of course, in the case of heat detection or other key management issues, this could spell disaster for you down the road.

Who should be involved in Management Team Meetings?

This is a decision that you need to make early in the process. Here are a couple guidelines for you to consider:

  1. You will want to include anyone who is a “key player” in your operation. Normally, this will include your Veterinarian, Nutritionist, Herd Manager, your Financial Advisor if you use one, your Banker if you wish and you as the owner.
  2. Include only people who have something positive to contribute. These meetings are designed to improve your business, not to point fingers at each other and determine who is at fault in an area that needs improvement. The real reason for the meeting is to make sure that you are achieving everything you possibly can. My experience has been that participants that are argumentative or critical of others do not really add to the success of the Team.
  3. When you hold these meetings, you can reach a point of saturation in terms of participation. In other words, you can get to the point where you have too many people in attendance. This will tend to impede your progress because it will often reduce the level of open dialogue between your Team members. Thus, we typically do not include anyone who is selling a product. For example, your semen salesman may be a great guy and also very intelligent. However, do you actually need him at these meetings? The same goes for feed salesmen & pharmaceutical representatives. Your Nutritionist and Vet can cover their areas of expertise sufficiently.

Why do they lead to higher levels of success?

1.) Accountability
2.)Teamwork		 3.) Common Goals
4.) A reason for celebrating success

I plan to make this a regular section of this program – MTM Topics for consideration – these will vary throughout the year!

Management Team Meetings (MTM) Future Topics:

If you want to maximize the success of your MTM, I suggest that you include the following items at every meeting:

  1. Herd Management Issues
  2. Herd Health Update & Concerns
  3. Herd Reproductive Performance
  4. Nutrition Update
  5. Financial Review, including what is happening within the dairy industry. This discussion can also cover what challenges you are having and how they potentially can be overcome. You should also include your team of dairy professionals in discussions of potential Capital Expenditures, i.e. what items do you need to acquire or build in the next 12 months? A conversation about their potential payback and what your Vet and Nutritionist have seen other places may prove very helpful as well.

Financial Tips for Success

I am assuming that you have already completed your Herd & Feed Inventory position reports for the year ending 12/31/09. If not, consider going immediately to our “Tools” Section of the website and downloading the Excel file located there for such purposes. Why?

  1. Your bank likely requires you to provide them with just such a position report. If not, they should. Regardless, giving them one will keep them and their auditors out of trouble by showing that you are in compliance in terms of Loan to Values (e.g. less than 65% on Herd and less than 100% on Feed).
  2. Your CPA will, undoubtedly, need this same information to complete your year end Financial Statements. It is necessary for him or her to have these numbers to generate an accrual set of statements. There is no other way!
  3. Finally, you should also be interested in this information, because it tells you a lot about how you are running your business. If you have a higher feed loan balance than what you have in inventory, it shows that you are probably not cash flowing. If your cash flow is short (as it has been for most dairymen in 2009), you need to find the extra dollars needed somewhere. The only two sources I know of include a personal cash injection from you or a good friend or a draw on your herd loan or feed line of credit. Of course, for most of us, the latter is the more likely source of funds. Thus, as you use up your feed inventory, and particularly if you can’t replenish it with new feed, your LTV % will start to exceed 100%. The best way to avoid this calamity is to always manage your LTV very closely. If you measure it often, you will be in a position to better manage this.

Monthly Reminders – W.I.N. What’s Important Now?)

I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles. Let’s say you are facing a difficult business challenge. Wow!! That sounds like a call to action. I have observed that in this type of situation people often do not want to face reality, as if it will change on its own or the problem will eventually go away. The odds of that occurring are remote.

How can you deal with change? How can you turn this into a positive outcome? Here is one method that I’ve used successfully with clients and seems to work even better with tougher problems:

  1. Surround yourself with your entire team. Yes, multiple brains work better here…
  2. Develop a chart on paper or on a marker board. At the top, list the problem to be overcome or the goal that you want to reach.
  3. Work as a group to complete a “brain drain” where every possible idea that the team comes up with gets written on the board. Do not evaluate them, judge them or criticize them at this point. Just write them down with no judgments or laughter (later, it could turn out to be the best response…)
  4. Additionally, each member of the team needs to participate. This is not a passive activity where some of us can just watch. We can only capture the best ideas if we get them all written down.
  5. 1.Finally, after every idea that you can think of is written down, start to evaluate the pros and cons of each idea. However, this should not begin until you have a minimum of 20 ideas listed. I know what you are thinking – “You are kidding, John!” The fact is – I am not joking. This is the only way you can be assured of not overlooking a great option.

To give you an example of how this works, I was working with a client whose facility had become overcrowded. After listing 20 possible options, we concluded that he could reduce his herd, lower his debt levels and improve efficiencies or he could change his facility, which would add to his debt levels. Another option that surfaced was that he could diversify his operations. Eventually, he decided to decrease his herd size and diversify into some tree crops, and this is working out very well.

“Wherever you see a successful business, someone once made a courageous decision.”
– Peter Drucker,
Management Expert
& Author

This process of brainstorming for all possible options can be used to work through a crisis. It can also be utilized on a regular basis for ongoing business decisions, as well. Why not try it in your operation today?

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TM & © of Success Strategies, Inc. All Rights Reserved. This newsletter is solely for the use of Subscribers to The Success Strategies Advantage OnlineTM Program. Any reproduction or redistribution of this information is expressly forbidden by Federal law. For further information, contact Success Strategies, Inc. at 209.988.8960.

I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles.

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Newsletter Q4

The Business Confidence Maximizer™ Online Newsletter

Have you ever heard about someone who claims that his bank or a supplier told him that if he only did one item, they would then be able to provide him with a certain type of financing arrangement? Sure, we all have. Often, I hear people state that their bank was planning to loan them an additional $600,000 to buy 400 cows if only they could upgrade their facility to handle the extra cow load.

“If a lender is unwilling to provide you with a written commitment letter, you most likely have the answer to your loan request. Obviously, it is not the one you were looking for, but it is an answer nonetheless!”

For example, they might need to improve their cooling system, add free stalls, or build more corrals, depending on the local climate. Since the industry is doing so well (e.g. in 2007-2008), why not make those improvements out of cash flow? The lender suggests that the dairyman should use his own cash to avoid becoming over-leveraged financially. Then, they contend, the borrower will be able to tap the equity of his herd to acquire loan funds for buying more cows.

BEWARE! I would not conclude that this is ever done intentionally, but it clearly can become a trap. Why? This is simply because the number one challenge for growing companies, whether they are dairies or high tech firms, is that they run out of cash just when they need it the most. The following true story tells just how this can happen…

Case Example

Ed called to say that his bank had “double-crossed” him. After asking for some clarification, I suggested that he slow down and tell me exactly what had happened. He said that, after a tough year in 2006, he felt a real need to expand his operation. This was likely true, given that it would allow him to spread his fixed costs over a greater number of hundredweights (cwt). However, this would not be possible without some extensive capital expenditures at his facility.

Here is where the real problems began. His loan officer suggested that if Ed could pay for these facility improvements (extra corrals and an improved milk cooling system) out of cash flow in 2008, the bank could then loan him money to buy additional cows. Overall, it sounds like a great plan, but here is how it “hit the wall…” First, he did not have a great deal of equity in his herd after the low milk prices of 2006. Just like many other producers, Ed had been forced to borrow money against his cows to maintain his cash flows with $10 milk.

After spending over $100,000 on his facility, he had no cash on hand to offset another round of low milk prices in 2009. In order to acquire the cows he needed to make this plan work, Ed would be forced to borrow 100% of the necessary funds to buy cows or heifers. Guess what? After the industry took another downturn in late 2008, nobody (including Ed’s current lender) wanted to loan him the money he needed to buy cows to complete his expansion plan.

Immediately, Ed had a problem! His cash flow was already suffering from the low milk prices. This problem was compounded by his having to buy cows at 100% loan to value. Remember, he had already spent his cash on the facility improvements. Finally, he was able to buy some high priced cows by using some outside financing. When I first met with Ed, I suggested that he was heading for a train wreck because of the high prices paid for the new cows, his high loan to value on his herd financing and potentially weak cash flows due to low milk prices throughout 2009.
What could he have done differently?

What If???

Suppose that Ed had requested a written commitment from his loan officer and even entertained the possibility of talking to a second lender. This process would have accomplished several tasks. First, his loan officer would likely have requested that Ed draw out his financial plan for the expansion. Additionally, the loan officer would have then reviewed Ed’s plan and hopefully made some suggestions to improve it wherever possible.

While it is true that a written commitment letter from the bank(s) represents a binding agreement on the part of the bank to take the expansion process to completion, it also accomplishes several other significant tasks:

  1. Before the bank will issue such a commitment to lend, they will require that the borrower develop, hopefully with the assistance of his CPA or Financial Advisor, a written Cash Flow projection.
  2. This Cash Flow projection should also be accompanied by a written plan that states why the project is being proposed, what its Cash Sources & Uses are, and when various steps of the expansion are expected to be completed.
  3. Most importantly, this process will answer the most important question looming out on the horizon.  Does it make sense financially?  If the answer is “Yes,” then go forward with it.  However, if the answer is “No,” then we can pursue what might represent better options.  For example, do we expand at a slower rate?  Should we buy younger, less expensive heifers and breed them ourselves instead of buying ones that are ready to calve within 30 days?
  4. In summary, this entire process will, once again, force Ed to “plan his work & work his plan.”  This always pays huge dividends!

Summary & Financial Tips for Success

  • I don’t know if promises were actually made by Ed’s bank, although I suspect that they were at least inferred.  This often happens, especially in good times for the dairy industry.  Unfortunately, the times of high milk prices are often followed by periods of depressed prices.  This is precisely why we need to develop an operating plan that can keep us on track, both from an operational standpoint and in knowing what our cash “sources & uses” will be.
  • In the prior story, there were numerous claims that it was all about “timing.” However, I would suggest that it is more than just that.  Historically, milk prices have always gone up and down.  As we face these highs and lows, we need to consistently ask ourselves, “Does this business plan still make sense?  Is it still profitable?”
  • Finally, any proposed financing should be accompanied by a written Commitment Letter.  This will clearly spell out the terms of the loans and credit lines being offered, i.e. there will be no surprises!  It is called a commitment letter because it literally represents a pledge by the bank to lend certain funds under specific conditions.  Most important, this document requires the signature of both the lender and the borrower.
  • One last point: If a lender is unwilling to provide you with a written commitment letter, you most likely have the answer to your loan request.  Obviously, it is not the one you were looking for, but it is an answer nonetheless!

Management Team Meetings Agenda

*** Leading Edge Topics to keep you and your Team at the Top of your Game!! ***

  1. Discuss with your Management Team whether it makes sense for you to expand your operation.
  2. What are the implications for your operation in terms of Fixed Costs, Variable Costs and overall stress on your current management regime and personnel?
  3. Is your lender on board for this change? This is important!
  4. Is your family on board for this change? This is crucial! You can find another lender, but, for most of us, finding another Family would have all sorts of negative implications…

Monthly Reminders – W.I.N.
(What’s Important Now?)

  • As you discuss whether or not to move forward with plans for expansion or other capital expenditures, think it through and be certain to develop a written plan.
  • Talk to banker(s) who might be able to assist you with the financing.  During these conversations, keep your ears open for possible solutions.  Even when you get turned down, a loan officer will sometimes make a great suggestion about how to better structure your deal.  If he cannot provide the necessary financing, he still might know of another source that can.
  • Be sure to develop a business plan or model that includes the projected cash flows for your operation.
  • After you’ve completed the three steps above, seek the financing options that look the best to you.  However, get any commitment from a lender in writing.  It can save a lot of misunderstandings later.
    Finally, now that you’ve planned your work, go forward and work your plan!

Looking Ahead

“Reduce your plan to writing… The moment you complete this, you will have definitely given concrete form to the intangible desire.”
– Napoleon Hill

In our next issue, we’ll take a look at what to do when you cannot find money for expansion or other improvements.  While banks normally come to mind for most of us, there are other sources.  Some of these can be internally generated, even in a year like 2009…
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TM & © of Success Strategies, Inc. All Rights Reserved. This newsletter is solely for the use of Subscribers to The Success Strategies Advantage OnlineTM Program. Any reproduction or redistribution of this information is expressly forbidden by Federal law. For further information, contact Success Strategies, Inc. at 209.988.8960.