March 2010 Issue

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


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:


  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