Tag Archive for: Finances

Was This the Perfect Storm?

Let’s consider the possibilities. If you are a dairy producer or almond grower (and they are not the only ones facing greater financial pressures…), you have been faced with lower prices this year. At the same time, your costs of operation have grown substantially, particularly in the areas of Labor, Fuel, Fertilizer, Feed and most other operating expenses.

Did I mention the higher cost of interest? In its efforts to stave off inflation, most of which was created by political geniuses spending money like a drunken sailor these past several years, the Federal Reserve Board has raised interest rates 5.50%, creating a lot of pressure on producers with any debt. What can we do?

One option is to worry, but I’ve never seen a case where that really helped. Mark Twain described worry as “paying interest on a debt you never owed…”

Another potential approach is to just complain, but no one really wants to hear that. As former President Teddy Roosevelt suggested, “Complaining about a problem without providing a solution is called whining.” What else is available to us?

Why not “Take Action?” Be cognizant of the previously mentioned challenges and then take steps to offset them.

Decide which variable you want to tackle first. Define the outcome you want as clearly as possible. Set a date for its achievement.

Recognize that there will, indeed, be obstacles for you to overcome. Yes, there are always plenty of them. Next, based upon what you currently know (and we never have complete information), decide what steps you can take. Discuss it with your Team and determine who will lead the project & its required steps. Finally, set your Action Plan, based upon the outcome you want and move forward.

Here’s a recent case I experienced with a client. He needed additional funds to buy more cows & fill a new free stall barn. Even though his Loan to Value % (LTV), after borrowing for the new cows, would only be 60% or less, his bank did not want to provide the necessary funds. Our solution? He offered an additional 20-acre parcel as collateral, and they provided him with a 20-year Real Estate Loan. Now, the LTV % on the cows was around 40% (which provided us with future borrowing capacity, if needed). The bank was happy because of the lower LTV % on the herd loan, and they had more collateral. The Client was pleased because he could add the needed cows, and his Cash Flow was improved due to the extra milk sales & a 20-year amortization on the RE loan vs. 7 years on a cow loan. Problem solved.

If you run a dairy of any size, I have recently introduced a system to allow you to measure your dairy operation’s cash flow results. I call it the Success Strategies AdvantageTM, and it is designed to create a budget for your dairy operation, using numbers for your region of the country, measure your actual results against this, and provide you with crucial Break-Even numbers. Check it out at www.success-strategies.com today.

Let’s take your business to the Next Level!

Do You Know Who I Am?

No, I am not Darth Vader, but I really believe this is a good question for each of us to ask ourselves. I recently listened to a speech by Matthew McConaughey, also known as the speech that broke the internet, where he explained that knowing who we are begins with knowing who we are not.

If you haven’t heard that speech, I highly recommend you listen to it. I find it very motivational. However, what does he mean? Please allow me to provide you with a couple examples.

I had a Client several years ago who sold his dairy operation. He had children, but none were interested in running the dairy. One was an outstanding Doctor, and the other child was a very successful Accountant. He was the third generation on the operation and had done very well. Unfortunately, he felt ashamed because he had no children to take over for him. Following extensive discussions, I reminded him of how well he had done, how successful his two sons were, and how he had continued his family’s legacy for a third generation, at a time when dairying was no easy task. In essence, to convince him that he was, indeed, a success story, he needed to recognize what he was not – someone who would live forever – because no one can do that.

I had another Client whose banker convinced him that he should diversify his operations. He was a lifelong dairyman, but he became convinced that he should diversify into almonds, too. On the surface, it sounded good. Almonds were bringing $3/pound. What could possibly go wrong?

Well, over the next five years, development costs soared from $6,000/acre to $12,000/acre. Operating costs skyrocketed and, magically, the $3/pound price dropped to $1.80. Oh, and did I mention that the Federal Reserve Board ratcheted interest rates up by over 5%? His stress levels jumped dramatically. He had done a great job of diversifying, but he was simply tired of the worry associated with the higher debt levels and soft returns.

Effectively, he began to realize identifying whom he was began with recognizing who he was not. He was not one to deal with the stress associated with higher debt levels and lower margins. He divested part of the almond property and got himself back on track.

What items do you need to consider as you recognize who you are by first identifying whom you are not? I wish you well with this crucial process.

If you run a dairy of any size, I have recently introduced a system to allow you to measure your dairy operation’s cash flow results. I call it the Success Strategies AdvantageTM, and it is designed to create a budget for your dairy operation, using numbers for your region of the country, measure your actual results against this, and provide you with crucial Break-Even numbers. Check it out at www.success-strategies.com today.

Let’s take your business to the Next Level!

Is This Sustainable?

This is likely a question many folks in the dairy industry are asking these days. In essence, how long can we make this work? Considering the lower milk prices, high feed prices these past 18 months, rising interest rates and our ridiculous rate of inflation, it really is a great question to ask. In fact, it’s an excellent question to be asked on every major decision.

Honestly, when I heard about sustainability in the past, my mind was immediately directed toward the environment and related issues. For example, if I heard about someone discharging material into a waterway, I knew that was not at all sustainable for others downstream.

However, it’s so much more today. If we add another 400-cow free stall barn at a cost of $700,000, that represents $1,750/cow of additional debt. Not a big deal. However, if I also need to go buy the 400 cows at $2,250 each, then we are adding $4,000 per cow of debt. That level can quickly become tenuous. Is that sustainable? Probably not, unless your pre-expansion operation was extremely low on debt.

What’s the solution? You just need to build a sound plan. Can you buy heifers ahead of time and feed them until they enter the milking herd? Can you build your herd numbers internally, using sexed semen on your existing herd? All of these decisions need to be considered several years ahead of the free stall construction.

We really need a plan on everything we do. You can start today by setting your objectives, determining your overall project cost, researching if you can finance it, and also figure out, as in our example above, how you can fill the barn with the 400 additional cows. Ultimately, however, you will need to project if it will cash flow.

To assist you with your financial analysis, I have recently introduced a system to allow you to measure your dairy operation’s cash flow results. I call it the Success Strategies AdvantageTM. It is designed to create a budget for your dairy operation, using numbers for your region of the country. You can run various “What If” scenarios within it in order to figure out what various repayment schemes will work for you (15-, 20- or 25-year amortization periods). For each scenario, it also will provide you with the following items:

  • A Year-to-Date (YTD) Cash Flow Comparison of your operation compared to a budget that is based upon typical numbers for your region of the country.
  • It will show you where you may be over or under budget.
  • It will provide you with Break-Even Levels for Milk Price/cwt, Feed Expense & Production per cow per day, all useful information for reaching higher levels of profitability, as well as setting your price level coverage through the Dairy Revenue Protection (DRP) and Dairy Margin Coverage (DMC) programs.
  • It will also equip you to better understand where you might be over budget and help you to talk with your Team (e.g., Nutritionist, Veterinarian, Financial Consultant & Others) about how to refine your numbers.

Check it out on our Home Page at www.success-strategies.com. Use it to build a sustainable plan and to streamline your operations. As I always say, “If you measure something, you can understand it. If you understand it, you will be better positioned to control it, and if you can control it, you can definitely improve it.

Let’s take your business to the Next Level!

Who Benefits from Delays?

It has been interesting to observe recent delays on loan approvals with several of my Clients. Frustrating, yet interesting, since the delays seem to occur for no real good reason.

I understand that all parties, particularly the bank, need to have sufficient, current information to make a good loan decision, but once they have it, why does the approval process take 3-4 weeks? No one’s analysis should take that much time…

Does the borrower benefit from this extended approval process? Not likely, especially when they have vendors who are dealing with uncertainty. This uncertainty will probably not lead to any cost savings. Similarly, it can jeopardize a borrower’s operation by generating doubt about their future.

What if interest rates go up in the interim period, as they have been for the last 18 months? It ends up costing the borrower even more.

At the same time, does the bank benefit if the rates increase? Probably not, because their “cost of funds” will also increase, leaving them with a similar margin. Additionally, whenever a borrower’s operation is negatively impacted, the risk level also increases for the lender.

Finally, if vendors decide to charge higher prices for their products, as we have seen with inflation’s impact these past two years, an operator can be hurt even more on the margin front. The air of uncertainty that is created is never beneficial for anyone. As Winston Churchill stated, “The ultimate sum of the maybe’s is always no.”

So, what are we waiting for? Let’s move forward and make a reasonably sound decision, if you have the information you need, whether it’s a Yes or a No.  Loan decisions are not like fine wines. They don’t get better with age. Instead, let’s follow the sage advice of Churchill who also said, “Let our advance worrying become advance thinking and planning.” Let’s move forward, for we have no time to waste.

To assist you with your own financial analysis, I have recently introduced a system to allow you to measure your dairy operation’s cash flow results. I call it the Success Strategies AdvantageTM.  It is designed to create a budget for your dairy operation, using numbers for your region of the country. After you input about two dozen “Actual” numbers from your QuickBooks or other accounting system, it will provide you with the following items:

  • A Year-to-Date (YTD) Cash Flow Comparison of your operation compared to a budget that is based upon typical numbers for your region of the country.
  • It will show you where you may be over or under budget.
  • It will provide you with Break-Even Levels for Milk Price/cwt, Feed Expense & Production per cow per day, all useful information for reaching higher levels of profitability, as well as setting your price level coverage through the Dairy Revenue Protection (DRP) and Dairy Margin Coverage (DMC) programs.
  • It will also equip you to better understand where you might be over budget and help you to talk with your Team (e.g., Nutritionist, Veterinarian, Financial Consultant & Others) about how to refine your numbers.

Finally, it will give you solid information to share with your banker, showing how you are currently doing and guiding you about future changes or investments that will help you streamline operations.

Let’s take your business to the Next Level!

Where Do You Get Your Confidence?

I thought it was a stupid question. However, it did come directly from a finance professional who was a serious worrier, and with him, “the sky was always falling.”

My response was that my confidence came from completing 150-200 Cash Flow Analyses per year for the last 20+ years. In other words, this “wasn’t my first rodeo.” One item that added to my confidence was this Client’s long-term history and their solid Cash Flow performance.

If you complete this type of analysis regularly, it will undoubtedly build your confidence. Whether your Cash Flow results look positive or negative, you will gain a much better grasp of your numbers. The largest benefit of this entire process is that if you measure the Cash Flow of your operation, you will understand it better. If you understand it, you can start to gain control over your Revenue & Expenses. If you can control these items better, guess what? You can improve them, and that is the ultimate benefit of completing this process.

Ray Kroc of the McDonald’s Corporation said, “I didn’t invent the hamburger. I just took it more seriously than anyone else.” Similarly, I didn’t invent the process of Cash Flow Analysis, but I have definitely taken it more seriously than most people! In fact, now I’ve created a system for you to complete your own Cash Flow Analysis. I call it the Success Strategies AdvantageTM . With the input of about 20 numbers related to your loans and feed inventory, it will create a budget, using numbers for your region of the country. Then, after you input about two dozen “Actual” numbers from your QuickBooks or other accounting system, it will provide you with the following items:

  • A Year-to-Date (YTD) Cash Flow Comparison of your operation compared to a budget that is based upon typical numbers for your region of the country.
  • It will show you where you may be over or under budget.
  • It will provide you with Break-Even Levels for Milk Price/cwt, Feed Expense & Production per cow per day, all useful information for reaching higher levels of profitability, as well as setting your price level coverage through the Dairy Revenue Protection (DRP) and Dairy Margin Coverage (DMC) programs.
  • It will also equip you to better understand where you might be over budget and help you to talk with your Team (e.g., Nutritionist, Veterinarian, Financial Consultant & Others) about how to refine your numbers
  • Finally, it will give you solid information to share with your banker, showing how you are currently doing and guiding you about future changes or investments that will help you streamline operations.

I recommend you look at it by visiting www.success-strategies.com to see if it will assist you to be more profitable.

Have You Ever Seen This?

Of course, you have. We all have witnessed this scenario. The banker is unhappy with the “problems” at the farm site, and one of the partners looks at the others and says, “You got us into this mess. Now, you can get us out of it!”

As I saw in a recent YouTube video, it’s time to quit playing the “Blame Game!” Instead of acting like the U.S. auto industry of the 1960’s and 1970’s, where every problem was considered someone else’s fault, until the Japanese practically overtook the entire industry, let’s try another approach to turnaround situations.

While it’s always better to avoid banking & financial problems because no one enjoys them, we need a system to do so. In every one of my 73 financial turnarounds to date, at least one item needed to be improved. Usually, it centered around a “lack of communication” between the partners, owners, managers, vendors &/or bankers…

My recommendation? Instead of playing the “blame game,” why not do the following? Meet regularly and discuss your challenges. I’ve met with every one of my Clients each month for the past 23 years. Believe me, that’s a lot of meetings, but you know what? They have kept each other better informed, and, as a result, been in a position to make more informed decisions. Did we get every decision correct? Probably not, but just like in Major League Baseball, if your batting average is high enough, you will succeed and probably participate in the All-Star game!

When you meet, always, always, always have an agenda! Not a hidden one, but rather, one that keeps you all on focus throughout your discussions. Tangents are so easy to get caught up within, and they are never productive…

Focus on one item at a time, if possible, and find a solution. So often, we (and sometimes bankers, too…) want to solve five issues at once. However, this process will dilute your focus and delay your progress on any of these challenges.

My experience has been that, once I get the biggest problem solved and stick to the process, the others start to look less intimidating. My advice to you is this: As Author Brendon Burchard so often states: “Honor the Struggle.” I think you’ll be glad you did!

Let’s take your business to the Next Level!

Are You Playing All Four Quarters?

I recently had an excellent discussion with one of my Clients about how the last 12 months had turned out. As many of you know, early 2020 presented an incredibly challenging time with the onset of COVID-19 and its extremely low milk prices, particularly during the second quarter.

However, he had maintained his production levels, despite the fear in the markets, and it had paid off. He was solid on his Cash Flows and the details of his herd management, but then at end of his year, he seemed to “take his foot off the gas…” Maintenance of his facilities seemed to fall short of their normal levels, and milk quality started to suffer.

When I asked what had happened, he seemed a little defensive. However, helping people stay on their “A Game” is part of what Clients pay me for. Then, he informed me with the following: “John, I’m tired. My employees are exhausted. These last 12 months have been very taxing.”

Believe me when I say that I did, indeed, understand. I had overcome several serious Client challenges on the banking front, facing off against some of the most ridiculous financing challenges I have seen in 23 years of consulting. However, I worked with my Team and my Clients to overcome those hurdles.

You know what made the difference? We “played all four quarters!” Every game is won or lost in the fourth quarter. You can plan an excellent game for three quarters and then lose it in the fourth quarter. Guess what? It is no different in the dairy business. You must play all four quarters each & every year. Defeat and its willingness to take you down is on call all the time, just waiting for you to let up the slightest little bit!

I want to encourage you to “fight the good fight,” and I mean all year long. Here are some suggestions for “winning the game” by playing all four quarters:

  1. Complete regular monthly Cash Flow Analysis, not just occasionally, but each & every month. My Clients see this information from me every month. There is no better way to stay ahead of the game. While I am an advocate of regular quarterly CPA prepared Financial Statements, a lot can happen in 91 days. I want to catch any expense items that are getting out of control before they get “beyond repair.”
  2. Regular Management Team Meetings – These should be held with your Financial Advisor, Nutritionist and Key Employees on a regularly scheduled basis. As I said earlier, you have to play all four quarters to “win the game.” However, you also have to have a winning team, all of whom are pulling in the same direction. If they are out of sync with you or each other, this can create real challenges to your overall success.
  3. Regular Finance Team Meetings – These can be crucial to making sure that your Team stays on track. Measuring your Cash Flow monthly is one thing, but making sure that your Team is aware of challenges that arise is crucial. How can we expect them to keep costs in alignment if we never share our concerns with them?
  4. DMC & DRP – These programs are, simply stated, a “form of insurance.” Like any insurance program, they provide you with a safety net against any severe downturn, in this case a falling milk price, which, of course, can wreck your Cash Flow. Think of these safety nets as an investment, not a cost. Just as you would not call your insurance agent at the end of a year & and complain about the premiums you had paid, although your house didn’t burn down, you likewise shouldn’t complain about these premiums. Both DMC & DRP are a form of financial insurance.

I hope you’ll consider playing all four quarters this year, even the frustrating ones, because that is the only way for you to WIN!

If you would like to learn more about these concepts, just shoot me an email (john@success-strategies.com) stating “NLT Workshops,” and I will be sure to include you in future invitations.

Are You Adequately Covered?

As the cost of buildings on your operation continue to rise each year, you certainly wouldn’t think of not covering their replacement with adequate insurance. Yet, have you done the same thing with the primary source of revenue in your business?

For most dairymen, Milk Sales represent 85-90% of their total revenue streams. This would seem completely prudent, given the increased levels of volatility in the dairy markets… It’s been almost two years since the introduction of the Dairy Revenue Protection (DRP) Program, but are you using it?

If you study the program, it is a fairly straightforward method for placing a floor under the milk price you receive at your dairy. You can choose to protect your Class 3 price, your Class 4 price or you can use your components as the basis for protecting your milk price, assuming that fits your operation better. The key question here is – Have you looked into DRP yet? If not, please do so soon.

I believe you can go ahead up to five calendar quarters. Of course, since the price protection is based upon the use of “Put Options,” which place a floor under your prices received, the longer into the future you contract, the greater the cost of those Put Options will likely be. Their cost can also increase when markets are more volatile (such as this year…) and if you select higher price coverage levels (e.g. $18/cwt vs. $16/cwt.)

However, there is some good news on the cost front. Currently, the federal government is subsidizing the cost of the DRP options by about 40-45%, so if an option costs $0.60/cwt in the open market, your net cost through DRP will likely be about $0.36/cwt. So, how do they pay out?

At the end of each quarter, if the market prices have been higher than those you had set as a floor in the DRP program, these Put Options will expire unused, and, unfortunately, you will receive a bill for the cost of that quarter’s Puts. That’s the bad news. The good news is that since the market was stronger than the level you had set for coverage, you should have been receiving higher milk prices & thus be able to pay this premium. And, please remember that you can do less than all of your milk; I believe you can also set this up with multiple tiers of coverage, e.g. 25% of your milk one week and then another 25% the following week. The costs of the two 25% coverages may be different, but as long as you contract before the required deadline (around the 15th of the month before the next quarter begins), you’ll be covered for the level you select. You can also go into your DRP account every day, if you wish, to monitor your progress/potential payout levels.

Is this DRP program perfect? Probably not. I’m certain that if we study it long enough, we can likely find some characteristic we don’t like… However, it can put a “floor” under your overall milk price received, the premiums are government subsidized, you have numerous different input factors that you can use (e.g. Class 3, Class 4 or Components), and you don’t even pay the premiums until the month following the quarter for which you were covered. As a result, you can pay the “premiums” out of the DRP coverage you received or out of the higher milk prices you collected if your DRP coverage didn’t kick in.

Yes, you will be out the cost of the Put Options, but do you call your insurance agent at the end of the year if your house doesn’t burn down, despite having it insured? I didn’t think so…

Given the higher levels of volatility due to market conditions, unforeseen events such as COVID-19, or disdain for some variables in our trade agreements, don’t you owe it to yourself to be covered? Take action now! I wish you the best of success!

If I can assist you in any way, please let me know at john@success-strategies.com or 209-988-8960.

Are You Kidding Me?

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