The Business Confidence Maximizer
By John Ellsworth of Success Strategies
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:
- 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.
- They might not want to face reality, especially if it is indeed negative.
- 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. . .