If you are an avid golfer, have you ever paused to wonder how Tiger Woods excels in his sport. Many would assume that he is a naturally good golfer, but there are many good golfers in the world so what sets Tiger apart? It could the mental and physical planning and preparation that takes place before he sets foot on the course. Farming is very similar.
A great deal of work is done planning and preparing for that great game that we play each season. Here are the five activities that, in our observations, successful farm managers make their top priorities:
1. Once the crop is in the bin, they take time to reflect on their actual results and how these resuls compare with the projected budget prepare one year ago. The first indication of significant differences is evident in the balance of the operating and trade credit. Any difference noted here can be accounted for by one of the following four causes: capital purchases, sale of inventory, change in operating expenses, or drawings, withdrawals and debt repayment. From here, the elite farm manager works at understanding why lies behind these significant deviations from expected results. At some point through the year, decisions were made that altered the outcome and evaluating these decisions is crucial in learning from them. Some decisions may have involved prebuying at an advantageous price, or not. Some decisions may have been a split second decisions to replace an aging our troublesome piece of machinery and a bit of time assessing these decisions is valuable when faced with a similar situation down the road. Reflection should go beyond the operating line and compare crop inventory levels to detect any differences, good or bad. Going hand in hand with this inventory is revisiting their cost of production on those commodities.
2.Although a farm’s performance is easy to detect in a farm’s operating line of credit, all too often farmers use the balance of their operating loan to evaluate the prior year. This can be misleading and it is crucial for the farm manager to understand why. What we see from our most successful managers is a determination to clearly understand where they deviated from their plan. Deviations are inevitable but the difference with the top managers is they intuitively understand the impact any deviation may have on their plan. The ability to make informed split second decisions are often rewarded. Evaluating the many split second decisions that were made during the last year is crucial to maintaining a handle on the operations overall position.
2. Second, with the crop in the bin and a firm handle on cost of production, our most successful clients revisit their written marketing plans to ensure all is on track. If inventories differ from what was used in the plan, the plan is adjusted to take these actual inventories into account so market opportunities are not missed.
3. The most successful farm manager takes little time to relish in last years’ success before they begin to carefully plan for next year. Top financial managers start with clearly understanding their present financial position with an updated balance sheet. From here they develop production plans, budgets and most importantly, lay out the year’s cashflow in detail.
Very few farm managers clearly understand the difference between a budget and a cashflow. Many farms complete budgets where they calculate what a commodity will cost to produce and what they expect to sell it for. Less than five per cent of farms take this to the next step where a detailed projected cash flow is completed. It is no coincidence that these five per cent are some of the best managed farms with exceptional financial results achieved.
The cashflow statement uses the budget information but clearly identifies when cash will come into an operation and when it will flow out. Completing this plan helps to eliminate the risk that cash will make management decisions at some point through the year. In this environment, management decides when to purchase inputs or market commodities. If cash makes these decisions, it often comes at the expenses of much needed margin. Following the budget and cashflow, a pro-forma balance sheet is prepared. A pro-forma balance is the balance sheet at the end of the next fiscal period and the difference between your present position and your pro-forma balance sheet clearly indicates the financial progress or lack thereof for the next period. This gives the top managers clear indication if changes need to be made in order to achieve objectives.
4. A fourth common trait of strong farm managers is proactively planning for tax management. Cash income tax reporting provides the farming community with a huge opportunity if utilized correctly. Top managers have up to date records and use a preliminary estimate of income and expenses to anticipate and plan for taxable income. At this point, changes such as pre-buying inputs or deferring sales or receivables can be implemented to manage taxable income.
5. Many of these aspects are related to one single year or production cycle however top farm managers have much greater vision than what can be accomplished in any one season and this is the final trait demonstrated. In order to achieve their vision, they know that their financial objectives, personal goals, and business goals must co-exist. Time is set aside during the off-peak season to reevaluate the direction of the business, plan for human resources, plan for succession or changes in ownership, plan for maintenance of internal business culture, plan for longer term business growth and the list goes on and on. Again,
many farms may complete some of this but less than five per cent of farms do an effective job of structured strategic planning and then communicating this strategic planning to people that are critical to their success.
So good luck in the game of farming for this upcoming year. Make sure you prepare to bring someone into help prior to teeing off and you will most likely have an enjoyable 19th hole. Fail to plan and don’t be surprised at lost balls, extra strokes, sprouted grain, and long faces in the club house.
Andrew DeRuyck and Mark Sloane manage two farming operations in Southern Manitoba and are partners in Right Choice Management Consulting. With over 25 years of cumulative experience, they offer support in farm management, financial management, strategic planning, and mediation services. They can be reached at [email protected]and [email protected]or 204-825-7392 or 204-825-8443.