KNOWING WHERE CASH GOES HELPS IN MAKING A PROFIT
Originally published on October 5, 2000
One of my favorite stories from last year involved a farmer friend who managed to surprise reporters at the Saskatchewan Legislature in Regina.
My friend, who is progressive and successful, had been asked to speak to an agriculture-related committee on the perils of farming. On his way out of the building a group of reporters asked him for his views on the recently announced Canada-Saskat-chewan Assistance program.
Turning the tables, he asked the reporters how much money a day they thought it cost him to run his farm. When he didn't receive an answer, the farmer replied, "a thousand bucks." The reporters were awestruck. This was and remains a lot of money. The farmer then went on to acknowledge that while this financial assistance was appreciated, it would finance only nine days of farming operations.
The moral of this story is that good farm managers know where their cash is going. Although it is important to know about profits and losses, it is critical that farmers be able to match cash in with cash out in the short-run.
A five-year projection prepared for a banker may show good profitability, but it does no good if you are broke in the first year. I remember a grey-haired management consultant I met at a finance conference. I told him our office was putting together some financial benchmarks that clients could use to get a better "feel for risk" in their businesses.
He countered by saying, "if there is cash, there is never a problem."
The nuts and bolts of your farm cash plan should begin right after harvest. Your first step should be to measure your farm's liquidity, which is the ability to meet financial obligations without disrupting normal operations. The more liquid your farm, the better.
Liquidity is best exemplified by the current ratio. Calculations of this ratio are shown in table one.
For those who have used a line of credit over the past year, this ratio is what your financial institution is actually calculating when it asks for your inventories and payables at the end of each quarter.
Don't practice ostrich economics if you are in financial trouble. It is imperative that you work through the balance of your farm cash plan and deal with it.
Your next step should be to evaluate the timing of your farm's monthly cash inflows and outflows. This is called budgeting.
Those who do not do this tend to stereotype those who do as penny-pinchers or neurotic Scrooges. This is not the case.
Computers and spreadsheets have made the job easier. Tape together four pieces of foolscap if you don't have a computer. Using last year's income tax return as a guide, write down your income and expense categories in the left margin and your months along the top horizontally. Place the receipts and expenditures in the months in which you believe that they will be realized or expended.
The third step involves monitoring and review. If you use a computer, your first entry should be the cash flow budget that was prepared in step two. This is a standard feature in most computerized accounting packages and it will enable you to print out a monthly budget-to-actual comparison.
If you are doing this manually, be sure to investigate budget discrepancies when your bank statement arrives. I know clients who prepare these budgets in pencil and simply rework their manual budgets each month.
Remember that the purpose of this step is not to simply examine past history, but to learn from it.
■ An operating line of credit should not be used to buy capital items. Farmers must make the distinction between funds used for buying and funds used for operating.
■ Forecasting the receipt of Canadian Wheat Board grain can be complicated. While the elevator delivery must be recorded at the initial prices, it is often difficult to estimate the timing of your interim and adjustment payments.
For this reason your budget should attempt to integrate the CWB pool return outlook prices with actual quantities you delivered. If you need help, contact your accountant or banker.
■ Keep separate banking for your farm and personal spending. If personal spending is greater than 25 percent of your gross farming income, you are spending too much or eating equity.
■ Don't give up if you get stuck with the numbers. According to table two, operating expenses for Saskatchewan farms averaged $246 per day in 1996. So at $1,722 per week (in 1996 dollars), it's worth your time.
Today's farming is big business. Due to the decreasing number of farmers, the public is becoming more disconnected from the realities of farm business. Farmers have an opportunity to better educate those who can make a difference. However, before we can do this, we must understand the realities of our own farm business, specifically farm cash flows.
Stockwell Day troubled our prime minister a few weeks ago when he asked him about the price of gas in his riding. As farmers, perhaps we should ask our elected members or public colleagues for their insight on what they think we spend each day on the farm. I know last year some members of the Regina media were surprised.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.