Northwest FCS News
In Part 1 of our discussion about the basics of business, we focused on setting goals, production budgets, projected cash flow, and business monitoring and adjustments. While these are important basic elements of business survival, let’s explore a few more management practices and how they will be applicable for 2017.
In January, take stock of your assets and liabilities by developing a balance sheet. However, be careful! This year, lenders will scrutinize your evaluation procedures, which makes conservative estimates best. Be transparent on all your liabilities including capital, leases, open trade accounts, and loans with friends, relatives and others. If you were one of the many producers who sold capital assets in 2016 such as machinery, livestock or land to meet bills, be transparent regarding these transactions as well. Remember, lenders do not typically like surprises.
Next, one must assess the exact amount of profit or loss for 2016. After all, you cannot make a plan to get somewhere if you do not know your starting point. Designed to minimize income, Schedule F tax records will not give an accurate showing and should not be used in this process. Rather, develop an accrual-adjusted income statement. This will take into account changes in beginning and ending balance sheet values such as inventories, payables, receivables, and prepaid and accrued expenses.
Another basic step is a cost-of-living budget. Knowing your cost of living is just as important as knowing your cost of production! Include family expenses as well as personal. In a year of tight margins, it is important to demonstrate both the willingness and discipline required to cut expenses. This ability signals to lenders, suppliers and others that you plan to honor your commitments.
If you do seek refinancing this cycle, include with your request a one-page written plan for corrective action. Credit will be tighter as the economic reset grips the industry. Your ability to commit to a plan can be a powerful step forward for business improvement.
Finally, education is paramount. I heard the saying, “If you’re not learning, your neighbor is.” For many, the competitive edge is their application of knowledge. Sometimes, education includes a visit back to business basics. However, education can also include exploring new technologies, software or trends to keep you moving ahead.
Together with our previous list of basics, these elements will help you prepare your business for the reality of lower prices and uncertainty in many areas for 2017, as my producer friend asked. Several factors will impact the profitability of agriculture this year for which you cannot plan. The key is to plan for the factors you can control and execute.