Preparing For the Next Swing in Milk Price – Part II

Contact: Ken Bolton, 715-877-1420

As stated by Tom Kriegl, University of Wisconsin-Extension, Center For Dairy Profitability, Farm Financial Analyst in his paper “Managing Through Difficult Times: Profitable Practices for Tough Times,” practices that maximize profit during good economic times minimize loss during periods of economic challenge.

Similarly, the main three financial instruments that allow a business manager to monitor how successful they’ve been during times of profit also allow them to mange and minimize negative effects during periods of financial stress. They are the Balance Sheet or Net Worth Statement; Farm Earnings or Income Statement; and Cash Flow Statement. The maintenance of these financial instruments along with an intimate knowledge of the same offers the business manager an opportunity to plan for the next dramatic change in farm profits and cash flows.

One strategy used during times of cash shortages is to delay or limit investments in capital assets. These are the items that show up on a Balance Sheet, some of which are depreciable or lose value every year like equipment.

So to limit financial risk when cash is short avoiding capital purchases should be carefully considered even when cash is available. When the decision is made to do so confirm that it is because a determination has been made that said investment is likely to improve profitability.

Too often farmers make investments because “I can afford it now” versus being able to afford “it” long term or, that the newly acquired asset increases profit opportunity. Former UW-Extension Farm Management Specialist, Gregg Hadley now with Kansas State University Extension suggests you make a “wish list” of desired capital assets to obtain. Develop a scoring system for each desired capital purchase by recording:
— The projected rate of return for each investment
— Whether you have a high, moderate or low need for each asset
— Whether each asset is a high, moderate or low investment risk
— The amount of cash you have available for the purchase
— How much debt must be accrued to make the purchase

While timeliness of operations is an important component of improving profitability, it in and of itself does not guarantee it. For example, purchasing a combine that increases costs by $50 per acre simply to own the machine because the custom operator harvested my crop a bit late last year is not likely to enhance profitability over time. Capitol purchases with borrowed funds effects both cash flow and equity positions. Managing at minimum Current Ratio and Working Capital levels are not adequate to effectively respond to available business opportunities, severe economic downturns or for long term financial security.

Consideration of information contained in the farm business Balance Sheet, Farm Earnings and Cash Flow Statements helps managers execute informed, well planned and evaluated decisions thus lowering financial risk.

To streamline this valuable management process, UW-Extension specialists have developed the “Planning for the Next Swing in Milk Price” program and “Working Capital Decision Support System” suite of decision tools for your use. Your UW-Extension county agricultural agent, Technical College Instructor or farm records business consultant can help you access this resource. Contact them today for more information.

This educational program is supported by a North Central Risk Management Education Center Grant.

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