successful farm business start up

8/6/2019 Successful Farm Business Start Up

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Successful Farm Business Start

Up: A Few IdeasPaul Dietmann, Sauk County UW

Extension Agricultural AgentJanuary, 2006


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Key Points

It can be done! It will often be difficult

Starting point will likely be much different thanending point Managing risks is critical

Some factors increase chance of success

Some create a recipe for disaster Understanding and using financial statements will

put you far ahead of the pack


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The Goal


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You DONT Need____ to Farm

To own a farm Dad, brother, grandma, rich uncle A government grant A big line of machinery

A big pile of cash in the bank A big pickup truck


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You Do Need

Openness to different ideas Patience Time to plan, analyze, re plan Ability to swallow your pride occasionally

Intestinal fortitude during tough times To communicate with lender and otherswhen problems are still small


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Most Common Starting Point

Rent farmbuildings, land, house or combo Buy livestock, minimal line of machinery Buy feed Custom hire, when necessary

Drive and determination>

Equity


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Factors That Success

Family close by Good communication skills

Frugality Ability to keep feed & vet costs low Paying down principal asap

Curious mind Good record keeping Multiple sources of capital


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Causes of Train Wrecks

Communication breakdowns Vague operating agreements Buying toys instead of paying bills High livestock illness/death rates

Poor record keeping Poor work habitswatching cartoonsinstead of watching for heats


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Understanding, Using Financial

Statements Balance sheetWhat the farm is worth,

how its financed

Income statementHow effectively thefarm generates profits

Statement of cash flowsWhere $$ comefrom, where they go, how many stick around


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Four Measures to Consider

Liquidity

Solvency

Profitability

Repayment capacity

Balance sheet

Income statement

Statement of cash flows


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The Balance Sheet

A snapshot of the investment in the farm business(assets) and the financing methods used (a combination of liabilities

and owners equity ) at a given point in time.

Assets Everything that is owned by or payable to the business asof the date the balance sheet is preparedLiabilities All obligations owed by the business as of the balancesheet dateOwners Equity or Net Worth Total assets minus total liabilities


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Information From Balance Sheet

Liquidity Ability of the business to meetits current (short term) obligations withcurrent assets

Solvency Ability of the business to payoff all of its debts if it were to be soldtomorrow


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Poorly structured debt Paying for long termassets as if they are current liabilities

High current liabilities forcing sales of inventory atunprofitable prices

Uncollectable accounts receivable continuing toshow up as current assets on balance sheet

Common Liquidity Problems


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Capital investments too high relative to potentialincome

Assets depreciating faster than the loan balances arebeing paid off

Common Solvency Problems


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The Income Statement

One years income and expenses, and how muchrevenue was retained by the business.

Income Includes cash sales of farm products,government payments, custom work income. Also includeschanges in the inventory of feed, crops, and livestock.

Expenses Includes all cash operating expensesincluding interest (but not principal) payments. It alsoincludes depreciation.


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Information From Income

Statement Profitability measures Net farm income Return for your unpaid labor,

management, and financial investment in the farmRate of return on farm assets The interest ratebeing earned on all of the investments in the farm

Rate of return on farm equity The interest ratebeing earned on your investment in the farm

Operating profit margin The operating efficiency of

the business


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Feed costs too high

Overhead costs too high

Common Profitability Problems

Preaching tothe choir here


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Statement of Cash Flows

All cash flowing into the operation (including loanproceeds) and all cash flowing out (including familyliving expenses, taxes, principal and interestpayments.

Anything left over is considered capitalreplacement margin


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Common Cash Flow Problems

Poorly structured debt Too much debt relative to income Rarely is family living expense the

problem!


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Increasing Profitability 1. Reduce overhead costs (They arent really fixed)

2. Improve gross margin

get more for your milk, cull cows, other products cut variable costs

3. Increase asset turnover

(Asset turnover ratio = Value of farmproduction/Average farm assets)

Increased production only improves profitability if variableand overhead costs stay the same


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Business Planning Costs

Overhead Costs Costs that exist on the

farm whether or notanything is being

produced Can include mortgage,

taxes, depreciation,labor

Variable Costs Costs that increase as

farm productionincreases

Can includes seed,feed, fertilizer, vetexpenses, utilities


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$

Number of cows0

Total gross value of farm production

Variable costs Feed, vet, breeding, milk hauling, etc

P r o f i t

Breakeven

Overhead costs Land, labor, buildings, equipment

L o s s

How overhead and variable costs relate to profit on dairy farms


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$

Number of cows0


V a r i a b l e c o s t s

P r o f i t

Original Breakeven

Overhead costs L o s s

Another way to increase profitability: Reduce variable costs

New Breakeven


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$

Number of cows0


V a r i a b l e c o s

t s P r o f i t

Number of cows neededto break even

Overhead costs L o s s

A third way to increase profitability: Increase production, keep all costs the same

New production level


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Some Bottom Lines

A good business will generate increasing levels of profitability and cash flow going forward

Profitability without cash flow is recipe for disaster Cash flow without profitability is a terminal condition

Doesnt make sense to borrow at 7% to earn 6% If a bank wont invest based on your business

plan, maybe you shouldnt either

successful farm business start up

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