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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
Total gross value of farm production
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
Total gross value of farm production
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