The Rural Voice, 1982-08, Page 18Financial and marketing management,
plus production - - the key to success
By W.H. Bearss
Royal Bank of Canada
Presented to the Ontario Pork Congress
Predicting the future, at the best of
times. is a risky business. With many
factors such as weather, prices and
government policies, beyond the control
of the farmer playing a significant role in
his operation, it is a small wonder that he
is often reluctant to prepare budget
projections. However, the preparation of a
"game plan" is critical to the success
of any business. The budget projection
reflects the ability of management to exert
control over those factors that are
controllable.
In a swine operation. nutrition,
breeding, ventilation. sanitation and
disease control are all factors that can be
controlled by the farmer. These are also
factors that have significant impact on
income and expenses and at the same time
are readily predictable. By reducing the
degree of uncertainty associated with
these factors in the budget, the overall
uncertainty of the future is reduced.
Consequently, unpredictable things, such
as adverse weather conditions have a less
dramatic impact on an operation. should
they occur.
Normally. the budget or cash flow
projection is broken down into quarterly
or monthly periods. This reflects the
pattern in which business is conducted. As
an example, a farrow to finish operation
often has weekly shipments of pigs to
market with fluctuations in numbers
according to breeding cycles. culling rates
or feeding programs. In this case. a
monthly cash flow would be preferable.
However, an all -in -all-out market hog
producer might find that a quarterly cash
flow is satisfactory for his needs.
The key to successful budget
management is evaluation. There is no
merit in preparing a game plan without
checking to determine what progress is
being made. Bear in mind, the budget is
not "etched in stone". It serves as a
framework for making business decisions
over the course of the year anu is subject to
adjustment and fine tuning in response to
changes in production, income. expenses
or any of the many other influencing
factors.
PG. 18 THE RURAL VOICE/AUGUST 1982
FINANCIAL
ANALYSIS
PART II
Every farmer should have a routine
system of collecting information from his
operation and this should be regularly
summarized. reviewed and compared
against projections. If sixteen pigs
marketed per sow was projected and
records show fourteen is being achieved,
you better find out why, and correct the
problem NOW!! If you projected expenses
or income at a certain level and your
summary of financial information (i.e.
income and expense statement) shows you
deviating significantly from the cash flow
projections. find out why and correct!!!
There are many systems available to
assist farmers in collecting production and
financial records. The range of sophisti-
cations varies from simple hand written
information, manually evaluated to full
blown computer programs. The choice is•
up to the individual farmer, but the
important point to remember is that
"garbage in means garbage out". The
accuracy of the analysis and subsequent
decision is dependant upon the accuracy
of the data collected. As an absolute
minimum. a farm financial accounting
program should include routine recording
of income. expenses, accounts payable
and receivable and inventory. The extent
to which analysis of the information is
made varies. but net and gross profit or
loss, return on assets or equity and
breakeven cost of production are a few of
the critical figures that ought to be
considered.
The goal is to achieve a better
understanding of the financial viability of
the farming operation to anticipate both
positive and negative developments. and
make adjustments in advance. In today's
business environment the farmer cannot
wait until six months and after his year
end to receive the tax return information
from the bookkeeper that indicates last
year was a disaster!! Regular monitoring
of the cash flow prevents that.
We are fortunate in Canada to have
access to an almost overwhelming number
of sources of financial information and
advice for farmers. Many of the sources
have specialized expertise while others
are of a very general nature. Sometimes
two different sources will have conflicting
viewpoints and this can lead to confusion
for the farmer seeking help. The decision
to use or discard information or advice
from any particular source is the pre-
rogative of the farmer. However, it is
important to seek out at least two or three
opinions on a certain subject before
making a decision, whether it be choosing
a particular record keeping system, an
accountant or even a banker. Listed below
are a number of sources of financial
information and advice:
-O.M.A.F. Management Specialists
-farm oriented Chartered Accountants
-private consultants
-bank Agrologist/manager
-special seminars.
-other successful farmers
-University
-subscriptions - newsletters, magazines
The question has frequently been
asked. "Does a lender require an upward
change in market prices before he can be
convinced to consider financing a new
venture or expansion of an existing
operation?" The answer is an equivocal
"maybe" or "sometimes" At any time,
the lender will always apply the "Three
C's" decision making process to a
financing proposal. For obvious reasons,
the degree of risk in any new venture or
project is reduced if there is strong
potential that the product marketed will
bring a price that ensures profitability.
Conversely. when prices are depressed,
there often is not enough profit after
expenses to cover principal and interest
payments on new debt that v,ould be
associated with an expansion project.
Incidentally. the number of farmers
considering expansion during a depressed