Own vs. owe. Two three-letter words and the last letter makes all the difference.
Few dairy farms today own all their assets and owe nothing. Dairies use debt as one method of controlling assets needed to produce milk. Renting, leasing, or full ownership are other common methods of controlling assets.
Three of the 15 Measures of Dairy Farm Competitiveness focus on debt: scheduled debt payment; debt-to-asset ratio; and debt per cow. These measures are easy to calculate with basic balance sheet information.
It is the “basic balance sheet information” that can use a little tweaking on some dairy farms.
The liability side of a balance sheet is simply a list of what the farm owes. This includes current bills, outstanding bills, credit card balances, balances on line(s) of credit and any loans for animals, machinery, buildings, land, etc. Information needed on these “owe” items include the current loan balance, interest rate, scheduled and total annual payments, and the date of the final payment.
All of this should be somewhere in your filing system. Original loan papers, current and annual loan statements and summaries can all be helpful. If needed, simply call your loan officer and ask for missing pieces of information.
Once a good list is developed, it is easy to keep up to date. When working with farm families, I find it very, very helpful to have this information to review. In addition to being able to quickly calculate the scheduled debt and total debt per cow, it is also very helpful when looking at cash flow and potential cash flow issues.
A heavy load of short-term debt frequently causes cash-flow challenges. Knowing when those debts will be finished (that great “last payment”!) helps the family determine if they can manage the situation as is, or need to consider ways to restructure or eliminate the debt.
Credit cards are now commonly used in dairy farm businesses. Generally, they should be used for convenience, with full balances paid off monthly. Interest rates are generally much higher (up to 24 percent) than rates available from lenders.
If credit card balances are building up, they must be addressed immediately — Step One would be cutting the card(s) up to stop adding to the balance.
Unmanaged balances are usually symptoms of a larger profitability issue that needs to be addressed.
Farm financial management is really enjoyed by only a few people (I admit to being one of them and have accepted the fact that people would much rather talk about dairy nutrition.) Breaking the financial statements into smaller, manageable pieces helps the designated numbers person to get started or to update what they already have.
Today’s assignment: Make or update a list of the “owes.” You’ll feel a whole lot better about it if you start with a list of the “owns.” Then get a copy of the 15 Measures and see how your dairy business stacks up.