Dr. David M. Kohl
Professor Emeritus
Agricultural and Applied Economics
Virginia Tech
Blacksburg, VA 24060
(540) 961-2094 (Alicia Morris)
(540) 719-0752 (Angela Meadows)
e-mail: sullylab@vt.edu
Weekly Website Columns:
Ag Globe Trotter: www.farm-credit.com
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Viability of Dairy Industry in Northeast
“Keys”
Macro
PA
natural resources
plus
location to markets
plus
conservative mode & mentality
plus
infrastructure
plus
possibility to diversify modest size
plus
Is Your Business
“Farmcreditable / Bankable/ or FSAable?”
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Do you know your cost of production?
Do you conduct enterprise analysis?
Do you complete and utilize accrual adjusted income
statements?
Do you have accurate up to date balance sheets?
Do you utilize key financial ratios in your business
planning?
Do you have a three prong risk management program?
(revenue, inputs, & interest rates)
Do you conduct sensitivity analysis on cash flows?
Do you communicate if you have problem?
Do you meet key metrics, ratios, & credit scores?
Do you utilize a business plan?
New Economic RealitiesFinancial Metrics
Measure
Code
Red
Code
Yellow
Code
Green
Working
Capital/Exp. Or
Rev.
<15%
15-33%
>33%
Debt/Asset Ratio
>60%
40-60%
<40%
Credit Score
<650
650-700
700+
Op. Exp.
Revenue
(Excluding Depr.
& Int.)
>80%
70-80%
<70%
Coverage Ratio
<125%
125- 200%
>200%
1
2
Profitability - Return On Assets
((Net Income + Interest - Management Fee) / Total Farm Assets)
Owned
Leased
Red
(0-4)
under 4 percent
under 6 percent
Yellow (5-8)
4 to 7 percent
6 to 10 percent
Green (9-10)
over 7 percent
over 10 percent
Capital Turnover
Ideal capital turnover
varies by enterprise
(Revenue/Total Assets)
Red
(0-4)
under 20 percent
Yellow (5-8)
20 to 40 percent
Green (9-10)
over 40 percent
Margin Management
Net Profit/Gross Revenue
Red
Owned Land
$ 50,000 (net income)
+ 20,000 (interest paid)
70,000
- 40,000 (f amily
$ 30,000 withdrawals
or mgt f ee)
$30,000
$500,000 assets = 6%
(0-4)
under 9 percent
Yellow (5-8)
9 to 16 percent
Green (9-10)
over 16 percent
Gross Revenue divided by
Total Assets equals Capital
Turnover
$450,000
$500,000 = 90%
Owned
0 - neg
1 - 0%
2 - 1%
3 - 2%
4 - 3%
5 - 4%
6 - 5%
7 - 6%
8 - 7%
9 - 8%
10 - >
8%
0 - negative
1 - 1 to 4%
2 - 5 to 9%
3 - 10 to 14%
4 - 15 to 19%
5 - 20 to 24%
6 - 25 to 29%
7 - 30 to 34%
8 - 35 to 40%
9 - 41 to 50%
10 - > 50%
Leased
0 - 1% or neg
1 - 2%
2 - 3%
3 - 4%
4 - 5%
5 - 6%
6 - 7%
7 - 8%
8 - 9 - 10%
9 - >10%
10 - > 12%
3
Repayment Capacity & Coverage Margin
Red
(0-4)
Yellow (5-8)
Green (9-10)
Repayment Capacity
$ 50,000 (net income)
+ 20,000 (non-farm rev.)
70,000
+ 30,000 (dep & int.)
100,000
- 40,000 (family withdrawals)
$ 60,000 (capacity available)
- 40,000 (int & prin. pmt.)
$20,000 (coverage margin)
Use 3-year average
f or less variation.
Capacity Available divided by
Interest & Principal Payment
equals Coverage Ratio
Coverage: $60,000
$40,000 =150%
Ratio
0 - < 100%
1 - 100 to 109%
2 - 110 to 114%
3 - 115 to 119%
4 - 120 to 124%
5 - 125 to 134%
6 - 135 to 149%
7 - 150 to 174%
8 - 175 to 199%
9 - 200 to 249%
10 - > 250%
Operating Expense/Revenue
Operating Expenses (excluding interest & depreciation) / Gross Revenue
Red (0-4)
Yellow (5-8)
Green (9-10)
Operating Expense: $370,000
$450,000 =82%
Gross Revenue:
0 - >90%
1 - 89%
2 - 85 to 88%
3 - 81 to 84%
4 - 80%
5 - 77 to 79%
6 - 73 to 76%
7 - 71 to 73%
8 - 70%
9 - 65 to 69%
10 - < 65%
Signs of a Dairy Business in Difficulty
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account payables / supplier credits > 10% of revenue
constant refinancing of operating loans
not covering variable cost of production- more than six
months
not covering total cost of production- more than eighteen
months
annual loss of earned net worth more than 10% of total
net worth
operating expense to revenue ratio (excluding interest
and depreciation) over 85%
interest paid revenue ratio over 15% of revenue
percent equity under 30%
credit scores under 650
have more than five different sources of credit on
balance sheet
Financial Profits
Diagnosis Worksheet
Problem
Low Profit Margin
Low ROA
Symptoms
Low
ROA
Causes
Solution/ Treatment
Poor
buying
marketing
Poor efficiency
Poor strategy
Poor execution
Murphy’s Law
Business
Poor
Risk
Refinancing
Lack
of planning
of execution
Growth
High mgmt. fee
Reduce
Increasing
Lack
Increase
operating debt
payables
plan
mgmt. plan
Marketing plan
Purchasing plan
Know your costs
Poor credit score
Rejected
credit
Higher insurance rates
Not
paying bills on time
Too much debt
Budget
Slow capital turnover
Below
High
asset values
Low revenue
Sell
Low liquidity
Poor
Using
short term funds/profits to fund long
term assets
Poor debt structure
Build
Rapid
Slower
average to
peers
Low Profits
Poor
High financial leverage
industry
working capital to revenue
current ratio
Missed
payments
Rejected credit
Personal stress
High levels of debt compared to
peers
aggressive growth
Beginning producers
Murphy’s Law
overhead
margin thru efficiency or growth
family & home expenses
Seek counsel in improving
the credit report
fixed assets
Sell unneeded or unproductive assets
Sell leased fixed assets
Machinery & equipment budgets per unit
an annual working capital reserve
margin
Refinance
Pay income taxes &
deferred taxes
growth
Allocate profits
Reduce liabilities rather than increase
assets
Capital stock infusion
Management
Diagnosis Worksheet
Problem
Symptoms
Causes
Solution/ Treatment
Management & Labor
Poor
communications
Labor turnover
Unproductive labor
High labor cost
Over scheduled
Poor
scheduling
Lack of planning
Doing vs. managing
Job
Long term transition
planning
No
estate plan
No wills
No mgt. transitions
 Failure to train next generation
Poor profits
Last minute corrections
Time
management
Lack size and scope of business
Philosophy of generations
Thunder stage comfort
3-year
Environmental ,
Technology &
Sustainability
Non
compliance
Loss of efficiency &
sustainability
Miss match of resources to
mode of operations
Challenges with public
Lack
of understanding of rules
Lack of understanding of technology or
sustainability
Independent vs. interdependent
Lack of understanding of consumer
and public
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Marketing Risk
Management
Home
Lack
Know
Failure
Lack
Plan
run hitter
to hit tops & bottoms of
the market
Failed before
Too complex
of time
of understanding
Failure to know costs
No strategy
No time table for execution
responsibilities
Delegation
Training
DISC personality profile
Salary / perks
Meetings
Hire facilitator
rule (away from business)
Hire for your weaknesses
6 year rule
Hire facilitator
Business plan
Exit plan
-6 hours of training per week
Records & documentation
Waste & nutrient management plan
Time allocation
cost
Strategy
Execution
Risk
mitigation
Advisor
Turnaround Strategies
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divide cost of production
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earned net worth vs. appreciated net worth strategy
monthly & quarterly variance analysis
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actual
projected
year over year
macro / micro
quick victories to build upon
meeting management
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variable
fixed
total cost
partners, spouses, lenders
agendas
minutes
assignments and to do lists
focus on larger costs
SWOT analysis
prioritization of goals
business planning, execution, and monitoring