This year was my 24th year of presenting at TEPAP, The Executive Program for Agricultural Producers, which was envisioned and strategized by Danny Klinefelter of Texas A&M University. This year I was greeted by both Klinefelter and Dick Wittman, the highly respected farm consultant from the Northwest, after a vigorous early morning workout. Dick Wittman was eager to share the results of the survey of best management practices of the TEPAP producers that are enumerated annually. Wittman was very concerned about the lack of practices in key proficiency areas. In the last column we discussed financial ratios and family living withdrawal procedures. Additional concerns will be covered this time.
Wittman was also very concerned that only one half of the TEPAP participants do cash flow budgets and enterprise analysis, tracking profit and cost centers. Historically, the average has been 47% and this illustrates a strategic vulnerability for producers given the economic tea leaves on the horizon.
I totally agree with him that in an environment of reduced prices and relatively high costs, the financials can quickly get out of hand if they are not analyzed and monitored. As producers look to diversify or shift enterprises, penciling out possible outcomes is critical upfront. More importantly, monitoring and examining prices and costs within the context of a marketing plan can be essential to ascertain margins or in some cases minimize losses. There are many good farm record and accounting systems available to perform this analysis, which will be critical for success.
Another area of concern pointed out in the best practices analysis was the balance sheet. Balance sheets need to be compiled on a market value and cost basis. Less than half of the producers at the TEPAP event were developing their statement in that manner. One must conduct cost and market value analysis to ascertain the deferred tax liability. Deferred taxes are a major concern, particularly on the top half of the balance sheet, relating to current assets and current liabilities. Often these assets have been expensed out in previous years and if one has no offsetting expenses, federal and state taxes can account for up to 40% of the value of the asset! Ouch!
Road Warrior Pit Stop
The median rate of return on assets of this year’s group was 7.0% with a debt to asset ratio of 28%.