Your college roommate and longtime golf partner asks you at the 19th hole, "So, Ace, you're a big 'investor' in your family's farm business…how's that going?" Without hesitation, you quickly respond, "Great...we just had our annual partners meeting. Partners, spouses and even some of the kids and grandkids attended. Our CFO, Rolf, presented the financial results and it looks like we've come through another great year.
"We instituted a really cool performance analysis process three years ago that started tracking cost centers, profit centers and linkages between strategic enhancements and performance results. Rolf calls it 'managerial accounting.' We've been experimenting with the DuPont Model to visually see how strategic enhancements are impacting ROE.
"Our five year annualized revenue growth at 7% is right in line with our goal for strategic growth. Our equipment sharing joint venture allowed us to liquidate non-essential assets without sacrificing income. Sales growth plus improved asset utilization increased our asset turnover ratio (ATR) from .33:1 to .45:1.
"Cost efficiencies from joining a buying group along with some value added revenue selling into a Sustainable Foods market combined to increase our Operating Profit Margin (OPM) to 16% compared to 12% the over the last five years. Rolf used the DuPont Model to illustrate how the combined impacts of increasing OPM and ATR drove ROA up to 16%, 33% higher than our previous five year average.
"Over the past 24 months we renegotiated rates on most of our long term debt and now sit with historically low interest rates, dropping our average cost of debt from 7% to 5%. About 25% of our excess net cash flow was used to pre-pay some of our higher cost debt. Despite some additional borrowings to finance a recent land purchase, we still dropped our leverage ratio from .42 to .33:1—well under our 40% target. Our lender is elated that our Debt Repayment and Capital Replacement Capacity is 40% over our annual commitments.
"Bottom line: We made $1.2 million on an accrual basis. Return on Equity came in at 17%...well above our long term 10% goal. In addition farm asset appreciation increased market value net worth by another 5%.
"Liquidity is excellent...we're sitting at a 2:1 working capital (WC) ratio; WC as a % of operating costs is 35%--well above our 25% baseline target. This positions us with a substantial cushion to withstand a substantial hit in input costs or inventory price deterioration. The extra 10% cushion over our baseline target also provides us with a $300,000 war chest to invest cash in expansion opportunities."
Your golf partner looks at you in awe. "Where did you learn to talk dirty like that? Wow, you sound like Mr. Wall Street Business Analyst! Would you take a hundred grand of my attorney earnings and invest them in your business?"
You wake up in a cold sweat. "Ugh, 5:30 already? Wow, that was a crazy dream! Gotta' get up and get ready for the dreaded family annual meeting. I hope the partners' spouses don't ask any hard questions. Maybe they won't show up. Where's that guy Rolf in the dream? Wouldn't it be cool if all that was real?
Truth is, on farms all over America, we crank out reams of reports, but no one really knows how to interpret them. It sounds simple when our accountant interprets our stuff and manages to minimize our tax bill every year. But I learned last week at a financial management seminar that measuring performance based on tax income is meaningless. Worse, we were cautioned that paying no tax may not be such a good thing, if we have high accrual income and don't even know it. We could also be passing up good marketing opportunities and creating problems in deferred tax to be reckoned with in future years.
Can you relate? Are you the 'designated CFO,' but really haven't developed skills beyond a bookkeeper? Wouldn't it be great to have a real professional annual meeting where business owners and their spouses are treated to a first class annual report and discussion about business performance?
If you feel a bit inadequate right now, join an elite club including some of America's most successful farm operations.
Defining the duties and skill set for a competent CFO is one of hottest topics I encounter in consulting engagements, workshops, and day to day conversations with successful farm operators. Facing this challenge starts with defining the "Cadillac CFO model"—what are all the things a good CFO could do to add value to the business? What are the opportunity costs of not having excellence in this position? What skills and experience would be desirable? Where can I find this expertise and what will it cost? How do qualified CFO's make professional presentations to stakeholders?
For starters you can use the above "dream narrative" as a template to conduct a professional annual meeting for your operation.
While conducting an Advanced Management Seminar for NW Farm Credit Service clients, I engaged participants in an intensive discussion about what constitutes an ideal CFO. A draft CFO job description and list of skill requirements was prepared to enable the group to benchmark their own operation's talent bank. Check out the description HERE.
One experienced CFO in the group observed, "This is three jobs—not one!" Maybe so, but no matter how large or small your operation, every farm manager has to define where this role fits into the operation and how to staff it with competence.
Back to the nightmare…it's five minutes before the dreaded annual meeting. Ace chants to the mirror to build his self-confidence, "I AM the CFO…I AM the CFO." The mirror talks back, "Yeah right, in your dreams!"
Stay tuned for creative strategies progressive farms are using to access this critical talent.
The condensed version of this article appears on p. 27D, March, 2011 issue, Farm Futures. Dick Wittman is a Farm Futures contributing editor and TEPAP (The Executive Program for Agricultural Producers) faculty member teaching Financial Management. Learn more at www.wittmanconsulting.com