The Executive Program for Agricultural Producers (TEPAP) is an excellent educational venue for those aspiring to increase their business acumen. The overall cost of the program is an investment in expanding your network, critical thinking skills and vision into the future of agriculture with thought leaders from around the world. Each year Dick Wittman, a highly respected agriculture consultant from Idaho, provides insight on management practices through his annual management audit. This year’s audit summary provided some interesting surprises.
One surprise that was very prevalent was the lack of cash flow budget preparation and comparing actual cash flows with projected numbers. Overall, half of the participants were either working on their cash flows budgets, had not completed them or reported that they did not need to complete a cash flow. Given that the businesses included in the audit have a median of $8 million in assets, $2.7 million in liabilities and median gross revenue of $2.3 million, a cash flow budget is a basic and necessary tool for business management. With larger numbers on the balance sheet, income statement and cash flow, the economics can quickly unravel with mounting losses and incorrect strategy moves. A cash flow is a great tool to map out the pathways of possibilities and outcomes.
A story from a recent producer meeting in the Midwest confirms this cash flow complacency. A baby boomer producer was critical of his agricultural lender requiring a cash flow because he was borrowing his first operating money in 15 years. He used every excuse under the sun for not doing a cash flow. The producer stated that completing a cash flow would be like throwing darts at a dartboard because of unpredictable weather, politics and trade agreements. What the producer missed was that you must make production, price and cost assumptions and test them on paper first. The first year completing a cash flow can be very intimidating. However, one can narrow down the possible outcomes if historical data is available to provide a benchmark of possibilities. An unfortunate fact was that the producer’s son was interacting and listening to his father’s comments.
Another surprise from the TEPAP management audit was that nearly 60 percent of participants were doing accrual adjusted income statements. Accrual adjusted income statements provide a true picture of farm profitability by adjusting Schedule F tax return income for changes in inventories, accounts receivable, prepaid expenses, accounts payable and accrued expenses. Many of the managers with higher business IQs are realizing the importance of accrual adjusted income statements for benchmarking and better communicating with lenders, family members, and business partners. On a side note, agricultural lenders must also understand the power of accrual adjusted income statements!
The engagement, interaction and energy of the TEPAP group was refreshing in an agriculture industry that is at the crossroads. I suggest committing to be a lifelong learner by investing your time and money to increase your network and critical thinking skills by enrolling in educational opportunities such as TEPAP.