BENCHMARKS FOR SUCCESS!

(a/k/a Your Business either Grows, Or You Have Woes)

Key issues to evaluate your operation, react to weaknesses and implement solutions include:

$ Proper pricing of your services

$ Selecting/firing your customers

$ Understanding your true operating costs

$ Useful report formats

$ Equipment B buy vs. lease

$ Use of ratios

ATo truly succeed in any business you must understand the past, to better forecast the future.@

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Pricing Your Services

(Profitability B still the greatest problem in agriculture today.)

Common approaches:

$ Price Freeze (Can=t lose any business)

$ Undercut your Competition (The K-Mart theory B make it up in volume)

$ COLA Rules of Thumb (The blind lead the blind)

$ Keeping up with the Jone=s (Follow the leader of your competition B

Do they know what they=re doing?)

Many factors influence the amount you should charge B equipment availability, soil conditions, topography, shape and size of field, geographical practices, type-size-age of equipment and more.

Yet it all revolves around understanding your costs (per acre, per bale, per hour, per linear foot, etc.)

It=s possible to become more profitable by either expanding B or also by downsizing B it all depends on your set-up and mix of customers.

Revelation: At times it is best to lose a customer (if indeed you are not covering your costs), meanwhile your profitable customers cannot be prioritized!

Classify your customers (A, B & C)

Dealing with Time Constraints when Time-Sensitive Crops are Involved B How to Prioritize?

< Prepaid customers are first.

< Larger jobs get priority.

< Begin with customers who are willing to start earlier.

< Pre-booked (first come, first served).

Or do you hire extra help and rent extra machinery to avoid any over-commitment?

Is it truly worth it for you to venture outside of your locality for new work? (Travel time, overtime labor costs, weather-moisture conditions, bumping of customers, etc.)

Any complaints?

$ Slow pay clients

$ Reliable help

$ Parts support (down time)

$ Communication

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Knowing Your Costs!

The Key is a RELIABLE report format.

< All statements (balance sheet, income statement, cash flows)

< Accrual vs. cash basis

< Classified balance sheet (Current vs. long-term)

< Cost basis vs. market values

< Include income tax accruals

< Normalized depreciation (vs. front-loaded for taxes)

< Personal/family costs (paid or unpaid)

< Fixed vs. variable costs

The value of the Balance Sheet is directly tied to the success of the Profit & Loss (not the other way around!)

No need to Acook the books@ for your management purposes B adjust all items for realism.

You must budget for a profit B not just to survive! (Remember why you are in business.)

Getting a handle on your costs allows you to control things:

$ Cash flow needs (Seasonability issues)

$ Adequate profits (More important for loans than asset values)

$ Labor estimates (Man-days, tractor-hours, gang-work, etc.)

$ Investigate alternatives (vs. current scenario)

- adding employees

- contract out labor

- machinery upgrades

- used vs. new assets

- timeliness of new acquisitions

- buy vs. lease

- refinancing options

- sale - lease back (sources of capital)

- new capital B internal vs. external?

Sort out the pro=s and con=s B for YOUR scenario!

(Costs vs. Benefits)

Proactive moves are always better than knee-jerk reactions!

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Ratios - Use them as a tool, but focus on the trends more so than specific figures.

(Ratio analysis = A way to extract more usable information from otherwise confusing accounts.)

C - L - A - R - P

Coverage - (How solvent are you? How reliant are you on outside money?)

Industry

Averages

$ Debt/Asset (Total Liabilities - Total Assets) 67% or less

$ Equity/Asset (Net Equity - Total Assets) 33% or more

$ Debt/Equity (Total Liabilities - Net Equity) 2 - 1

Liquidity - (Can you meet your current obligations as they come due B

without disrupting operations?)

B Current (Current assets - Current Liabilities) 1.2 or more

$ Under 1.0 is a problem for any business!

- Working Capital (Current Assets less Current Liabilities)

$ If negative, better restructure debt!

Activity - (How efficient do you use your assets and make decisions?)

Asset Turnover (Gross Sales - Average Assets) 1.7 or more

Operating Expense (Overhead - Gross Sales)

Keep at under 65%.

Depreciation Expense (Depreciation - Gross Sales) 2.3 or less

Interest Expense (Interest Expense - Gross Sales)

Net Operating Income (NFIFO - Gross Sales) * 5.2% or more

* 3.9% of sales for owner compensation

is already reflected as a normal expense.

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Repayment Capacity - (Can you repay outsider funds?)

$ Debt/Lease Coverage

(After tax income + depreciation + interest + lease costs

less family draws) - annual debt service costs.

Anything above 1.5 is good.

$ Capital Replacement Margin

After tax income + depreciation less family draws less principal paid on

current debts/leases.

Profitability - (What=s being generated from your land, labor & capital?)

* Return on Assets

(NFIFO + interest expense less normal family labor) - average assets.

* Return on Equity

(NFIFO less family labor) - average net equity 10.7% or more

* Operation Profit Margin

(NFIFO + interest expense less normal family labor) - Gross Sales

Size, diversification, family involvement & more will skew the results B but the trends still matter!

Conclusion:

Financial statements are a management tool to take new actions to succeed. Don=t generalize them too much, review them monthly and run your business....rather than it running you!