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Even An Up-trending Cattle Market Has Challenges

Posted Jul. 1, 2004

One of the most common phrases my two children hear me say to them is "tend to business". This is usually my parting comment to them as they leave home to return to college or as we end a phone conversation. Sometimes they even say the words before I can get them out because they have heard them said so often.

What does it mean to "tend to business"? For my children it means to wash between their toes, brush their teeth, and most of all make good grades. In the world of business it carries the same pretense but pertains to different matters. We generally refer to the business side of agriculture as the "books" or the "financial" part. In many operations the wife gets "stuck" with keeping the books or maybe at the end of the year (more like January of the next) we decide that we cannot put it off any longer and get out the old shoe box.

Many of us keep the minimum amount of records to file our tax return and hopefully satisfy Uncle Sam for one more year. We are four years away from the 21st Century. To survive in that era we must "tend to business" much more frequently and with persistent dedication. Tending to business must be done for a different purpose than just to satisfy government. It must be done to provide us as farm managers with much needed information to use in making good management decisions.

In recent months because of adverse weather, weak cattle markets, high feed costs, and an assortment of other things, many of us in the business of producing grass for cattle have lost a portion of our equity. For some, sizable amounts of equity have been lost while others have been more fortunate and have lost smaller amounts. But for still others, the amount of equity loss is unknown. Sometimes we know things are not good; so, we feel it is best to not know just how bad things really are. When profits are hard to come by is when we must be astute "business" people.

At a minimum we should be preparing a net worth statement annually. If net worth is declining, then an accrual adjusted income statement can help pinpoint where the short fall is. Adequate income and expense records must be kept to develop a correct income statement. Additional information from enterprise summaries can be a real help when trying to analyze why the farm is losing money.

Simple ratios and percentages are also helpful. As an example, a business may have too much debt if the interest expense is more than 20% of total cash farm receipts. A comfortable debt load for most agricultural operations is when the interest expense is less than 15% of cash farm receipts. Exceptions exist but 15% is a good rule of thumb.

These are a few of the things that we should be doing if we are "tending to business". The last few years in agriculture have magnified the need for us to be better business managers in addition to good agricultural producers. Do not put off knowing the financial condition of the farm because you think it's bad. It is doubtful it will get any better on its own. We should strive to make grades as good as our children's.

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