Unleashing the Power In Your Clients Numbers A Financial Toolbox To Business Success April 13 & 15, 2010 Rick Hermonot Farm Business Consultant Farm Credit.

Unleashing the PowerIn Your Clients Numbers

A Financial ToolboxTo Business Success

April 13 & 15, 2010Rick Hermonot

Farm Business ConsultantFarm Credit East, ACA

The Five FivesThe Five Fives

Five Keys to Effective FocusFive Line Income StatementFive Year AveragesFive Keys to Profit“DIRTI 5”

Five Keys to Effective FocusFive Keys to Effective Focus

VisionPrioritiesHard WorkDisciplinePassion

Five Keys to Effective FocusFive Keys to Effective Focus

Vision: (lifestyle focus)

“Our mission is to supply the high quality of life to our family that we

believe a farm can offer”

Five Keys to Effective FocusFive Keys to Effective Focus

Vision: (entrepreneurial focus)

“Our mission is

to develop our farm

into our primary product”

Five Keys to Effective FocusFive Keys to Effective Focus

Priorities:

“We will develop a continuously improved systems approach that

maximizes the efficiency

of our farm”

Five Keys to Effective FocusFive Keys to Effective Focus

Priorities:

“We will maintain an organizational chart that defines our strong future

through management continuity and succession”

Five Keys to Effective FocusFive Keys to Effective Focus

Once you have your “destination” and “rules of the road” defined….

Focus on getting there with:

Hard Work (we do this too well)

Passion (burnout?)

Discipline (toughest part)

Five Line Income StatementFive Line Income Statement

Gross Sales 100%Less COGS 50%Equals Gross Margin 50%Less Overhead 35%Equals Net Margin 15%

Five Year AveragesFive Year Averages

2005 - $16.132006 - $13.812007 - $20.522008 - $19.592009 - $13.75 (estimated)

Five Year Average = $16.76/CWT(source: Northeast Dairy Farm Summary)

Northeast Dairy Farm SummaryNortheast Dairy Farm Summary

Milk Sales

COGS

Gross Margin

Overhead

Net Margin

NCOP

Per CWT

$17.48

$ 8.57

$ 8.91

$ 5.13

$ 3.78

$13.71

% of Sales

100%

49%

51%

29%

22%

78%

Per CWT

$17.34

$ 11.81

$ 5.53

$ 6.41

($ .87)

$18.22

% of Sales

100%

68%

32%

37%

(5%)

105%

Five-Year Averages (2004-2008)

Top 25% Bottom 25%

Five Keys to ProfitFive Keys to Profit

Gross SalesEfficiencyCapacityDairy HusbandryCost Control

Gross SalesGross Sales

Production X PriceMeasured by milk sales per cow

EfficiencyEfficiency

Effectiveness at converting raw materials into finished product

Measured by your Gross Margin–Per Cow–Per CWT–% of Milk Sales

CapacityCapacity

Effectiveness of your use of facilities and equipment

Measured by Overhead–Per Cow–Per CWT–% of Milk Sales

Dairy HusbandryDairy Husbandry

Industry SkillsMeasured by Internal Herd Growth

–Cull rate–AAC–DOA–Heifer Non-Completion–Calving Interval

Cost ControlCost Control

Per Unit Comparisons to Benchmarks

Measured by Net Cost of Production

““DIRTI” FiveDIRTI” Five

DepreciationInterestRepairsTaxesInsurance

Percent “DIRTI” FivePercent “DIRTI” Five

For example: $400,000 Whopper ChopperDepreciation = 20% Interest = 6%Repairs = 5%Taxes = 2% Insurance = 2%Total = 35%

$400,000 X 35% = $140,000 per year OH

FOR EXAMPLE:FOR EXAMPLE:How much is a cow worth to me?How much is a cow worth to me?

Dairy husbandry performance (production & cull rate) impacts your investment value.

Level of efficiency (Gross Margin) impacts your investment value.

The more efficiently you are able to convert variable inputs into milk, the more you can justify paying for a cow.

Will we use this year’s toolbox stats or multi-year stats and what is the difference?

Step 1:Step 1:Overhead (“DIRTI 5”) and profit?Overhead (“DIRTI 5”) and profit?

Top 25 Bottom 25 Depreciation (Cull Rate) 32% 36% Interest Rate 6% 7% Repairs 0% 0% Taxes 0% 0% Insurance 1% 1%

TOTAL OVERHEAD 39% 44%

Profit Expectation (as %ROA) 33% 33%

Total 72% 77%

Step 2: Calculate her Maximum Step 2: Calculate her Maximum Investment Value on Your FarmInvestment Value on Your Farm

Milk Sold/Cow

Milk Price (2009)

Sales/Cow

% Gross Margin (5-yr avg.)

Gross Margin

Divided by % “DIRTI 5” & Profit

Equals Max. Investment Value

Top 25%

23,000

13.85

$3,186

31%

$978

72%

$1,358

Bottom 25%

20,000

13.60

$2,720

17%

$462

77%

$600

Using the toolbox, we can quickly determine a farm’s “investment value” of a cow. How does that compare to the current market price of a cow?

As service providers, As service providers, what can we do?what can we do?

Ask Questions:– What vision and priorities do you have for your farm? – What is your percent gross margin?– What is your net cost of production?– What are these numbers using five year averages?– What needs to happen to make that investment be

profitable on your farm? (Use the

As service providers, As service providers, what can we do?what can we do?

Encourage use of “advisory teams” and offer to participate

More and more farms are willing to share at least the numbers used in this toolbox with all members of their advisory team.

SummarySummary

Do you have vision and priorities?

What strategic destination are you focusing on:– With Hard work

– With Passion

– With Discipline

Use the financial toolbox to help with building the roadmap that directs your business to it’s destination

SummarySummary

Look at your five-line income statementConsider five-year averages in volatile marketsConsider the five keys to profitabilityUnderstand the “DIRTI Five”

SummarySummary

As service providers we can all help

to lead our customers to:

Become proactive profit makers

rather than reactive profit takers!

DiscussionDiscussion

Rick HermonotRick HermonotFarm Business ConsultantFarm Business Consultant

Farm Credit East, ACAFarm Credit East, ACA800-327-6785800-327-6785