Finding the “Right” Financial Advisor

The most common question The Retiring Farmer™ receives from the 200 – 300 farm families who attend our seminars annually is “how do we know if you are the advisor we should work with?”  A fair question when there are more than 100,000 financial advisors in Canada all offering solutions to complex problems.  Most will provide investment advice with limited planning but fall short at implementation or execution.  The reason for this is that farm succession, exit or retirement planning is remarkably complex.  It requires a team of professional advisors all with distinctive specialties and backgrounds.

These complexities that require multiple professional disciplines to address is the reason why The Retiring Farmer™ has evolved from a firm of professional accountants to an office of professional advisors coordinating the accounting, taxation, legal, investment, insurance and estate expertise to successfully transition the family farm.

My response to the question as to how to know whether myself or any other advisor is the professional to assist with planning any type of farm transition, is to first ask if the farmer agrees that their farm lives are complex requiring multiple areas of expertise to address.  I have never met a farmer who consider their affairs other than complex.  I then move on to explaining the career of the 100,000 independent financial professionals in Canada.

Independent Financial Professionals in Canada

Being an independent financial professional implies:

  1. A commitment to a profession
  2. An element of planning
  3. A focus on the future
  4. Experience and expertise in a specific specialty

So far, so good.  All financial advisors will agree the core of their profession covers these four points.

The Problem

However, looking beyond the business card, the following will be discovered:

  1. 95% of independent financial services professionals are one-owner practices
  2. Almost all this 95% are building their businesses borrowing tools from historically successful, but vastly different business models such as an outdated “wirehouse” full service brokerage offering research, investment advice and order execution. Today the term “wirehouse” has been updated to “financial institution” referring to large institutional money management firms and banks.
  3. Revenue-sharing, commission-splitting and other eat-what-you-kill compensation models govern the relationship between the financial institution and the independent financial professional.

Result:

  • The relationship between the financial institution and independent financial professional ends upon the retirement or death of the advisor. At this time the relationship with the farm family also ends although a remote connection with a financial institution will remain.
  • The financial advisor’s role reverts to a job that focuses on the sale of financial products as that is how the advisor pays his bills and how the advisor/financial institution relationship is modeled.
  • The farm family’s wealth management has a lifetime matching that of the advisor’s career.
  • 99% of today’s independent financial services and advisory practices will not survive their founder’s career. When the advisor leaves, for whatever reason, the advisor/farmer relationship is over.
  • It is impossible for the advisor to focus on meaningful planning and advice as to do so:
    1. Requires time for which the current advisor compensation model does not support
    2. Requires the skill set of multiple experts as the complexities of law, accounting, taxation, investment management etc. make it impossible for any one advisor to be proficient at
    3. Regulatory bodies and fiduciary responsibilities require a segregation of duties amount two or more advisors

The Solution

Much of the problems faced by the independent financial professional trying his best to truly provide the advice sought by the retiring farmer could be solved, or at least substantially mitigated, if the independent financial advisor profession in Canada was one of independent financial “firms”.

A firm:

  1. Is an established business with a strong foundation of ownership and leadership recruiting and retaining the very best people in the industry.
  2. A firm has multiple generations of ownership with key staff visioning the right to become partners and invest in the firm.
  3. The compensation model is a bottom-up approach where firm earnings is the measure of success, not individual staff commission or revenue-sharing is the focus.
  4. Continuity agreements are the norm giving the firm the ability to weather the death or early retirement of its current leadership group over time.
  5. Collaboration among owners and staff is standard procedure
  6. The goal is not to have the best advisory professionals but rather the best advisory firm
  7. Recognizes senior, professional advisors have gathered experience over time; their role is to not only apply their experience for the advantage of clients but to also pass their knowledge down to more junior advisors to ensure clients interests are maintained beyond the career of the senior advisor

About the Author: 

Donavon K. Tofin CPA, CA, CFP

The Retiring Farmer Wealth Management Process  & Assante Financial Management Ltd.

Don Tofin is a Senior Financial Advisor with Assante Financial Management Ltd. Please contact him and his team at 1-877-996-8696 to discuss your particular circumstances prior to acting on the information above.

 

What Happens to Me, if Something Happens to You?

Retiring farmers may very well have worked through their own retirement plan with the guidance of a financial advisor.  Congratulations, you are one of the few to do so!

However, in my experience there is one question these farmers will ask their advisor but typically never get a clear answer.  That is, “What happens to me if something happens to you?”  This is a very valid question that deserves not only a clear answer but also a copy of your advisor’s continuity plan.  If your advisor can’t provide you with either of these – then it is time to start asking more questions and exploring your options.

If you have a financial advisor, it’s a fair assumption that this person is also considering (or at least planning) for retirement.  You need to understand how their plan will impact you; as your retirement strategy has been developed for your lifetime (which could either be longer or shorter than your advisors).

Candidly, if your financial advisor is an independent advisor (95% of Canadian financial advisors are) it is unlikely a continuity plan exits.

In this case, you need to:
  • Understand the impending transition from your current advisor to another.
    •  Ask now about your advisor’s retirement date
    • Ask how he or she specifically intends to handle your account throughout and after the remainder of his or her career
  • Ask yourself if you want to stay with your current advisor or:
    • Move to someone with a continuity plan that is a better match for you
    • Move to a “firm” of multiple advisors who share responsibility for managing your affairs and has a continuity plan contemplating the retirement of your primary advisor
  • Do you want your current advisor to handpick his successor at his future retirement date?
  • How quickly would a successor advisor be able to become familiar with your affairs?
  • Look for an upgrade.
    • You may be satisfied with your current advisor but there is always room for improvement. Your advisor will appreciate your input on how his or her services could be improved.
    • Take this opportunity to reset your expectations and clarify how your needs are changing.
  • Ask questions. You want to know all about your options long before you are notified of a transition from or retirement of your advisor.

Remember, your financial advisor will at sometime retire or slowdown.  Advisors’ also must face mortality and/or health and family issues that will affect their ability to continue providing the services you have engaged them to provide to you.

This means you MUST TAKE CHARGE OF YOUR RELATIONSHIP with your advisors and that you should always feel free to change this relationship to best match the services you want.  To do this you deserve answers from your professional advisors as to how their personal and business plans will affect you and your family.  After all, you sought out a relationship with an advisor to address your and your families needs that will likely cover a period extending well beyond the career of your primary advisor.


About the Author: 

Donavon K. Tofin CPA, CA, CFP

The Retiring Farmer Wealth Management Process  & Assante Financial Management Ltd.

Don Tofin is a Senior Financial Advisor with Assante Financial Management Ltd. Please contact him and his team at 1-877-996-8696 to discuss your particular circumstances prior to acting on the information above.

 

You’re Only As Good As…

I had the Cowboys-Packers game on in the background this past weekend when I heard the comment from one of the broadcasters: “Your passing game is only as good as your 3rd receiver.” The 3rd received being the “weakest,” this suggests that even if you have the #1 receiver in the entire league along with the last and second to last receiver, your offence will suck. Interesting theory. How does this apply to your farm?

  1. Production: all the nitrogen in the world won’t grow you a crop if the plants are lacking other nutrients. Even something as overlooked (but gaining more attention) as micro-nutrients, a crop will grow and produce, but will it be the winner you need?
  2. Marketing: “If all you have is a hammer, everything looks like a nail.” Certainly we have progressed beyond selling our entire crop into a cash market; most producers now are using forward pricing contracts. Without them, even grain delivery is left to chance (many grain buyers won’t accept deliveries that haven’t been contracted in advance for that time period.) What about hedging accounts, foreign exchange risk, direct shipping, cross border delivery, etc? Forward pricing contracts today are the minimum, kind of like hauling a load to town and taking the price of the day was the minimum practice 30 years ago…
  3. Human Resources: “Hire for attitude, train for skill.” If you’ve done the opposite (hired for skill,) you’ve likely “fired for attitude.” Your team is only as good as its weakest link. While we can fire a non-arm’s length employee for cause, it is a lot tougher to fire a parent or sibling! Often times, we are not utilizing our team in the best way; many people who might not seem to “fit” can be redeployed, or re-purposed, in a manner or task that allows them to flourish. Training, not only your team for the work you expect of them, but for yourself to be a more effective supervisor, is indescribably critical to success.
  4. Management: “You don’t know what you don’t know…” I find myself spending time with some very successful farmers who don’t have a basic understanding of their financial statements, nor the financial ramifications of many business decisions. They are happy to garner the knowledge and happier still to be able to use that knowledge to improve profits and protect cashflow. Others do not have a game plan, choosing instead to focus solely on operating their farm, and making financial decisions reactively instead of proactively. The reduced tension that can be seen when they understand the benefits of strategy is often quite remarkable.

It’s easy to see how a small oversight in one area of your business, whether it be production, marketing, human resources, or business management, can have significant impact on your financial results. An oversight can be excusable, but negligence cannot. It is up to you as the CEO of your business to identify your weaknesses, evaluate their potential impact, and establish strategy to mitigate the risk. Help is a phone call away if you are not confident in tackling this important management function.

Direct Questions

What are you doing to identify weaknesses in all aspects of your business?

How to you engage in risk mitigation strategies?

What do you do with the weakest link?

From the Home Quarter

In football, players recognize that they are only as good as their last game. There is always someone else who is eager for a chance to take the position on the roster of a player who hasn’t performed to expectations. Reputation will only take a professional athlete so far, they still have to perform. Same can be said for your business. Your reputation with your creditors and vendors is important, and can get you through an occasional “difficult time,” but at the end of the day, they still want to be paid. It’s your performance, not your reputation, that will get them paid.

A chain is only as strong as its weakest link…
Your production system is a chain.
Your marketing practice is a chain.
Your HR approach is a chain.
Your management strategy and execution is a chain.

Your farm’s success is linked by production, marketing, HR, and management. Ignoring the trouble spots makes you the weakest link…

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

Expansion Plans

Harry* is one of those subtle role models that every farm community has. While no one treats him like royalty, nor does he act like it, everyone knows Harry is highly respected, not just here at home, but in the agriculture community across the entire province. He has quietly, and diplomatically, build his own little empire.

Most people wonder how Harry has done it. True, they are a little envious, but they cannot understand how Harry could be so well off compared to most others in the area when he gets the same weather, he farms similar soil, and grows similar crops as everyone else. Harry’s yard is always neat and tidy, his buildings are clean and kept up, and his “not new, but not old” line of equipment shines like a new dime despite some of it being over ten years old. There are three new 60,000 bushel bins going up this spring, and a concrete pad has been poured which, if you believe what you hear on coffee-row, is for a new grain cleaner.

Harry has expanded his crop acres a little at a time, never making a big splash in the market. Neighbors usually come to him because they know he is a character guy: he always pays his rent on time, he respects their land, and he keeps them informed. Through rent and purchase, Harry has taken the 1,200 acres he inherited from his parents in 1984 and has grown it to 8,600 acres today. He owns about 6,000ac and rents the remaining 2,600.

Harry heeded some sage advice when he started out. He was told that production is only part of the equation; the haughtily delivered quip stuck with him through the years, “Farmers don’t get paid for growing it, they get paid for selling it!” While production is incredibly important in the commodity business, Harry learned early that in the commodity business you have to produce as much as possible as cheaply as possible. Efficiency of finances and expenses, not just operations, would be key.

Harry has worked diligently to keep his costs down, especially equipment. Despite easy credit and low interest rates readily available, Harry has stuck to his guns when solicited with discounts and deals on newer equipment. He has drilled down on every operation on his farm, and can tell you quite accurately what his entire cost is per acre, including labor and depreciation, for seeding, spraying, harvesting, and trucking. He knows off the top of his head when he is better off hiring custom work or doing it himself by comparing the custom rate he is quoted against what he knows are his “all in” costs.

Harry recognizes that he cannot be an expert at everything. He knows he is an operations expert because he has managed his costs to their lowest reasonable point and because he manages his crew and makes all logistical decisions to get 8,600 acres seeded and harvested with greater efficiency every year. Harry knows he is not a human resources expert, so he’s taken coaching in order to improve his employee relations; he knows he is not an expert in international grain markets, so he’s hired an advisor and subscribed to market intelligence services, he knows he’s not a financial expert so he heeds his banker’s advice and has even hired a financial and capital expert to increase his confidence in the decisions he wants to make.

Harry has been thinking about expanding the farm for a couple years now. His two children, now in their early twenties, have shown a real penchant for the farm. After taking his advice to work somewhere else (either in or outside of agriculture) and to get a post-secondary education, Harry’s children have solidified their dedication to the family farm, bringing with them their outside work experience and their formal education: one with a Bachelor’s of Science in Agriculture, the other with a Bachelor’s of Commerce. The kids get along fine, and work very well together. Their differences in interests and education will bring a real synergy to the passion they share for the farm. Harry is incredibly proud.

Two of Harry’s neighbors have been thinking about retiring for a number of years now. Being the proactive strategist that he is, Harry has been discussing the possibility of expanding the farm with his advisors. Today, Harry is supremely confident that he knows exactly what upgrades need to be made to equipment and labor, and how it would affect his balance sheet, income statement, and cash flow, should he be successful in taking on more acres.

When Harry heard that Fred’s effort to rent the land of both neighbors came up short, he was honored when those neighbors came to Harry and asked him to rent their land. Having been planning for this opportunity for almost two years, Harry has been aligning his resources and as such he has abundant working capital to take on about 2,000 acres from each of his two new land partners. After having coffee with each neighbor for a couple hours, Harry has acquired the knowledge he needs and now knows what he will seed on which field. He calls his supplier to inform them of the additions to his original corp plan and procures the required inputs. Despite it being early April, Harry gets everything in place smoothly. He knows full well what a stressful mess this new land would be if he just tried to pull the trigger without planning for how to get it done.

To Plan for Prosperity

If the story above sounds too idyllic, please know that Harry’s last name is not “Perfect” (Get it? He’s not “Mr. Perfect”!) Harry hasn’t done everything right, and he doesn’t do everything right on a daily basis. What he has done different, what he does so well is that “he knows what he knows, and he knows what he doesn’t know,” and as such, he has equipped himself with the right help and advice to fill the gap. What might be the most important thing that Harry does well is that he makes a plan, and uses great discipline to not allow temptation to lead his plans astray. He avoids the temptation to increase his costs from high priced equipment or fancy yield-exploding elixirs. He maintains his strategy of keeping costs down, and protecting cash flow & working capital as the life-blood of his business that it is.

If you asked Harry, he’d admit that there are many decision he would have made differently from knowing what he knows now. But, being strategic and disciplined has allowed Harry to grow his business, not only in size and scale, but in efficiency, profitability, confidence, comfort, and lifestyle.


*Harry is a fictional character. The story portrayed above is fictional. Any similarity to a real person or situation is purely coincidental.

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

Farm Acronym Challange: ROI & ROA

ROI (return on investment) is a metric I lean on heavily when working with clients to illustrate an expectation of profit. Each farm deploys (what feels like) unprecedented volumes of capital every year in an effort to grow a crop; there should be an expectation of profit for doing so, and I expect my clients to demand an ROI that reflects the risk they take. Accepting lesser returns is insufficient and could be realized with less risk by deploying said capital elsewhere.

We can break down ROI by measuring a return on various aspects: crop inputs, investment in equipment, annual cash costs, etc. Some of the many options against which we can measure ROI are highly useful, others less so. We try to decide which metrics to measure based on which gives us the most useful information. Of course, the ability to have an accurate measurement of ROI depends entirely on quality information and your ability to collect it.

ROA (return on assets) is a measurement I will be using more in the future than I have in the past. More and more I am finding that there are excess assets on farms, especially equipment, that are using good capital yet providing an inadequate return.  Here is what I mean.

ROA is defined as a company’s net earnings relative to total assets. By dividing net earnings by total assets, we see how efficient management is at using assets to generate profit. A company that generates $1,000,000 in net earnings on $5,000,000 in assets has a 20% ROA. A similar company generating $1,000,000 profits with $10,000,000 in assets has a 10% ROA. It’s simple math. And the question begs: if you had invested $10,000,000 elsewhere, could you get better than a 10% return on those assets?

Before the argument about land values is thrown out there, let’s just curb it right away. Yes, ROA can be manipulated (as can ROE – return on equity) by owning fewer assets. Banks do it all the time: they sell their owned real estate such as stand alone bank branches and ivory office towers in order to lower their total assets, thereby making their profitability (when measured as ROA) look fantastic.

Direct Questions

How do you measure the effectiveness of your investment in assets, specifically equipment?

Are you over-invested or under-invested in equipment? What evaluation methods do you use to validate your position?

If you were to invest your capital elsewhere, what return would you expect? What return do you expect from your farm? Is there a difference? Why?

 

Today, let’s focus on the asset that gets much love: farm equipment.

How would we measure ROA when it comes to farm equipment? I prefer to use Fair Market Value (FMV) because that figure represents both what it would cost you to acquire said asset and what you could reap should you sell said asset; it is arguably the asset’s intrinsic value. Online searches and blue book values are great ways to validate FMV. I summarize it as “when the auctioneer’s gavel drops, what would you get for that piece of equipment?”

Focusing on ROA as it pertains to equipment only, and excluding land, levels the playing field so to speak. All things being equal, this approach will clarify which farm management team is efficient with how it invests in equipment, and which is not.

 

From the Home Quarter

When calculating ROA, consider multiple criteria: all assets (land, buildings, equipment;) land and equipment only; equipment only. The ROA will obviously be much lower when including more assets, but don’t let that sway you into selling land to improve your ROA. Land ownership has been, and will continue to be, the anchor of a farm’s wealth.

What is a target ROA? The jury is still out. Simply put, there isn’t a large enough sample with adequate accurate information available to draw from.

So let’s find out!

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

Dashboard

What’s on your dashboard?

If you’re thinking about your trucks & tractors, the answer might be anything from gloves to a coffee mug to a clip for the rifle.

What I mean is “what are you watching on your dashboard?”

  • Oil pressure?
  • Coolant temperature?
  • Exhaust temperature?
  • Seeding Rate?

All of these are important, and no doubt they all get significant amounts of your attention.

What are the consequences if any of these go into the RED?

What about your BUSINESS dashboard?
  • Working Capital?
  • Debt:Asset or Debt:Equity Ratio?
  • Unit Cost of Production?
  • Gross Margin?

What are the consequences if any of these go into the RED?

 

Which set of gauges get most of your attention? A failure on which set would be catastrophic?

When I was still farming, the first day of seeding in 2014 had one of these go into the red, only I didn’t know it because the gauge failed. In short, the tractor needed an engine overhaul because of severe overheating. Did it break the farm? No. Did it make seeding extra costly, and take longer than otherwise would? Yes. Did we survive? You betcha.

To Plan for Prosperity

We tend to do what we do best, what we like to do, and what we understand. Understanding the safe range, the limits, and the consequences of oil pressure or coolant temperature running into the red is something that is ingrained into us as youngsters who were imploring that we be able to run equipment. Yet, if no one teaches business owners the safe range, the limits, and the consequences of running their working capital or gross margin “into the red,” how will they know what to watch, or to watch at all?

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

Easy, Efficient, Effective or Expensive?

Let’s get it right out of the way first: I am not an agronomist.

I do, however, have a solid base of understanding relating to agronomy. With tongue in cheek I like to say, “I know enough to be dangerous.” Nonetheless, I took great pride in the significant attention to detail I employed while being in charge of seeding when still part of the farm. I carefully measured TKW (thousand kernel weight) and calculated seed rates accordingly. I was diligent about what fertilizer, and volume of fertilizer went into the seed row (we only had a single shoot drill.) I always slowed down to 4mph or less when seeding canola and ensured to reduce the wind speed to the lowest possible rate to minimize the risk of canola seed coat damage.

I always had a long season in spring from having to cover the whole farm twice: once with a fertilizer blend to be banded, (all of the N and whatever PKS that couldn’t go in the seed row) usually at least 2″ deep; the second pass was with seed and an appropriate PKS blend that could be be in the seed row. It’s just what I did to respect what I’d learned about the importance of fertilizer rate and placement. It took more time in applying, hauling home, storing, etc. It created operational challenges during application (it seems there were never enough trucks and augers available.) It took more time to set the drill for the correct application rate. All of that didn’t matter to me because I only had once chance to get the crop in the ground and fertilizer properly applied (at least at that time, the equipment we had made it so that all fert was applied in spring) and I wasn’t going to leave anything to chance that I could easily control.

The key point in fertilizer management is “The 4 R’s.” Right source, right rate, right place, and right time of fertilizer application make for the best use of your investment. So why over the last number of years have we seen such a boom in spreading fertilizer on top of the soil?

This article was recently published by FCC. There is no ambiguity as to the best and most effective way to apply phosphorus. I’ll ask again, “What’s with the shortcuts?”

I know the answer: time. There isn’t time to incorporate adequate volumes of fertilizer into the soil. We can use a spinner that has a 100′ spread at 10mph (or more;) this permits more fertilizer to be applied in a shorter amount of time, and it permits fewer stops to fill the drill during seeding…all of it saving precious time. I get it.

But where is the trade off? Have The 4 R’s of Fertility been tossed aside completely? Where is the balance?

Casting aside the proven science of the 4 R’s in order to save time by broadcasting is easy and efficient, but is it effective? I suppose that depends on what effectiveness you are trying to accomplish. I’m suggesting effectiveness of the fertilizer you’ve paid dearly for.

Direct Questions

When making important management decisions like fertility, what methods are you employing to determine your best strategy?

Where is your balance between ease, efficiency, effectiveness, and expense when making critical management decisions?

How has your Unit Cost of Production projection changed if you decide to accept only 80-90% effectiveness from your fertility program?

From the Home Quarter

What is easy might seem efficient, we might believe it is effective, but it is most likely expensive. Historically, decisions were made with the goal of minimizing expense with little else given to consider ease, efficiency, or effectiveness. Management decisions that do not provide adequate emphasis on effectiveness will likely see higher expenses. Your focus with your agronomy must be to produce at the lowest Unit Cost of Production possible on your farm. Choosing a fertilizer application method that places more emphasis on that which is easy versus that which is most effective is likely to create a situation that is expensive. Management decisions that focus heavily on one aspect to the detriment of the others rarely achieve results that meet or exceed expectations.

Introducing the Growing Farm Profits 4E Management System™. Details to follow.

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

If You Are Happy Just Floating Along, Go Fishing!

I wasn’t trying to be funny when I quipped what is the title of this commentary while in a meeting with an excellent banker and the exciting young prospective client he introduced me to. It just sort of rolled off my tongue in the moment. It was a hit; both men enjoy fishing.

The premise of that particular conversation was profit. In my work as a lender and a consultant, I venture to say I’ve looked at hundreds and hundreds, maybe thousands, of financial statements. Those statements have told a vast array of stories, from the depths of successive and devastating financial losses to the opposite end of the spectrum with profits that make you wonder if your’re drunk when reading it. Many hang around the middle, somewhere south of an impressive profit , but still north of a fundamentally adverse loss. It is sad to discover than many farmers create this break-even situation by choice.

The choice is often centered around tax and the great lengths taken to avoid payment of income tax. The list is long and arduous; it won’t be found here.

Let’s put this in real terms. Most farms I’ve analyzed range from approximately $250/acre on the low side to $400/acre (or even higher) as the figure that represents whole farm cash costs. That is the amount of cash required to operate the entire farm for one full year. Now, I got my math learnin’ in a small town school, long before calculators were allowed in the classroom, back when cutting edge computer technology was the Commodore Vic 20, but math is math, so if we consider a 10,000ac farm with $400/ac costs, we’re looking at $4,000,000…each year!

Granted, there aren’t too many 10,000ac farmers who are happy to break-even each year, but they are out there. At the end of the day, I don’t care if you’re 400 acres or 140,000 acres, expect a profit!

Farmers take far too much risk each year to not expect a profit. If you walked $4,000,000 into any bank, could you get a better return than 0%? Of course! You could get a risk free rate in GICs that would probably approach 3% (or maybe 4%…any bankers reading this what to comment???) So I ask why, if you could get a risk free rate of 3% or 4%, why would you take a sh_t-ton of risk to accept a 3% or 4% return farming?

Direct Questions

Investing $4,000,000 in GICs and getting a risk-free 3% annual return grosses $120,000 per year before tax. Could you live on that?

Land owners/investors demand a rent that mimics 5% return on the value of the land. If you invested $4,000,000 in land, you could earn upwards of $200,000 gross in rent, plus enjoy the long term capital appreciation…could you live on that?

What is an acceptable return to demand from your business…based on the amount of risk you take each year?

From the Home Quarter

Farming is not for the faint of heart. Farmers accept the financial risks that come with farming because they understand them. The opposite if often true of stock markets: farmers aren’t typically investors in equity markets because generally they don’t fully understand the risks. But savvy stock investors who do understand the risks still expect a positive return, they aren’t happy “just getting by.”

If you’re happy just floating along, go fishing.

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

Hide & Seek: How Perfection Kills Success

While on holidays in early July, I watched our group of 3-5 year olds playing hide and seek. They were having a ball because each of them is learning to count so being the seeker was their chance to show everyone how high they could count, because the thrill of the chase is invigorating, and because the risk of getting caught (found) adds an element of excitement.

What I found consistent while watching these children play was how all of them, no matter how long the “seeker” counted, kept moving from one hiding spot to another. Yes, these are small kids, aged 3 to 5; yes, they are too young to grasp the strategic concept of the game; yes, they were actually hoping to get found. It appeared as though they would hide, then identify a spot that looked better, so they’d leave their first hiding spot to go to another. Once there, they’d realize that it either wasn’t as good as it looked, or that they see yet a better hiding spot elsewhere. And the cycle continued until the seeker was done counting.

The point is not meant to be critical because it applies to older kids who do understand the strategy of hiding stealthily so that the seeker can’t use his other senses to pick up a hint where the hiders might be. Either by making noise while hiding, or by wasting their precious lead time looking for the ideal place to hide, they often leave themselves vulnerable by trying to find the perfect hiding spot.

These children were exhibiting a behavior that we, as adults, emulate far too often. We regularly short-change ourselves by seeking perfection, or our personal idea of it; we jeopardize success in the now because we we see something that we “think” is better.

The young children playing hide and seek spent their entire hide time, while the seeker counted, their entire hide time was spent moving from spot to spot, often giving up a great hiding spot for a poorer one. The older kids playing hide and seek waste their hide time by trying to find that perfect spot that no one has thought of, and when they can’t find it by the time the seeker announces “Ready or not, here I come,” the hiders are usually not ready and end up settling for a terrible hiding spot just so that they actually hide and aren’t caught just standing there in the open…


How does this apply to you or your business?

  • How much time over the winter is spent researching the “perfect” seed variety to grow?
  • How much time is invested into monitoring equipment prices and inventories to feed the desire of owning a seed tool (sprayer/tractor/combine) which might be “that much better” than the one on farm now?
  • How much time is spent in frustration thumbing through all the resorts available to choose from in the Caribbean so that your winter vacation will be “perfect?”

 

Direct Questions

Is there more analysis put into short term decisions than long-term or even permanent decision?
(It took 3 months to decide what canola to seed…but we’ll just expand that bin yard over there!)

Is there more analysis put into what we find fun and less into what we don’t enjoy?
(I know precisely how many combines like mine are for sale in Manitoba right now, but I haven’t bothered to consider if I could reduce my interest rates.)

Have you passed by a really good hiding spot because you were trying to find the perfect one?

From the Home Quarter

“Paralysis by Analysis” is a not so old adage that I lean on regularly. It is a challenge for detail guys like me because we want to be sure we’ve got everything right and in place before we take the next step. “Paralysis” because sufferers never take the next step; they justify their inaction because the “analysis” isn’t complete. News Flash: it is never complete!

I have made great strides in shucking that condition. It pokes its head out occasionally…I treat it like “Whack-A-Mole!”

Your farm will succeed if your canola variety yields 3 bushels less, but stands better than the other variety you desired. Seeking a marginally better sprayer probably won’t make enough difference in your overall profitability to cover the added cost. And take the damn vacation…you deserve it, you’ve earned it! Stressing over picking the “right resort” kills part of the fun. It’s like trying to pick the juiciest apple on the tree by looking at them from the ground.

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.


 

 

ROA – Return on Assets

Return on assets, or “ROA” as we’ll refer to it, is an often overlooked financial metric on the farm. Partly, I think it is because there is a culture in agriculture that places too much emphasis, even “romanticizes” the accumulation of assets (namely land, but mostly equipment.) This doesn’t necessarily bode well for ROA calculations. But the greater reason ROA isn’t a regular discussion on the farm, in my experience, is because it is not understood.

The math is simple to understand, so when I say “ROA is not understood,” I mean that the significance of ROA, and its impact, is not appreciated.

Return on Assets is a profitability measure. Its key drivers are operating profit margin and the “asset turnover ratio.” ROA should be greater than the cost of borrowed capital.


 

Let’s ask the question: “When calculating ROA, do we use market value or cost basis of assets in the denominator?” The simple answer is “BOTH!”
Do two calculations:
1) using “cost” to measure actual operational performance;
2) using market value to measure “opportunity analysis” which is a nice way of saying “could you invest in other assets that might generate a better return than your farm assets?”


 

Operating profit margin is calculated as net farm income divided gross farm revenue, and is a key driver of Return on Assets.

The asset turnover ratio (also a key driver of ROA) measures how efficiently a business’ assets are being used to generate revenue. It is calculated as total revenue divided by total assets. The crux of this measurement is that it has a way of showing the downside of asset accumulation. The results of this calculation illustrate how many dollars in revenue your business generates for every dollar invested in assets. While there is no clear benchmark for this metric, I’ve heard farm advisors with over 3 decades experience share figures that range from 0.25 to 0.50. This means that for every dollar of investment in assets, the business generates 25-50 cents of revenue (NOTE, that is REVENUE not PROFIT).

If assets increase and revenue does not, the asset turnover figure trends negatively.
If revenue increases and profit does not, the operating profit margin trends negatively.
Increasing revenue alone will not positively affect ROA. “Getting bigger” or “producing more” alone without increasing profit does not make a difference. If you recall: “Better is better before bigger is better…”

To Plan for Prosperity

As you will find in many of these regular commentaries, the financial measurements described within are each but one of many practical tools to be used in the analysis of your business. Return on Assets cannot be used on its own to determine the strength or weakness of your operation. But used in combination with other key metrics, we can determine where the hot issues are, and how to fix them so that your business can maximize efficiency, cash flow, and profitability.

About the Author

Kim Gerencser

Kim has a unique ability of fostering strong business relationships by building trust quickly and easily through his genuine care and interest in the well-being of everyone he speaks with. Kim holds a Certified Financial Planner (CFP®) designation, a Bachelor’s Degree in Financial Services, and a lifetime of on-the-farm experience. After nearly a decade in the financial industry, Kim knew he could bring greater value to farmers by being independent, unbiased, and unrestricted in how he serves his clients.


This content is published with permission of the author.

For more information, visit Growing Farm Profits Inc.