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The Need for a Record System

Dr. David Kohl
Educational Opportunities: 
Grain, Young, Beginning Farmers
Home > Education & Events > November 2017 > The Need for a Record System

Hi. I'm Dr. Dave Kohl, Professor Emeritus Agriculture Economics at Virginia Tech, Blacksburg, Virginia, and welcome to another segment of The Macro Clinic.

In a previous blog, I talked a little bit about Level 5 businesses. Well, one of the critical elements of Level 5 businesses is that they have a good record keeping system. Often times, I'll ask agricultural lenders, "What's the differentiator between the bottom 20 percent and the top 20 percent?" They'll say, "Invariably, a good record system." Well, what constitutes a good record system? Well, having budgets where you can obtain your cost of production. And if you've got multiple enterprises, by multiple enterprises. But within that, dividing out the fixed and the variable cost. Particularly in this economic reset, one of the things that we're finding is, if you do not cover your variable cost, then one of the things you may have to consider is liquidating that enterprise, or partial liquidation or total liquidation of the business.

Another element of a Level 5 record system is cash versus accrual. The low 20 percent often manage your business off of Schedule F. Or if it's small business, Schedule C. Top 20 percent of producers often use accrual adjusted records to make business decisions. What's accrual adjusted records? In other words, using beginning and ending balance sheets, and changes in inventory, accounts receivable, accounts payable, accrued expenses, prepaids, and often times, supplies or crops growing in the field. Now, the next element is to have a system where you track it throughout the year. In other words, don't wait until November and December to manage your business, but manage it monthly or quarterly. And having that tracking system is very critical, and sometimes using your accountant and lender to have another set of the eyes on the books is very, very critical.

Another element that we're starting to see on Level 5 record systems is having a financial dashboard. In other words, benchmarks concerning percent equity, coverage ratios, working capital to expenses or revenues, operating expense/revenue ratio, and return on your assets. But a new one that we're starting to see is your term debt to EBITDA. All EBITDA is, is net farm income plus interest and depreciation. Not only having them for one year, but comparing them to other years, called a trend analysis, but also comparing those to peers.

Finally, Level 5 record system: backup, backup, backup. Today's world of cybersecurity and computers, it's very important to have a backup system, but, even if you have written records. When I was at Cornell University, one of the guest speakers had lost his house the week before, but he kept a backup record system of his paper records in a fireproof safe, which proved to be invaluable.

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