Hosterman lists wise farm management
By DOROTHY NOBLE
GRANTVILLE, Pa. (March 21, 2017) — “How valuable is farm business management to you?” Mike Hosterman, helped his audience with answers to this question at the recent 2017 Corn and Soybean Winter Congress of the Pennsylvania Corn Growers Association and the Pennsylvania Soybean Board.
As agricultural business consultant for AgChoice Farm Credit, Hosterman guided the growers through a series of factors that influence success.
Hosterman recognized that farm business can be overwhelming. Change is inevitable, profits are difficult to attain, more regulations abound, everyone is trying to do more with less, plus he adds, “Stress finds us.”
But significantly, Hosterman advises, “You should be doing financial management on a daily basis.”
Hosterman addressed the definition of a successful business. Noting that being profitable and having cash is one factor, but high profitability and quality of life need to be balanced. If not, he says, “Something breaks.”
Turning to analysis, Hosterman said successful managers strive for better returns to owner labor and management and to capital investment.
Regarding profit drivers, he pointed to top producers—they control the uncontrollable, have a positive attitude, recognize that their operation is a business and know there is no magic solution. They became top producers by having a healthy balance in five key areas.
The five keys to profitability include volume, efficiency, capacity, internal growth and production cost control. Each does not necessarily need to perform the best. But these factors must be sized for the particular operation, and must ensure a return.
Growth is a key concept of successful businesses. Hosterman noted different ways to grow. It can be through expansion of the existing business, such as adding land or cows, a new enterprise, better facilities, or a partner.
Growth can also be accomplished by improving an existing business, which can enhance profit margins, raise milk quality, increase production per cow, or undertaking risk management.
The planning process is vital. Hosterman suggested written plans—communication is easier. Steps include the plan, implementation, evaluation and adjustment. Check for achievability. The planning process needs to be performed at least quarterly.
Reserving cash in the business, Hosterman noted, is your liquidity. Spending capital for expansion and/or replacements must be prioritized. Income taxes should be continually discussed, particularly with the treatment of depreciation.
Working capital as a percent of annual expenses is strong at 50 percent. Be cautious if lower; 20 percent needs improvement.
Hosterman advised analyzing wants versus needs in capital purchases. He urged a reality check. Zero expenditures is unrealistic, but a long list must be analyzed for affordability.
He said a budget should be prepared with separate lists for equipment, buildings, land and other investments. Project the time upgrades or improvements would be needed and estimate cost. Then rank priorities by necessity, need or want.
Retirement planning according to Hosterman is not often considered but should be a larger part of planning. Consider tax deferment and transition in these plans. Income tax planning too is vital, especially in tax deferment situations.
Managing debt, he said, is not about cutting, but controlling. Debt should be at a reasonable level, and paying it off sooner is obviously preferable. Debt reduction positions the business for future growth and provides capacity to borrow. If leveraged, be sure cash reserves are strong, he added
Finally, planning is more important in good times, as capital purchases, alternative investments and debt reduction require decisions. In low times, maintaining a good financial position is prioritized.
Hosterman urged, “Be honest with yourself, and with your lender.”
Top operations, he pointed out, plan, build reserves, control expenses, manage income, evaluate, adjust, make decisions and are consistent in managing their business.