May Small Improvements Add Up Join The 5% Club in 2017 By Don Nitchie. Search for Farm Business Management Field Staff By Don Nitchie

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1 Don Nitchie Tonya Knorr Garen Paulson May 2017 Inside this Newsletter: Search for Farm Business Management Field Staff Small Improvements Add Up Join The 5% Club in 2017 Ratios: What do they reveal? (THERE WILL BE A QUIZ!) Search for Farm Business Management Field Staff We are seeking an additional field staff person to provide farm financial management education, consultation, financial analysis, and tax expertise to member farms on a contract basis. The work is seasonal in nature and scheduling is flexible, with the majority of the work during the winter and early spring. On-farm consultations also occur in late summer. Travel is required within approximately an eight county service area. If you know of someone that may be interested, we have a detailed description of the position posted on Please share with anyone you think would qualify or be interested in this position. Cost Basis; Definition and the Importance of Maintaining It Adjusting living expenses in lean times is an important challenge What s New in Pc MARS 2.5 Small Improvements Add Up Join The 5% Club in 2017 A single 5% improvement may be easy to overlook, but you should not take this small improvement for granted. Increasing revenue 5% while also decreasing costs 5% can have a big impact on your bottom line. The table below compares actual outcomes for the average association farm in 2016 to the projected 2017 results for the average association farm if it joins The 5% Club. Our analysis of The 5% Club compares farm performance if the average association farm improves gross revenues by 5% and lowers operating costs by 5% over 2016 for It is impressive how just these small changes result in Net Farm Income more than doubling to $170,000 and Term Debt Repayment Capacity improves from 1.4 in 2016 to 2.4 in In 2016, the same 5% changes would have almost tripled Net Farm Income for the average farm. Therefore, small changes have a BIG impact on your bottom

2 line. Attention to the correct details can make a real difference. Projected Impact of Improved Margin Management; 5% Increase in Revenue & 5% decrease in Costs on the average SWMFBMA Farm Liquidity: Current Ratio Solvency: Debt to Asset Profit: Rate of Return Assets Profit: Net Farm Income Term Debt Coverage Net Worth Change 2016 All Farms Actual Projected 2017 using The 5% Club Improved Margins % 25% 2% 4% $81,552 $170, % 5% As we have done the past few years, the data above can also be found in detail on page 21 of your 2016 SWMFBMA Annual Report. It shows the assumptions used to determine the likely 2016 outcomes for the average association farm across several financial & profitability categories. Is it possible to achieve a 5% improvement in gross revenue? Probably. Do a little better than average on selling prices, yields or a little of both. Be willing to sell portions of your production when profitable pricing opportunities are available. Do not hold out for the highest price and avoid selling all your production in a few large portions. Make the basic math work in your favor. Try to sell increasing quantities if a market is moving higher and a greater quantity first as a market moves lower. Any price should always be evaluated relative to YOUR projected cost of production instead of on the latest price forecast. Is it possible to lower costs by 5%? Probably. Being more effective with expenditures on inputs is one of the real keys. Getting the most revenue possible for each dollar spent on herbicides, pesticides, seed, fertilizer, and feed is very important. You do not necessarily want to try to cut expenses 5% across the board. Be strategic and critically examine which of those expenditures may not be adding to production efficiency at current expenditure levels. Sharpen your production management and marketing skills. Be a student of current production technology research and methods. Discard products and methods that seem to only have great advertising and cost money with little proof of effectiveness. Know where your costs are relative to competitors using your benchmarking reports. Zero in on costs that seem out of line, and seriously examine the products or practices behind those costs. Also, celebrate the things you have done well. Successful managers do more little things just a little better rather than doing one thing really well. It pays off when profits are scarce! Strive to join The 5% Club in Ratios: What do they reveal? (THERE WILL BE A QUIZ!) By Garen Paulson This is the first in a series of articles on the ratios reported in your annual Finpack analysis. Your analysis is full of ratios; a little study will help you find strengths and weaknesses within your operation. Use this information to improve weaknesses and enhance strengths. Operating Profit Margin. (OPM): This profitability ratio is a measure of operating efficiency on your farm. For instance, a farm with a substantial profit margin makes more money per dollar of sales than a farm with a narrow profit margin. Finpack calculates operating profit margin by dividing return to farm assets by value of farm production. Return to farm assets is net farm income plus farm interest less value of operator s labor and management. Value of farm production is the amount of income produced on your farm less any cost of goods sold, such as purchased feeder livestock. Think of operating profit margin as the profit your farm makes per dollar of sales. Asset Turnover Rate (ATR): Asset turnover rate is a measure of volume of sales per dollar of assets. This measure is calculated by dividing value of farm

3 production by total asset base. A strong asset turnover rate indicates good sales and volume efficiency. What is a good OPM or ATR? Over a long period of time, a strong OPM would be greater than 25% and a weak score would be less than 15%. In 2016, the association average OPM is 8.2%, weak compared to long term standards, but average for A strong ATR is greater than 45% and a farm with a weak score would be less than 30%. The association average ATR was 30.9%, which is not strong over the long run but average for How does your farm compare? As you know, in any one-year different profitability conditions exist. That is why I like to look at your benchmark reports over a number of years to see how you compare to your peers in different profitability conditions. Watch these ratios over time to see how your farm competes. These two ratios, when multiplied together, equal an important profitability ratio. ATR (times) OPM (equals) what? The first person to Garen with the correct answer will win bragging rights. Extra credit for you if you can name the company that first started using this analysis. We will cover what that analysis is, and how profit margin and volume efficiency are related to this measure next month. Cost Basis: Definition and the Importance of Maintaining It By Tonya Knorr The definition for cost basis is the price of an asset for tax purposes. In other words, it is a number one use to determine the capital gain or loss on an investment. This being true, one can say the cost basis of an investment is an important number to track. Many mutual fund investors fail to keep track of cost basis and it ends up causing complications and possible problems in the future. You not only want to keep the cost basis on investments you purchase, but any basis on inherited property or property you purchase for your business. It can literally be used on anything you would consider an asset. The cost basis of an investment is equal to the amount you paid for the security when you purchased it. Keeping track of this number is critical to your success as a trader in mutual funds. Many people take for granted this information is tracked and therefore believe it is not necessary for them to personally track their costs. While this may be true, you do not want to leave your financial future in the hands of anyone else, even if it is your broker. Therefore, you should always keep track of your own cost basis on every transaction you make. One of the most important reasons to keep track of your cost basis is because of the tax implications involved. Capital gains and ordinary gain taxes are based upon the difference between the purchase price and the selling price. It is typically easy to determine the price of a recent stock because they are posted and readily available. However, you will also need to know the original purchase price of the stock in order to file your taxes correctly. Otherwise, you could be in violation of tax law and it could result in significant fines in the future. At the end of the year, it seems like everyone starts to scramble for the information from their broker on cost basis. It may be contained on the statement you receive from the investment company or you may need to call your financial adviser and request detailed yearly statements. The broker then calls the mutual fund company and asks for the same information. With as many investors as there are in a mutual fund, this can be a very big administrative task for the mutual fund staff to handle and you may not receive the statements that you request in a timely manner. While you may be waiting for information from a broker that does not necessarily mean you can go past your tax filing deadline. This could result in late fees on your taxes and other serious problems. You also want to make sure the information they provide is correct. Lastly, it is also a good way to know ahead of time when you are doing pre-tax planning, what your income from the investment or asset is and how it will affect your taxes.

Another cost basis you may or may not be aware of is the "Basis of Inherited Property".

This basis rule is generally referred to as a "stepped-up-basis" if the FMV is higher than the decedent's basis or "stepped-down-basis" if the value is lower than the decedent's basis.

The following chart illustrates only the Household Operating Expense portion of Family Living, which has remained somewhat stable around $70,000 since 2011.

4 Another cost basis you may or may not be aware of is the "Basis of Inherited Property". Generally, the basis of property acquired from a decedent is its fair market value (FMV) on the date of death or, if Form 706 was filed, the value of the property on Form 706. This basis rule is generally referred to as a "stepped-up-basis" if the FMV is higher than the decedent's basis or "stepped-down-basis" if the value is lower than the decedent's basis. Either way this value or basis is an important basis to retain so when you go to sell the asset you have the cost basis. The following chart illustrates only the Household Operating Expense portion of Family Living, which has remained somewhat stable around $70,000 since This would be basic items such as food, utilities, medical care, transportation, clothing, real estate taxes, entertainment, home mortgage interest, education, etc. It also makes the point that these basic costs have been rigid and are not easy to reduce, which is probably true for most families. So again, the decline in overall living expenses has been primarily in non-farm capital purchases, investments and income taxes. Adjusting living expenses in lean times is an important challenge Not all SWMFBMA members track the detail of their annual living expenses. As you can see from the following chart of those that do, living expenses as a percentage of Gross Farm Income remain somewhat constant over time but vary greatly as a percentage of Net Farm Income. In the high profit years of and , spending expanded greatly mostly in the form of non-farm capital purchases, investments and income taxes. When profitability (Net Farm Income) returns to tighter margins, these expenditures are not easily reduced. As a result, in the chart below, living expenditures as a percentage of Net Farm Income have exceeded 100% since When this occurs, accumulated Net Worth is reduced by selling farm assets or increasing debt, so it cannot go on for long. Fortunately, living expenses did decline on average in 2016 as a percentage of Net Farm Income. This is encouraging. The help with basic living expenses that many families continue to use is Non-Farm Employment by one spouse or both on a part-time basis. In many cases, this provides access to employer provided group benefits such as health insurance as well as a wage or salary that assists with cash flow. For some people who only recently started farming, the historic (unusual) profit years of & , did not provide a realistic long-term view of the living style a typical farming operation could provide. However, there are many people in farming operations who have training/skills that are very marketable. The added income that their employment can generate can be extremely helpful to the family during these lean times and beyond. This can help reduce the impact on their farm finances. As a result in the chart below, after declining in 2011 & 2012, income to the average farm from off-farm employment increased to almost $40,000 per year. This is a great help and reduces the pressure on the farming business if the family has talented labor available that is under employed.

If you enter your checks monthly when the statement comes, this new capability is for you. Unfortunately, there is quite a bit of setup time to do this.

Once Pc MARS recognizes the file, you must do an initial setup to have PC MARS understand the information. Once you have this setup done, the process is very smooth.

5 If you enter your checks monthly when the statement comes, this new capability is for you. Unfortunately, there is quite a bit of setup time to do this. You will need to be able to download a file from your bank s website to your computer. Then, you must direct Pc MARS to that file. Once Pc MARS recognizes the file, you must do an initial setup to have PC MARS understand the information. Once you have this setup done, the process is very smooth. Keep records of your family living expenses. Like farming expenses, it is hard to know if your expenses are reasonable when you do not know what they are. Discuss these expenses as a family and plan for adjustments or big expenses. This will not only help your family s well-being but should also help maintain the financial health of your farming business. Source: 2016 SW Farm Management Profitability Conference, SWMFBMA Financial Trends and Profitability. What s New in Pc MARS 2.5 By Garen Paulson In January of 2017, Pc MARS updated the accounting program with some changes. Most of them are cosmetic in nature. However, two could be helpful for us. Change 1: You can set a default bank account for your checks/deposits. Previously, Pc MARS always defaulted to the last account used. Now you can set up a bank account to always appear first when you start Pc MARS. Change 2: The ability to download your bank statements directly into Pc MARS. This saves you the action of entering the amount and date of each transaction. So, all you have do is add a vender name and the account code to each transaction. Pc MARS will also learn the bank s transaction name and convert it to your vender name. I have found this system to be a huge time saver. If you enter your transactions as they occur and do not wait for the statement, this system is not for you. If what you are doing works for you, keep doing it. We have found the people who do their books at least once a month have the most success with bookkeeping. If you would like to learn more about this downloading capability, let us know. We can offer a class on the steps necessary to utilize this feature. Contact Information Don Nitchie SW Research & Outreach Center th Street Phone: Fax: dnitchie@umn.edu Tonya Knorr Co Hwy 6 Phone: tonyaknorr@gmail.com Garen Paulson US Hwy 71 Jackson, MN Phone: gkpaulson90@gmail.com Gretchen Thillen SW Research & Outreach Center th Street Phone: gthillen@umn.edu

November Educational Activities. Don Nitchie Tonya Knorr Garen Paulson. Inside this newsletter:

November Educational Activities. Don Nitchie Tonya Knorr Garen Paulson. Inside this newsletter: Don Nitchie Tonya Knorr Garen Paulson November 2016 Inside this newsletter: Educational Activities Supplemental Data Worksheet W-2 and 1099 Filing Deadline Changes for 2016 Tax Year 2016 Tax Return Due