Dr. David M. Kohl. (540) (Alicia Morris) (540) (Angela Meadows)

Transcription

1 TAKING CARE OF BUSINESS Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) January 8, 2019 Macro Clinic Video Blog: Road Warrior of Agriculture: Ag Globe Trotter: Dave s GPS & Dashboard Indicators:

2 Why Some Businesses Are More Profitable Than Others These businesses are a little better at: production marketing cost control asset and capital efficiency utilize the 5% Rule 2

3 Median Net Farm Income 3

4 Is the New Normal the Old Normal? Time Period Approximate Net Farm Income In Constant Dollars Era Name $35,000 Agricultural Economic Reset $50,000 Asian Tigers Boost Commodity Demand $54,000 Pre Agricultural Super Cycle $125,000 Agricultural Commodity Super Cycle Source: 4

5 Net Farm Income,

6 Net Farm Income,

7 Net Farm Income,

8 Economic Warming How quick to cash? Collateral Mountains Business Net Income Spring Working Capital Hills Non-Farm Earnings Spring Cash Peak Inventory Pinnacle Capital Infusion or Refinancing Canteen Accounts Receivable Ridge Prepaid Promise Prosperity Valley 25% Killer Toy Swamp Lake Earnings Family Living/ Dividends Creek 50% Adapted From: Harlan Hill- Hill Financial Education Earned Wealth Inlet Cap Ex & Growth Run Postponed Principal & Interest/ Operating Delta Income Tax Gulch 25% *EBITDA- Earnings Before Interest, Taxes, Depreciation & Amortization 8

9 The Burn Rate Working Capital Adversity vs. Opportunity Defensive Adversity Oriented Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Offensive Opportunity Oriented Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Projected Loss: $500,000 Working Capital = 2 Years Projected Loss Debt Service(Existing & New) Payments: $200,000 Working Capital = 5 Years Total Debt Service Payments Red < 1.0 Year = Vulnerable Yellow Years = Resilient Green >3.0 Years = Agile Red < 2.5 Years = Vulnerable Yellow Years = Resilient Green >5.0 Years = Agile 9

10 Burn Rate on Core Equity Adversity vs. Opportunity (Assume $500,000 Earnings Loss & 20% land value decline) Assets- Market Value 1. Long Term (20% Decline on Land) Estimated Value $6,000,000 $4,800,000 Loan Maximum X 70% X 70% Collateral Position = $4,200,000 = $3,360,000 Remaining Principal - $2,200,000 - $2,200,000 Equity Excess Reserves = $2,000,000 = $1,160, Intermediate $3,000,000 X 60% =$1,800,000 - $800,000 = $1,000, Current $1,650,000 X 80% =$1,320,000 - $860,000 = $460,000 Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 Years Earnings Loss¹ $ 500,000 20% Decline Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years Earnings Loss¹ $ 500,000 ¹ Assume Earnings Loss of $500,000 Red < 4.0 Years = Vulnerable Yellow Years = Resilient Green >7.0 Years = Agile 10

11 Business IQ: Management Factors Progressive Businesses Customer Checklist Green (3-4 points*) Yellow (2 points) Red (1 point) 1. Knows cost of production Written In head No idea 2. Knows cost of production by enterprise Written In head No idea 3. Goals- business, family & personal Written In head No idea 4. Record keeping system Accrual Schedule F (one & done) No idea 5. Projected cash flow Written In head No idea 6. Sensitivity analysis Written In head No idea 7. Understand financial ratios, break evens Written In head No idea 8. Work with advisory team and lender Yes Sometimes Never 9. Marketing plan written and executed Yes Sometimes Never 10. Risk management plan executed Yes Sometimes Never 11. Modest lifestyle habits, family living budget Yes Sometimes Non existent 12. Written plan for improvement executed & strong people management Yes Sometimes Non existent 13. Transition plan/business Owner plan Yes Working on plan Non existent/controversy 14. Educational seminars/courses Yes Sometimes Never attend 15. Attitude Proactive Reactive Indifferent *Extra Points: Progressive Business may receive 4 points for #2,6,7,8,14 Struggling Business attempting turnaround may receive 4 points for #3,5,8,11,12 Score Overall Analysis Strong management rating & viability Moderate risk & viability; will most likely show previous refinancing <20 High risk & lack of long term viability

12 Financial Philosophy & Perspectives cash is Queen chess board equity is King profits and cash flow are the Kingdom volatility is either friend or foe business IQ will be the difference maker 12

13 Critical Financial Performance Index for Debt & Risk Criteria Calculation Vulnerable Resilient Agile Debt/Asset Ratio Term Debt/EBITDA Working Capital/Expenses Operating Expenses/Revenue Total Farm Liabilities Total Farm Assets Total Term Debt (non-operating) EBITDA¹ Current Assets - Current Liabilities Total Farm Expenses Operating Expenses² Total Farm Revenue Coverage Ratio (Net Farm Income + Interest + Depreciation + Total Non-Farm Income Income Tax Expenses- Family Living Withdrawals) / Total Annual Principal & Interest Payments on Term Debts & Capital Leases >70% 40-70% <40% >6:1 3:1-6:1 <3:1 <10% 10-33% >33% >85% 75-85% <75% <110% % >150% Customer 3 Year Average ¹ EBITDA = Net Farm Income + Interest + Depreciation ² Operating Expenses Excluding Interest and Depreciation 8

14 Habits of Successful Businesses 1 goal focused & balanced business family personal core values focused on five to seven key words that means success invest in productive assets land machinery & equipment livestock people modest family living withdrawals from the business develop and monitor income statements and cash flows monthly quarterly 14

15 Habits of Successful Businesses 2 understand macro economics- how it creates opportunities and challenges and complete scenario analysis for: production price cost interest rates follow the management principle of better before bigger 5% rule rule of profitability and positive economic cycles interdependent vs. independent know the value of people best crop you will ever raise children grandchildren aspiring agriculturalists 15

16 Staying Positive in the Down Cycle network of people = self worth + net worth older mentor and wisdom education and development take a look at yourself exercise hear the silence giving back sweat the small stuff position for small accomplishments 16

17 Four P s of Success Purpose: working toward your passion Picture: mapping where you want to go Planning: written business plan & mental image detailing your strategy and tactics Partnering: the people you will engage and align with to accomplish the plan 17

18 Questions 18

19 Business IQ: Management Factors Critical Questions for Crucial Conversations Customer Checklist Green (3-4 points*) Yellow (2 points) Red (1 point) 1. Knows cost of production Written In head No idea 2. Knows cost of production by enterprise Written In head No idea 3. Goals- business, family & personal Written In head No idea 4. Record keeping system Accrual Schedule F (one & done) No idea 5. Projected cash flow Written In head No idea 6. Sensitivity analysis Written In head No idea 7. Understand financial ratios, break evens Written In head No idea 8. Work with advisory team and lender Yes Sometimes Never 9. Marketing plan written and executed Yes Sometimes Never 10. Risk management plan executed Yes Sometimes Never 11. Modest lifestyle habits, family living budget Yes Sometimes Non existent 12. Written plan for improvement executed Yes Sometimes Non existent 13. Transition plan/business Owner plan Yes Working on plan Non existent/controversy 14. Educational seminars/courses Yes Sometimes Never attend 15. Attitude Proactive Reactive Indifferent *Extra Points: Progressive Business may receive 4 points for #2,6,7,8,14 Struggling Business attempting turnaround may receive 4 points for #3,5,8,11,12 Score Overall Analysis Strong management rating & viability Moderate risk & viability; will most likely show previous refinancing <20 High risk & lack of long term viability 19

20 20 Part 2

21 AGRICULTURAL ECONOMIC MEGA TRENDS Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) January 8, 2019 Macro Clinic Video Blog: Road Warrior of Agriculture: Ag Globe Trotter: Dave s GPS & Dashboard Indicators:

22 Radar Screen : Low Beams international trade USMCA China s Belt & Road Initiative other slowing of the global economy post mid term elections baby boomer, farm land values, the great bridge great wall of protein U.S. economy all time record! interest rates/dollar debt, debt, and debt- Achilles heel 22

23 U.S. Farm Real Estate Values Source: Dr. Steve Isaacs, University of Kentucky

24 Farm Real Estate Perspectives farm real estate appreciated or stayed level 79% of years from since WWII (1941) farm real estate appreciated or stayed level 88% of the years 1910-WWII (1940) farm real estate appreciated 57% of the years farm real estate was flat or declined for 13 years from farm real estate declined for four years in the 1980 s 24

25 Land Value Resilience local or regional vs. state or national marginal land values crop insurance hedge funds low interest rates cycle of refinancing Baby Boomer farmer 25

26 Factors Contributing to Dramatic Discount in Land Values 100 to 200 basis point increase in long term interest rates more conservative refinance cycle outside investors seeking alternative investments supply and demand in a given area strong value of dollar, higher rates, less export potential crash of the U.S. or global economy 26

27 State of U.S. Economy 110-plus months 106 & 120 months urban and coastal economies and the fly over states central bank driven- U.S. and abroad wealth effect consumer investing consumer spending IMPACT: killers of economic expansions 27

28 Federal Reserve s Interest Rate Barometer Three increases in 2019 Indicator Unemployment GDP Growth Inflation Consumer Sentiment Current Estimated Flag Levels Below 5.0% or Above 6.0% Above 3.0% or Below 2.0% Above 2.5% or Below 1.0% Above 90 or Below 80 trends matter stock market/real estate wealth effect copper prices 28

29 Mega Trends : High Beams 29

30 Mega Trends : Dietary Trends Millennials, Gen Z & Baby Boomers cultured meat & non-dairy vegans- U.S. & abroad environmental footprint 95% of success is alignment of: resources talents markets experiences & personalization vs. commoditization We have not seen anything yet. 30

31 Mega Trends : Tech Transformation robotics data in the food chain retail & wholesale disruption blockchain technology Market disruptors. 31

32 Mega Trends : Non-Government Organizations Smithfield lawsuits Monsanto lawsuits others biosecurity open pens antibiotic free animal welfare NGOs more disruptive than government regulations. 32

33 Mega Trends : Technology/Consumer bio engineering information convergence production consumers/food industry/producers great wall of protein & impossible burger sliders skill base analyze data critical thinking communication first replaces labor higher level of talent systems/replicate use of information data too connected Think beer. 33

34 Mega Trends : Technology & Productivity interruptions occur on average every 2-7 minutes It takes a half hour to regain focus after interruptions drops IQ 10 points once interruptions occur interruptions contribute to a poor night s sleep need 2 hours per day with no technology errors increase 19 times 4 alcoholic drinks techlash People touch their phone 2,617 times per day on average, or 2 hours and 25 minutes. Source: Wall Street Journal on May 17, Silence is golden. 34

35 Mega Trends : Technology & Production Metric Tons Increase Since til 2018 Country Corn (Percent Change) U.S. 21% 55% China 48% 1.1% Brazil 85% 108% Argentina 174% 73% Canada 36% 125% Europe -9% Paraguay 168% Source: Kirksville, MO presentation - University of Missouri Soybeans (Percent Change) 35

36 Mega Trends : Oil & Energy Economics 911 tragedy U.S. is globe s major energy producer drive towards efficiency solar, wind, and electric 2040 Germany & France electric vehicles one fourth of cars in China will be electric Central Africa will become the new Saudi Arabia 80% of ag expenses are energy related. 36

37 Mega Trends : Natural Resource/Environmental great water wars soil health air quality extremes in global weather moisture, temperature, other energy weather applications to farming Accidental superpower: America/your business 37

38 Mega Trends : Millennials, Gen Z/Gen A years old- 7.2 jobs $15,000- $20,000 cost of leaving 91% turnover in 3 years Gen Z values college degree less 4 generation work force Five year itch. 38

39 Mega Trends : Old School Generation Vs. New School Generation Old School Generation New School Generation Control Structure Manage Mentor Collaboration Private Time Career Path Projects Tell How to Do Problem Solvers 8-5 Productivity & Flexibility Course Bit Size Job Description Create Job Description Task Internships Training Training & Development Life Skills Old school vs. new school. 39

40 Mega Trends : People & Lifelong Learning people skills life long learning 3 to 5 educational venues annually aptitude vs. emotional intelligence internships 3,000/500/2,500 hour Rule If you are going to lead, then you must read. 40

41 Mega Trends : 2020 Decade of Transition agri-entrepreneurs multi task larger complex businesses cousins non-family members women in farming, ranching, ag lending, and agribusinesses ag lending / non-traditional The mythical becomes typical. 41

42 Mega Trends : Black Swans of the Economy immigration disease cyberattacks in technology air banking agriculture weather world wide economic debt depression Paradigm shift in the economy. 42