INDIANOLA, Iowa (DTN) -- Good times lift both good and bad farm managers, but when profit margins grow slim, farmers with higher levels of business intelligence are more likely to succeed and grow.
Agricultural economist Dave Kohl, a professor emeritus at Virginia Tech and adviser to ag lenders for more than 35 years, said it's important for farmers and their lenders to know where they stand. Kohl has developed a 15-point financial and risk management checklist that helps measure farmers' management skills by scoring them.
"It's not rocket science, but it is very insightful to see how much the manager knows about his or her business," Kohl said.
Producers today generally fall into three buckets. Forty percent will grow incrementally because they have working capital, equity, proactively approach problems and have a high business IQ, or intelligence quotient.
Another 40% will be able to hang on, but won't thrive because they're limited by their "low business IQ." These producers will probably need to refinance to survive this downturn.
Then there's the remaining 20%. These farmers and ranchers will likely need to have a partial or total liquidation.
"They have already refinanced two or three times since the 1980s. Yes, land equity is a great bridge over troubled waters. But eventually, these farm borrowers will drown in their debt service," he said.
AgCarolina Farm Credit has used Kohl's Business IQ checklist at several educational seminars it hosted, as well as with individual conversations between lender and farm credit member.
"At our Ag Leadership Institute for mostly young and beginning farmers, it was a way to start the conversation about management," said Skipper Jones, senior vice president for marketing and communications with AgCarolina Farm Credit. "For one couple, the wife gave the operation a lower score, and it started an in-depth discussion between her and her husband.
"A lot of farmers know the numbers in their head, but to see it on paper and have a score, it makes it more real to them. Having that visual makes them think more about it."
DETERMINING YOUR BUSINESS IQ
There are three sections to Kohl's metric. For each of the first six categories, give yourself 3-4 points if you have the actual numbers (or goals) written down, allotting more points for higher levels of detail. Award yourself 2 points if the numbers are in your head. And give yourself 1 point if you have no idea.
1. Knows cost of production.
2. Knows cost of production by enterprise.
3. Goals -- business, family and personal.
4. Projected cash flow.
5. Sensitivity analysis (what-if scenarios for changes in prices, production, interest rates, etc.).
6. Understands financial ratios and break-evens.
7. This concerns your financial record-keeping system. You earn 3-4 points if your records are kept on an accrual basis. You get 2 points if your record-keeping system is based on your Schedule F, and you receive 1 point if you have no idea.
For the next six categories, give yourself 3 to 4 points if you answer "yes," 2 points for "sometimes" and 1 point for "never or non-existent."
8. Works with advisory team and lender.
9. Marketing plan is written and executed.
10. Risk management plan is executed.
11. Modest lifestyle habits and has a family living budget.
12. Written plan for improvement is executed and strong people management.
13. Attends educational seminars/courses.
14. This involves a transition plan for your operation. Give yourself 3-4 points if you have a transition or business ownership plan. You score 2 points if you are working on a plan. You get 1 point if you have no plan or there is controversy that has not been worked through.
15. This category is all about attitude. Give yourself 3-4 points if you are proactive, meaning you anticipate potential problems and solve them quickly. You get 2 points if you are reactive and handle problems as they occur or when they get too big to ignore. If you are indifferent and most of the time you just "muddle through because things always work out in the end," give yourself 1 point.
"Thirty-two or above is a good score," advised Kohl. "Forty or above is a super-good score. If you scored 20-30 points, you are in 'refinance' mode and you need to move into the 'reinvent' mode," Kohl added. Farms that score under 20 points are high risk.
Kohl also suggests having multiple business partners fill out the assessment independently and then compare notes to help determine the farms financial management strengths and weaknesses.
A TOOL FOR LENDERS
Lenders can use this to help determine if they want to stay with a customer who is going through a tough financial situation but is a good manager and is intent on turning the operation around. Also, the lender can use it to assess weakness in the operation.
"We found in the past that we can get to a point where we lend a client too much money for them to manage well. If they don't have the financial management system in place, we are not doing them a favor by simply lending them more money," said Nate Franzen, president of Agri-Business division, First Dakota National Bank.
The bank, based in Yankton, South Dakota, has used a similar management score card to assess their farm and ranch clients' depth of management skills over the past year.
"We're trying to put more matrix in our lending decisions," Franzen explained.
Kohl suggests farm operators use it as a self-improvement tool, adding that the more you know about your operation, the better you can control its future.
"The 1980s wiped out the average to below-average farm production managers," Kohl said. "This current environment will wipe out the average to below-average farm marketing and financial manager."
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