Step 3: Prioritize Financial Issues
With the number crunching completed, Step 3 identifies the #1 financial problem. The major categories of financial performance are liquidity (the ability to pay bills on time), solvency (the debt-to-asset ratio and net worth of the business), Efficiency as measured by the sales-to-assets ratio (how hard your investment is working to generate sales), and the profitability of the business as shown by the return on assets ratio. Low profitability in the business over time will ultimately cause a problem in all the other financial aspects of the farm. Getting to the root cause of broken profitability is essential or other financial problems will inevitably follow.
Step 4: Identify Production Problems Linked to Finances
The last two steps relate to the production side of the business. When working with farms on financial problems, the financial consultant is well advised to team up with the best production consultants available. Step 4 says “Identify the production problem linked to the #1 financial problem.” No financial progress ever occurs on a farm without solving production problems first. The big challenge is to correctly identify the problems and to diagnose issues that are by nature complex and intertwined. Not every problem will produce desirable financial consequences, so it’s also important to prioritize the problems correctly to work on the ones that really move the dollars in the right direction.
Step 5: Make Changes!
Finally, after correctly identifying the problems and opportunities, Step 5 is to “Change/adjust the production system.” Every other step in the process can be done to perfection, but if this last one isn’t carried out, the entire process breaks down. Failure at this implementation step will void the best laid plans.
Monitoring and regular checkups throughout the year are needed to assess how the plan is working. To achieve financial improvement this cycle needs to be repeated year after year. The Extension Dairy Business Management team regularly works with producers who want to learn this process. During 2017 a program called Crops to Cow to Cash will be offered where consultants will be trained on the tools and resources available to help producers with this process. In February and March producer workshops will be held to plan 2017 dairy cash flow projections and evaluate strategies for a successful year ahead.
Source:psu.edu