“Growing Advantage” was the theme of the 2011 Almond Conference earlier this week in Modesto, CA. The theme was well deserved by an industry whose production has ramped up from 516 million pounds in the early 1990’s to around 1.9 billion pounds this year. I attended a portion of the conference, and I was particularly impressed with the panel presentation on the Economics of Almond Production.
A common theme from several growers on the panel revolved around subjects that are near and dear to a CPA’s heart: strong accounting systems, active budgets, and measuring results. The presentations by these growers were a great illustration of concepts that we’ve been talking about for a long time, and I’m excited to see them applied in the ag setting.
Accounting Systems – the days of pencil and paper are gone for most businesses, and farming is no exception. The most important thing about an accounting system is that it should be able to supply the information needed for informed decisions on a timely basis. We’re seeing more and more ag businesses invest the resources to upgrade or add systems that are leading to better informed decisions. Most people didn’t choose to farm because of their love for paperwork, but those that pay close attention to the financial matters will have an advantage.
Active Budgeting – one grower talked about their operation’s use of budget to actual reports, including the use of cost centers to separate crop production and overhead costs. These were monthly reports with line by line budgeting. Does it take some time and headache each year to plan this budget? Sure, but the reward is better feedback throughout the year in monitoring their financial performance. A budget can look like an overwhelming process, but we’ve helped clients break it down into manageable pieces that are easier to deal with and achieve results.
Measuring Results – several growers talked about measuring Return on Investment and Return on Acreage, both being key components of the farm business scorecard. How does your net return per acre compare to the value of that acre of land? Karen Klonsky discussed the UC Davis cost study results which calculated that it costs $8,738 per acre to establish an orchard – what kind of price and production results are needed to make that a profitable investment over the next 25 years? [As an aside, the UCD cost study can be found at http://coststudies.ucdavis.edu]
In summary, the conference was well worth attending. The presentations highlighted the fact that the growth of business expertise in the almond industry has kept pace with their expanding crop production. Financial measurement and analysis is just as pertinent for the farm as it for the factory, and we enjoy helping our clients make these concepts a reality in their businesses. Best wishes to the industry for a great 2012!
I have to be honest. I didn’t start out today looking for a ukulele-version of Queen’s Bohemian Rhapsody. As a matter of fact, when I saw the post on TED (www.ted.com), I was attracted to it more for its novelty than for my expectation of great music. After all, who hasn’t endured an Idol wanna-be’s screeching attempt to resurrect Freddie Mercury?
“Why not?”, I thought. So I clicked on the link to hear Jake Shimabukuro play the rock classic on his ukulele.
I was transfixed by the beautiful sound coming from what is so often considered to be a toy or a token Hawaiian souvenir. The tone of the instrument was beautiful, full and rich, with masterful fingering played by the artist who held it. The simple ukulele had become magnificent.
You see, I had put the ukulele in a box labelled “For Luau Only”. That’s where it belonged, didn’t it? In a Don Ho music special from my youth. Or, more recently, as a pleasing , but simple sound produced by the late Izzy. It’s not that the music wasn’t good, but that it wasn’t meant for Queen.
And I could relate to the ukulele. Many times, we have fought to get out of the “CPA” box that others are quick to put us in. Everyone knows what a CPA does, right? Business owners hire us, bankers rely on our services, attorneys bring us in for assistance, based on their own notion of what a CPA does. Their perception may even be quite flattering, but it’s incomplete.
What Bohemian Rhapsody is to the ukulele, our Business Profitability Service is to a CPA firm. The service is often unexpected, but the reaction is nearly always extremely positive. We show the owner (or the banker) the business’ financial history, just like they expect to see. (“OK, Don Ho, I’ve heard this before.”)
But, then, we show them insights they haven’t seen before. Possibilities open up to new areas of improvements through pricing strategies, growth opportunities, cost controls, working capital management. We involve their team so they have buy-in and enthusiasm. Everyone knows what to do and how to get it done.
We polled everyone on our team for some ideas that would help our current and future clients begin 2011 on the right track. Here are the resulting suggestions.
The number one suggestion, according to our unscientific, non-secret vote, was for businesses to update their 2011 Strategic Plan and decide where they want to be financially in 2011.We also suggest every individual prepare his or her personal financial budget. (If you don’t have a Strategic Plan or a personal financial budget, now would be the time to sit down and create one. Ask us for a $COPE grid that you can use to start the process.)
Here are some other resolutions you might want to add to your list.
Retirement and Estate Planning
Review your estate plan. Recent tax law changes and asset revaluations may have substantially impacted your planning.
Consider meeting with an estate attorney if you don’t have an estate plan.
Review your retirement portfolio. Is it time to change your investment allocation?
Review your retirement contributions. Is it time to increase the amount or frequency of your contributions?
Pension Plan Fiduciaries
Review pension plans to ensure that all fees are reasonable. (To comply with new rules that take effect in July 2011.)
Establish or review your business succession plan. Who is next in line? Are your processes documented?
Businesses
Planning and budgeting
Establish or update your 5 year plan.
Create both an Income Statement and a Cash Flow budget. (Ask us how our $COPE It! Software can help.)
Focus on building more business now.
Review and communicate your company’s break-even point.
Create a capital expenditures budget to capture any planned projects or expected investments in furniture, fixtures, buildings, equipment or other similar items.
Prepare a monthly budget to actual analysis (check your software for reports that provide this view.)
Accounts Payable
Start capturing 1099 vendor information early. Formalize the process each time you add a new vendor.
Contact your top vendors and suppliers to see if you can negotiate a better deal based on volume purchases.
Look for ways to improve your accounting system.
Banking/Collections
Review your lending relationships to see if you can lower your interest rates on debt.
Look for business expansion opportunities – is it time to add a new product or to acquire a new business?
Review your Accounts Receivable. Now is the time to take action on any amounts that are older than 60 days.
Expense Management
Review your advertising and marketing expenses. Investigate new marketing ideas and evaluate the success of your past efforts.
Golf is a funny game. The premise is simple. Beginning at the tee, hit the ball into the cup at the other end of the fairway in as few shots as possible. Unlike baseball, the ball doesn’t move while you swing at it. Unlike basketball, people aren’t yelling and waving their arms while you concentrate. And, unlike football, no one is ready to do you bodily harm during your backswing. Yet, it is a very difficult game to play consistently well. (See the graphic at the end of this post.)
After decades of playing decent golf, I decided to entertain folly and contacted a local golf instructor to help me with my swing. At an epiphany moment during my lesson, this story came to mind:
Scenario:
A local business is experiencing cash flow problems. Profits are down, but the company is still in the black. According to the owner, they’ve never been busier, but the line of credit has nearly reached its limit. The owner calls on us for help.
Solution #1:
After reviewing the income statements, we determine that sales are indeed up by 10% over the previous year. Our analysis of the income statement shows that the company’s cost of materials has increased as a percentage of sales, causing the gross margin to slip by 3%. However, upon analyzing the company’s balance sheet, we find that accounts receivable are taking an average of 10 days longer to collect and that inventory has grown from 60 days of sales on hand to a current 90 days. The result is less profit, more cash tied up in assets, a higher debt load, and more interest expense.
Solution #2:
Discussions with the owner reveal that prices were cut by 5% to gain a bigger share of the marketplace. So, while sales are up by 10%, the volume of activity is actually up by 15%. The result is smaller margins on increased sales. As the company became more aggressive with its pricing, it also extended credit to customers with higher credit risks, leading to a longer collection period. Salesmen insisted on having inventory in stock for all sales. Slowly, but surely, inventory had grown by 50% over the previous year.
Now, what on earth could have brought this to mind while hacking 8-irons on the driving range?
As I hit ball after ball, the instructor would watch a few swings and stop me to make corrections to my posture, my alignment, my pivot, my hand position, the position of the ball. (My gosh! I thought I was a fairly decent player, but I felt like a basket case.) One thing, though, that he harped on for several minutes was that I was leaning forward during my backswing. He gave me several tips on how to keep my weight back, my posture straighter, etc., all in an attempt to keep me from leaning forward.
After standing there watching, he finally had an “Ah-Ha!” moment. He noticed that it was nearly impossible for me to keep my weight back because my left knee was bending forward instead of towards my right knee. That simple move caused my weight to fall forward. We made the correction and my swing began to improve.
This was the epiphany. Only by observing, asking questions, analyzing, and tweaking can we get to the root of the issue. Many situations present themselves with symptoms that need to be corrected, but we often treat the symptoms instead of looking for the root cause.
In my case, it was an incorrectly bent left knee. In the situation above, it was an aggressive sales strategy without proper guidelines and controls.
Stopping with the steps in Solution #1 may have led us to advise the owner to reduce inventory, find alternative suppliers, and send customers to collections. However, in short order things would have been right back where they started.
By asking more questions, watching how things were done, and analyzing financials with our SCOPE-It software tool, we were able to get to the root cause of the problem and make corrections that would have a lasting impact. With various team members from sales, operations, and finance assembled togethere, we were able to show the cash impact of the changes that had occurred. We then strategized with them how best to meet the customers’ needs, but to also minimize the cash requirements of carrying accounts receivable and inventory. Pricing strategies were examined and we were able to quantify the relationship between price decreases and customers gained. With everyone more aware of the financial impact and the effect on other departments, the group was able to form a working plan with specific implementation steps. They owned it.
I, too, have specific things I’m working on to develop a consistent swing. Now, if I could just get my putts to go in.
As accountants, one of the hardest concepts we have to explain is the difference between cash and profit. (There’s also that whole Debit versus Credit thing but don’t get me started. ) I can’t tell you how many discussions have centered around the subject of cash. The discussion with a client can go in one of two directions: 1. “If I made this much money, why don’t I have any cash in the bank? ” or 2. ” I have cash in the bank, so why don’t those financial statements of yours show a profit?”
In the past, I have resorted to drawing on the financial statements, creating elaborate flow charts, building multi-tabbed excel spreadsheets, and one time I tried hand-puppets to make my point. But it’s just not a subject that makes sense to most people. The missing cash can usually be found hiding in the balance sheet as an investment in customer receivables, increased inventory, or additions to fixed assets. The ins and outs of the missing cash can be tracked on the statement of cash flows, but no one ever reads it. (Except fellow accountants and sometimes bankers who are looking for evidence that their loans will be repaid.)
Part of the problem in explaining this concept and many others is the language barrier between us as accountants and the language of normal people like our clients. We tend to think and speak in a linear, numerical fashion while most business owners think visually and speak conceptually. After many years spent wrestling with this issue. we have found a tool that lets us bridge the communication gap. It’s called $COPE It!. It’s a new iteration of similar products we have been using for a couple of years. The beauty of this tool is that you can bring in financial statements, convert them into pictures, and then make changes to your results. So now, rather than telling you that selling more products and services at the same margin (with other factors unchanged) will generate NOT more but LESS cash, I can change one number on the screen and show you the impact on your cash. I can also enter your targeted cash balance, and show you where to focus to achieve it.
After making one simple onscreen change to a set of numbers, I have had even marketing people proclaim that the blanket of confusion has been lifted from their eyes. Suddenly they understand why cash and profit are not the same thing. It really changes the dialogue when you’re doing business planning, negotiating loans, or evaluating new sales strategies.
But you really have to see it to believe it – just ask a member of our team to show you how it works.
Last night I ate at the Mesa Grill in Las Vegas, a wonderful restaurant owned by Food Network Star and Iron Chef, Bobby Flay. I was curious and was keen on keeping my consulting eye open to what makes him one of the country’s most famous restaurateurs. In addition to the fabulous food, two things stood out immediately.
Team members know their numbers. In a brief, informal exchange with the hostess, I found out that the restaurant has 217 seats, breaks even at two table turns per evening, has a goal of three turns per evening, and once served a record 732 dinners in one evening.
Employees know their products. The waitress was very quick to recommend only a few items on the menu, but described them in great detail. She told us which dishes were spicier and exactly how they were prepared. She also asked us exactly how we wanted our steak cooked, so she could properly communicate with the chef. The steak was excellent and perfectly prepared.
Your employees crave information about your business and your products. Give them numbers. Let them know how the business makes money. Give them samples of your products and allow them to describe their personal experiences with your customer. You like to do business with real people. So do your customers.
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