In all his years as a farm extension adviser, a remarkable set of records on a 300-cow herd one rancher meticulously maintained in a ringed binder stands out as a highlight for Grant Palmer.
“He said, ‘These are my calving records,’” said Palmer, in a presentation at the recent Manitoba Grazing School.
“We started flipping through it, and it went back to 1971. He had cow number, age of the cow, colour, and date the calf was born. I thought, ‘My God, when he’s done, that thing should go into an ag museum somewhere.’”
Palmer, a policy economist with Manitoba Agriculture, Food and Rural Initiatives (MAFRI) says ranching has always been a tough business that requires good record-keeping. But in today’s world, carving notches on the gate post as the steers run past in the fall is no longer enough.
Whether farmers use a computer or a notebook, the important thing is to be “ferocious” about preserving relevent numbers, he said.
That means everything from the obvious, which includes the number of calves born/weaned, tons of forage made and fed, pasture days and pounds of calves sold, as well as AgriStability payments and sales tax paid.
Keeping track of fuel expenses is often overlooked, especially on mixed farms, but for diesel-intensive operations, it is data worth keeping, because future make-or-break management decisions may require rethinking big-picture strategies to cut costs.
Processing that information pulls important elements into a format that can be studied, such as gross income, income per calf and per cow, as well as debt payment per acre and per cow.
This helps when meeting with bankers, who like to assess their client’s ability to meet short-term or 12-month obligations.
“The liquidity or solvency ratios are snapshots of a point in time. Today, I owe this much on my line of credit, I have this much of a cash advance, the value of my market livestock is X, the value of my feed inventory is Y. My earning potential is included in this,” said Palmer.
When current assets are divided by current liabilities, the ratio is “hopefully” greater than one to provide a buffer if something goes wrong. If not, you might have a cash flow problem, or come up short in the next 12 months.
“If you go in to FCC or MASC, they are going to want to see something at 1.25:1 or greater before they lend you any more money,” he said.
Like a good general inspecting the troops, supplies and weapons, a manager needs to know his solvency ratio, or debt-to-equity ratio. In war, this helps determine the risk of defeat in a new campaign, and in management terms, the capacity to borrow.
This is calculated by total liabilities over total assets, and varies depending on the business venture.
“In my opinion, if your ratio is 0.5:1, that’s a problem. That means for every dollar of assets you have, there’s 50 cents in debt, or 50 per cent equity,” he said, adding that even 0.3:1 is a potential problem for cow-calf operators with no off-farm income.
Net farm income is gross revenue minus total expenses, plus or minus inventory change less depreciation. Return on equity, helpful for comparing the farm to other investments, is net income minus labour, divided by equity in the farm.
Expense-revenue ratio, or how much you need to spend to earn $1 of income, is often an “eye-opening experience,” he added.
Don’t even bother to schedule an appointment with a lender if your debt service ratio is not greater than 1.25:1, because for every dollar of principal and interest paid, there needs to be at least $1.25 of net income to make it.
Equipment investment on farms in Manitoba typically ranges from 50 to 200 per cent of gross revenue.
“So, if you have $100,000 in gross revenue, there is anywhere from $50,000 to $200,000 in equipment investment.”
Is your farm viable? Ideally, that means it operates in an economically and personally sustainable manner. Second best is a farm business that offers returns greater than the next best alternative.
The worst, said Palmer, is a farm that can only keep going if it is heavily subsidized by owner labour, depreciation, and off-farm income.
“There are profitable cattle farms out there, but they are run by maybe the top 10 per cent of managers. At some point, you have to ask yourself, where do I fit in?” he said. [email protected]