Recently, my business associate, Alicia Morris, and I completed two three-day courses in cash flow, ratio analysis and loan structuring with Dean Duelke, of Deannco Financial Enterprises, Irvine, CA. The courses were very intense and were led by an outstanding instructor who has had numerous years of experience as a banker and consultant.
Dean really made accounting and cash flow fun and had some very good perspectives to which all of us in business could relate. First, in a business turnaround, one has to have good records and financial accounting to make objective decisions.
Next, focus on increasing efficiency rather than growth as a first-line strategy. That includes earning more net margin. For the production and business person reading this column, that may be knowing your cost of production by enterprise and conducting a variance analysis on each cost item. For example, review what is budgeted, what was actual, and the reasons for the deviation.
Dean indicated that some surprises are because of external events, like oil prices this year that have impacted fertilizer, fuel and chemical cost. Others may be the result of mismanagement. Examples might include an ineffective marketing plan, improper resource management or failure to lock in interest rates.
Next, the business should generate sufficient profits to cover the principal portion of the long-term debt. If your business does not generate enough profits to do this, then you must live off of depreciation, utilize off farm income or sell capital assets.
To summarize, for a successful business turnaround, have a good foundation of records, know your cost, seek efficiency to improve margin and meet the long-term loan pay down with the bottom line profits. More perspectives from this educational experience will be included in later columns.
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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