Who Wears the CFO Hat on your Dairy?

Lee Gross, FYP Consulting

Who’s responsible for keeping track of income and expenses on your dairy? What exactly should they be keeping track of? Is your lender helping? How about your accountant? What is a CFO anyway? Do you need one?

Joe Hemauer

Joe Hemauer ([email protected]) is our “Chief Financial Officer” coach at FYP Consulting and helps producers with financial planning and analysis. I spoke with Joe recently about the value of having a CFO hat, and the importance of someone on your dairy to wear it. We also talked about tools the CFO needs to do a good job and bring value to the dairy business.

A lightly edited transcript of our conversation follows.

Lee Gross

Let’s start with a definition. CEO is a widely known business term but CFO less so. What is a CFO and what are they responsible for? And while you’re at it, explain the other commonly used titles of COO and CIO, and what they each do.

Joe Hemauer

The CEO or Chief Executive Officer is the highest-ranking executive of a company, responsible for making executive level decisions that affect the entire business. The CFO or Chief Financial Officer, reports to the CEO and is responsible for executive level decisions pertaining to the financial affairs of the company. The COO or Chief Operating Officer, also reporting to the CEO, is responsible for decisions specific to operations.  The CIO or Chief Information Officer is responsible for the information technology used within the company. In larger commercial companies, separate individuals hold these well-defined positions. However, in smaller companies, like many smaller and mid-sized dairies, one person may wear all four hats!

 

 

Gross

We don’t see these titles used very often on dairies. Why is that?

Hemauer 

Having owned and operated our family dairy for a significant portion of my career, I think the boots on the ground dairyman/dairywoman, though they certainly fill the above rolls, probably do not use the titles given the dynamics of the family unit running the dairy. That said, as family dairies grow larger, or with multiple families running multiple dairies, titles like these are given to help identify, and most importantly, clarify responsibilities within the larger or more complex business.

Lee Gross

Gross

But someone on every dairy, regardless of size, is tackling CFO duties, right?

Hemauer

Yes, regardless of size, there is someone doing the job of a CFO. This could be the spouse doing day-to-day bookkeeping for the business, or the farm’s banker monitoring the year-to-year financial progress. However, on most dairies, robust CFO analysis is not performed due to the constraints on time. It’s hard enough getting the production jobs done! That said, as margins get smaller and lenders provide fewer services, there is a need for dairy owners to either intensify their commitment to CFO-type duties or bring in someone who can provide the service. I would argue that we have reached a tipping point where there is a greater need and greater value to the success of the business, having a person dedicated to CFO-level oversight than focusing exclusively on the dairy’s ability to produce that next pound of milk. It’s time for dairies to get a better handle on their finances, either by developing those skills internally or finding a “CFO for Hire”.

Gross

So, what’s important is the work that a CFO does, rather than the title.

Hemauer

Yes, titles are helpful to assign tasks but it is the type and scope of work performed that brings value to the business.

Gross

Let’s back up for a moment.  We’re assuming our readers think financial management is important, but what makes it so?

Hemauer

Uncertainty is really hard on the people within a dairy.  Every day brings uncertainty – where are milk prices headed, how are the cows milking, what’s the lender thinking. It goes on and on.  Having a solid handle on your dairy’s financial status removes some of that uncertainty and adds confidence into decision-making.

Gross

Clearly CFO training and coaching is very important to you.  How did you develop your skills and the interest in helping others build CFO capabilities and/or work with farms in a CFO role?

Hemauer

My wife and I started farming in the mid-1970s. We purchased a 40-cow, 120-acre dairy farm from a retiring dairy farmer. Given my limited knowledge regarding business plans, the FHA Loan Officer and my father, who at the time was a farm training instructor for the local technical college, helped me cobble together a Balance Sheet and Cash Flow (Business Plan) for the venture. Of course, this was “pre-computer” so everything was done long hand without the benefit of Excel, QuickBooks and the like! My wife and I ran the dairy in typical fashion, with my responsibilities leaning more to operations and my wife’s to record keeping. All financial records were done longhand. We used the “record-keeping book” provided by FMHA, capturing just enough detail so taxes could be filed.

By the mid-1980s, our business – and family – grew, and responsibility for our business’s record keeping transitioned from my wife to me. To facilitate the process, I took a major leap and invested in a computer and a software accounting program available through the University of Wisconsin. As time progressed, I moved on to Quick Books as my go-to accounting software.

I have always been a lifelong learner with a desire to dig deeper, asking why.  In the early ‘90s while working with a financial consultant on an expansion, I observed the consultant using a software program called FinPack.  FinPack was developed by the Center for Farm Financial Management at the University of Minnesota.  Seeing the analytical capabilities of this software and ability to develop detailed month-to-month reports and annual business plans, I decided to learn the program myself by attending several seminars at the U of MN.  I continue to use the software today in my consulting.

My interest in helping other farmers runs in my blood.  Being the son of an ag teacher/FFA advisor instilled in me a desire to teach and help others. The seed that ended up growing into my current consulting work was planted while having lunch with a good friend and dairyman, several years ago.  Over lunch, he shared his plan (literally drawn out on a napkin) of how he intended to diversify his 700-cow dairy by starting up a calf ranch and dairy beef finishing enterprise in Southwest Kansas.  My friend was looking for someone who understood the dairy business, had good analytical skills and could be someone he could trust.  He suggested that I launch my own consulting business – with him as my first client. It was quite a project, and I’m glad to say the new venture is successfully up and running, sourcing calves from dairies throughout the greater Midwest.

Gross

Like several of us at FYP, you’ve been involved in operating and managing dairies.  What are some of your on-dairy experiences that shaped your work in this area?

Hemauer

I consider myself very fortunate to have been able to participate in the dairy industry in different capacities: as a “boots on the ground” dairyman starting with 40 cows growing to 500 cows, working “on the other side of the fence” in sales and nutrition, as director of operations for a large multisite/multifamily owned dairy, and now in my consulting role. One common thread I observed from the more successful individuals and/or businesses was the diligence in developing a plan and then “working” the plan.  Regardless of the business’s size or scope of work, all started with a plan.

 

 

 Gross

Let’s talk about what you see as the specifics of a CFO’s work.  What are the key responsibilities of a CFO in terms of working with a dairy?

Hemauer

In a general sense, the key responsibility of the CFO is to help the business develop a strategic financial plan that will enable success for the business and its stakeholders. While there are a lot of details to a plan, my approach is to start with gaining an understanding of the dairy’s:

  • Past performance
  • Current performance
  • Direction the business wants to go.

Past performance: Being able to review several consecutive years of accurately prepared Balance Sheets, Income Statements and Statements of Cash Flows is a tremendous jumpstart. When these statements are not available, the process may be limited to reviewing several years of tax returns. Because most farm businesses file taxes on a cash basis, tax returns do not provide an accurate accrual picture of profit or loss. However, having access to year-end balance sheets for any individual tax year allows the CFO to perform an accrual analysis of past year’s Profit and Losses.

 Current performance: This is looking at the flow of cash through the business.  Is the business on track to cover operating expenses, replacement of capital items, e.g. buildings and equipment, and debt repayment?  Here’s where an annual business plan, preferably month-to-month, pays off.  The CFO can compare budget to actual and quickly determine how things are going.  Monthly tracking gives management a chance to make immediate changes, rather than wait for an end-of-year report.  That’s too late!

Direction the business is going financially: As important as the former two points are, a key responsibility of a CFO and arguably the most important one, is to forecast the company’s future success. Again, this is an involved, detailed process that requires the CFO to dig into other key elements of the business such as:

  • Capital Structure of the business
  • Risk Management
  • Tax Planning

Forecasting begins after an overall understanding of the business has been determined. As I mentioned earlier, the details are beyond the scope of this Q & A but certainly accessible through resources like FYP.

Gross

The items you listed looks daunting to assemble.  How do you approach a “deep-dive” with a dairy business, from your initial meeting to arriving at a strategic plan and forecast?

Hemauer

Indeed, it is daunting, but the payoff is great. I referenced earlier that I use a farm financial management software program called FinPack. It is not an accounting software such as Quick Books but a program that allows one to assemble detailed Balance Sheets, develop Cash Flow Projections (Annual Business Plans), construct “what if” scenarios; i.e., what if we added more cows?  stopped raising replacements? or bought the 80-acres down the road? Among other capabilities, the software has the ability to perform an accrual analysis of a completed year. Especially powerful are the internal calculations performed and detailed in the Executive Summary such as:

  • Cash Flow Summary
  • Change in Working Capital
  • Income Statement
  • Earned Net worth Change
  • Term Debt Coverage
  • Financial Standards Measures

Unfortunately, space here does not allow me to go into greater detail regarding each item but it is my mission to help farmers gain an understanding of these key business indicators.

Gross

You get pushback from some dairy producers that they’ve done just fine without these financial management strategies.  How do you answer that?  Put another way, what’s the risk of not having a CFO or someone doing those duties?

Hemauer

Having someone on the dairy or hiring a person to perform CFO duties will not guarantee the price of milk will remain above the cost of production. However, when prices do fall, the producer that’s done his/her due diligence will be better prepared to deal with that down cycle.  They’ll also find lending institutions more inclined to work with them and help them through challenging times. I believe it was Warren Buffet that said: It’s only when the tide goes out that you learn who has been swimming naked”.

 Gross

Most dairy businesses work with an accountant or accounting firm.  Aren’t they doing what a CFO does?  Can they assume the role of CFO?

Hemauer

Generally, the farm accountant or accounting firm is charged with maintaining a general ledger, depreciation schedules, and other key documents to allow for accurate preparation of tax documents. However, what’s sufficient to compile a tax return is not necessarily detailed enough to construct a strategic business plan.  Also, as I mentioned earlier, most dairies file taxes on a “cash basis”.  Accrual adjustments are needed to give an accurate view of profit and/or loss. Though a good tax accountant is a valued member of the financial team, relying solely on information as presented on a Schedule-F tax return is too limiting. A CFO needs more detail to make decisions.

Gross

How about the dairy’s lender?  They request all kinds of numbers and some have CFO-like capabilities.  How much help can they provide?

Hemauer

The lender can be a source for help, as they need you to succeed. They may do a good job of monitoring business performance and loan repayment – from their point of view.  In good times, the ability to service additional debt may seem apparent and the banker may be inclined to forward additional debt.  This may not be in the best interest of the dairy business.  Without the benefit of a managed strategic plan, the dairy risks becoming over-extended with too much debt.  This can put the entire business at risk during challenging times when working capital dries up!

Gross

Dairy producers hire nutritionists, veterinarians, tax accountants, and others to perform specialized jobs.  Should dairies be hiring a CFO, or can someone on the dairy do it well?

Hemauer

If someone on the dairy has the interest, possesses the skills needed, and has the time available to perform the specialized work of a CFO, there is no reason not to have someone in the dairy take on these tasks. However, specialists such as the nutritionist, veterinarian, and tax accountant were brought into the business because of their expertise and ability to dedicate the time needed to perform their role at a high level.  The role of CFO should be looked at in the same way.

Gross

We should talk about the tools needed by the CFO.  What’s the minimum and what’s ideal?

Hemauer

Assuming one has invested the time to acquire the underlying knowledge to provide the level of service required, at a very minimum the tools needed would be a sharp pencil, note pad and hand calculator! However, if you were to look into my toolbox, you would see most of my “tools” are computer driven. Probably 80% of my time is spent working in Microsoft Excel. It is an extremely powerful tool that I use to record, organize, and analyze the volumes of data collected.  I’ve already mentioned my use of the Center for Financial Management’s software FinPack.  I use this program to build annual business plans, perform year-end accrual analysis, and construct “what if” scenarios for dairies looking at making changes to their business.  Another helpful tool is an accounting software program such as QuickBooks, Red Wing’s Center Point or other farm specific accounting software.  In my case, you will find QuickBooks in my box of CFO tools.

Gross

Where can a dairy producer go to learn more on this topic?

Hemauer

Your state’s University Extension service is a good place to start.  The Center for Farm Financial Management at the U of MN is an excellent resource. https://www.cffm.umn.edu  For a deeper dive, Purdue Extension has published an excellent paper entitled “Farm Business Management for the 21st Century” https://www.extension.purdue.edu/extmedia/EC/EC-712-W.pdf

Gross

Are you available to help a dairy producer set up a system so their important CFO jobs get done?

Hemauer

Yes.  I can be reached at [email protected] or 559-335-3552.  I’ll be happy to help producers build a system that provides financial clarity for their operation. We can get someone in your operation trained to the do work or discuss what to look for if you decide to hire an outside expert.

You can contact Lee Gross directly at [email protected] or through the website at www.fypconsulting.com

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