1. “Taking Action” With Your Farm Accounting System Farm Business Planning 101 – January 24 th 2015 MN Farm Bureau Leadership Conference Pete Henslin – VP Agriculture/Business Banking Owatonna, MN Pam Uhlenkamp – Farm Business Management Instructor Southern Minnesota Center of Agriculture

2. 2 Agenda For Today The Importance Of Farm Records Characteristics of Record Keeping systems How the Accuracy of Farm Records Can Affect Your Operation The “C”s of Credit Preparing For Your Lender Beginning Farmer Lending Options Questions /Discussion

3. 3 Importance Of Farm Records Three Main Reasons For A Good Farm Record Keeping System Income Tax Reporting Obtaining Credit Management Tool

4. 4 Records For Income Tax Reporting Income and Expenses Categories Need to Match Schedule “F” Good Records will dictate a fair taxable income rate. Deprecation Schedules for prorating original costs of Assets Purchased and Capital Gains Tax on Asset Sales

5. 5 Records For Obtaining Credit Financial Records Beyond Income and Expense Records Balance Sheet Income Statement Cash Flow Statements Cost of Production Demonstration of Loan Repayment Capacity

6. 6 Records For Management Tool Financial Production Risk Marketing Personnel Strategic

7. 7 Characteristics Of Record Keeping Systems KISS Appropriate Level of Detail Your Records Should Provide Essential Information On A Timely Basis Integration of Financial and Production Information

8. 8 What Is Included In A Record Keeping System A Business Checking Account to handle Transactions Income Ledger by Calendar Month Expense Ledger by Calendar Month Inventory Ledger for physical counting and valuation A Depreciation Schedule A Balance Sheet to Determine Net Worth Statement of Owner Equity An Income Statement to Determine Net Profit or (Loss) A Cash Flow Statement to Measure Flow of Funds

9. 9 The “C”s of Credit Character Capital Capacity Collateral Conditions Common Sense/Cranium

10. 10 CHARACTER – CEO QUALITIES Financial Management Risk Management Marketing Skills Production Relationship Management INTEGRITY

11. 11 CAPITAL Net Worth Assets That Can Be Utilized To Generate Income Typically, the business/farmer must have its on funds invested and at risk in the farm business before a financial institution will be wiling to risk their own investment Owners personal investment in the business which could be lost if the business fails.

12. 12 CAPACITY Ability To Produce Goods and Services Sufficient Cash Flow to Service Debt Payment History on previous loans. Debt Service Coverage Contingent sources for repayment - personal assets, savings, checking accounts, other resources that might be available.

13. 13 COLLATERAL Assets to Secure Debt Market Value as what could be generated upon sale Type of Asset determines advance rate and length of allowable repayment period. Useful Life Of Asset – Short - Intermediate - Long Term Crop inventory Machinery Livestock Titled Vehicles Buildings/Facilities Land

14. 14 CONDITIONS Borrower and Overall Economy An Event, Action or Obligation That Must Be Fulfilled Or Completed Before Another Proposition Is Fulfilled Often Associated With Contracts General Purpose of the Loan Increase Income or Reduce Expenses

15. 15 COMMON SENSE/CRANIUM Importance of Personal Relationships Communication Skills Vision/Values Realistic Expectations Problem Solving Ability

16. 16 Top 10 Things To Do Before Seeing Your Lender Be Prepared to Tell Your StoryBe Prepared to Tell Your Story An Introduction to Your Management TeamAn Introduction to Your Management Team Know How Much You Need To Borrow and WhyKnow How Much You Need To Borrow and Why Get Your Financial House In OrderGet Your Financial House In Order Understand Your Internal/External Historical Cash Flow SourcesUnderstand Your Internal/External Historical Cash Flow Sources Prepare A Capital Expenditure BudgetPrepare A Capital Expenditure Budget Know What You OweKnow What You Owe Complete Credit Request PackageComplete Credit Request Package The UnmentionablesThe Unmentionables Be Prepared For The MeetingBe Prepared For The Meeting

17. 17 Two Definitions To Help You “Take Action” INSANITY Expecting different results while continuing to do the same things ……. The same way STRESS Stress comes from knowing what is right and doing what is wrong.

18. 18 “Take Action” - Keep Sane and Avoid Stress Examine New Recommendations That Will Preserve Capital Without Abandoning Tactics That Have Proved Valuable In The Past Develop A Financial Plan & A Business Plan- In Writing Save At Least 10% Of Your Earnings Manage All Your Resources Wisely – especially long term assets Keep Debt to a Minimum Spend Less Than You Make Build A Cash Reserve - called ‘Working Capital’ Insure Risk Where Possible Watch Your Health – physical, mental, spiritual

19. Producers That Will Thrive Strong Productive Asset Base Records That Talk To the Business Modest Living Expenses Modest Non-Farm Capital Expenses Working Capital – 33% of Revenue Burn Rate of Working Capital Above 3.5 years Know Cost of Production via Enterprise Strategy/Alternatives History of Handling Adversity Are Not “Victims” NOR “Know It All’s” 19

20. Two Definitions To Help You “Take Action” INSANITY Expecting different results while continuing to do the same things ……. The same way STRESS Stress comes from knowing what is right and doing what is wrong. 20

21. Key Ratios Current Ratio: Current Assets / Current Assets Ideal = 1.25 or higher Debt to Equity: Total Liabilities / Total Equity (Net Worth) Ideal = 1.00 or lower Debt Service Coverage: (Net Farm Income + Non Farm Income + Interest Expense + Depreciation) – Family Living ---------------------------------------------------------------------------------------------------------------------------------------- Principal & Interest Payments (Total Annual) Ideal = 1.20 or higher 21

22. THANK YOU FOR YOUR ATTENTION The Bremer Difference "When you bank with Bremer, we deliver profits to our owner, the Otto Bremer Foundation. The Otto Bremer Foundation uses those profits to make grants to nonprofits in your community."

23. Contact Information Pete Henslin Office: 507-446-2763 Cell: 507-421-6781 E-mail: prehenslin@bremer.comprehenslin@bremer.com Pam Uhlenkamp Cell: 507-351-0463 E-Mail: pam.uhlenkamp@southcentral.edupam.uhlenkamp@southcentral.edu 23