Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) Weekly Website Columns: Ag Globe Trotter: Road Warrior of Agriculture:

Viability of Dairy Industry in Northeast “Keys” MacroPA natural resourcesplus location to marketsplus conservative mode & mentalityplus infrastructureplus possibility to diversify modest sizeplus

Is Your Business “Farmcreditable / Bankable/ or FSAable?” l Do you know your cost of production? l Do you conduct enterprise analysis? l Do you complete and utilize accrual adjusted income statements? l Do you have accurate up to date balance sheets? l Do you utilize key financial ratios in your business planning? l Do you have a three prong risk management program? (revenue, inputs, & interest rates) l Do you conduct sensitivity analysis on cash flows? l Do you communicate if you have problem? l Do you meet key metrics, ratios, & credit scores? l Do you utilize a business plan?

New Economic Realities- Financial Metrics MeasureCode Red Code Yellow Code Green Working Capital/Exp. Or Rev. <15%15-33%>33% Debt/Asset Ratio >60%40-60%<40% Credit Score < Op. Exp. Revenue (Excluding Depr. & Int.) >80%70-80%<70% Coverage Ratio <125% %>200%

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Signs of a Dairy Business in Difficulty l account payables / supplier credits > 10% of revenue l constant refinancing of operating loans l not covering variable cost of production- more than six months l not covering total cost of production- more than eighteen months l annual loss of earned net worth more than 10% of total net worth l operating expense to revenue ratio (excluding interest and depreciation) over 85% l interest paid revenue ratio over 15% of revenue l percent equity under 30% l credit scores under 650 l have more than five different sources of credit on balance sheet

Financial Profits Diagnosis Worksheet ProblemSymptoms CausesSolution/ Treatment Low Profit Margin l Low ROA l Poor buying l Poor marketing l Poor efficiency l Poor strategy l Poor execution l Murphy’s Law l Business plan l Risk mgmt. plan l Marketing plan l Purchasing plan l Know your costs Low ROA l Refinancing operating debt l Increasing payables l Lack of planning l Lack of execution l Growth l High mgmt. fee l Reduce overhead l Increase margin thru efficiency or growth Poor credit score l Rejected credit l Higher insurance rates l Not paying bills on time l Too much debt l Budget family & home expenses l Seek counsel in improving the credit report Slow capital turnover l Below average to industry peers l Low Profits l High asset values l Low revenue l Sell fixed assets l Sell unneeded or unproductive assets l Sell leased fixed assets l Machinery & equipment budgets per unit Low liquidity l Poor working capital to revenue l Poor current ratio l Using short term funds/profits to fund long term assets l Poor debt structure l Build an annual working capital reserve margin l Refinance l Pay income taxes & deferred taxes High financial leverage l Missed payments l Rejected credit l Personal stress l High levels of debt compared to peers l Rapid aggressive growth l Beginning producers l Murphy’s Law l Slower growth l Allocate profits l Reduce liabilities rather than increase assets l Capital stock infusion

Management Diagnosis Worksheet ProblemSymptomsCausesSolution/ Treatment Management & Labor l Poor communications l Labor turnover l Unproductive labor l High labor cost l Over scheduled l Poor scheduling l Lack of planning l Doing vs. managing l Job responsibilities l Delegation l Training l DISC personality profile l Salary / perks l Meetings l Hire facilitator Long term transition planning l No estate plan l No wills l No mgt. transitions l Failure to train next generation l Poor profits l Last minute corrections l Time management l Lack size and scope of business l Philosophy of generations l Thunder stage comfort l 3-year rule (away from business) l Hire for your weaknesses l 6 year rule l Hire facilitator l Business plan l Exit plan Environmental, Technology & Sustainability l Non compliance l Loss of efficiency & sustainability l Miss match of resources to mode of operations l Challenges with public l Lack of understanding of rules l Lack of understanding of technology or sustainability l Independent vs. interdependent l Lack of understanding of consumer and public l 2 -6 hours of training per week l Records & documentation l Waste & nutrient management plan l Time allocation Marketing Risk Management l Home run hitter l Failure to hit tops & bottoms of the market l Failed before l Too complex l Lack of time l Lack of understanding l Failure to know costs l No strategy l No time table for execution l Know cost l Plan l Strategy l Execution l Risk mitigation l Advisor

Turnaround Strategies l divide cost of production variable fixed total cost l earned net worth vs. appreciated net worth strategy l monthly & quarterly variance analysis actual projected year over year macro / micro l quick victories to build upon l meeting management partners, spouses, lenders agendas minutes l assignments and to do lists l focus on larger costs l SWOT analysis l prioritization of goals l business planning, execution, and monitoring