Surviving banker scrutiny

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Lenders are asking dairy producers questions today that many folks on both sides of the desk didn't consider relevant even five years ago. But that's changed dramatically.

Emphasis has shifted from cow numbers to producers' financial acumen. And, that's good for the industry, notes Gary Sipiorski, executive vice president of Citizen's State Bank of Loyal, Wis. "It isn't size that's important," he says. "It's profitability."

For example, if you're planning an expansion, bankers want to know if your operation is currently profitable and what your plans are for the future. And, they're going to ask why you want to expand. "'Because the neighbor is doing it' isn't going to work as an answer," says Sipiorski. Have a plan and be prepared to discuss it.

Furthermore, bankers want greater detail about your day-to-day management style. This includes areas like:

  • Can you work with hired labor?
  • Do you communicate well?
  • What is your environmental mentality?
  • Can you keep cows comfortable?
  • Can you grow or buy high quality feed?
  • Who is involved in your management team?
  • Have you investigated forward contracting your milk?"

They also want to know whether you're willing to learn from key individuals within the industry, and take advantages of opportunities these alliances may afford you. "Are you networking with other producers and key suppliers?" questions Sipiorski. "The top third of producers are doing so and are getting a little more ahead every year.

In fact, producers seem to have stratified into three layers of profitability, he adds. "The top third always asks questions, and the bottom third always thinks it has all the answers."

And, of course, producers' money mentality is critical. "Do you understand the difference between a balance sheet and a cash flow statement?" he queries. "Do you know how your operation compares to other dairies in terms of return of assets, return of investment, asset turnover, operating expense rate, investment per cow, ownership equity and - most importantly - the real cost to produce 100 pounds of milk on your farm?

"When someone comes in and says, 'I have my current balance sheet and cash flow right here, I've figured my return on investment and return of assets on my idea, and if you'll lend me the money to invest in this enterprise plan I've developed, I think we'll see returns like this,' you can bet I'm sitting up and listening," Sipiorski says.

Finally, "bring me good news," Sipiorski says. "I want to hear about your victories."

Visit with your lender monthly, let him know what is happening on your operation and ask his advice regularly. Don't let the only time your lender hears from you is when you need something.



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