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Adjusting to meet new financial reporting requirements

Larry Davis Published on 03 February 2011
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Much has happened over the last three years in both the dairy industry and the financial world – changes that dairy producers will need to navigate with care.

During this time, we have seen milk prices swing from near record-level highs to the lowest lows in 10 years.

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Price volatility in feedstuffs also has followed a similar pattern and is creating considerable challenges for many dairy producers.

During this same period, we witnessed a prolonged recession, a financial crisis and the freezing of the credit markets, all of which ultimately resulted in an entirely new landscape for the financial industry.

This sea change has ushered in a new era of heightened reporting requirements that dairy producers will now face.

The reason dairy producers are being asked to provide more financial reporting information to their lenders boils down to two simple facts:

1. The credit quality in a lender’s portfolio is being scrutinized more than ever.

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2. Dairy producers have been through a very difficult price cycle that has negatively impacted many balance sheets.

These increased reporting requirements have undoubtedly had an impact on financial management system and preparation. Here are a few suggestions on how to manage these changes.

1. Arrange a meeting among yourself, your lender and your bookkeeper/CPA to discuss reporting requirements.

Understanding what information is required is the first step in being able to implement changes to reporting.

Ask questions to better understand what information is needed. For example, make sure you know how advance rates on cows are calculated. Discuss the frequency of reporting this information. Is quarterly reporting acceptable or does the information need to be provided monthly? Can this information be sent electronically or is a hard copy necessary?

Understanding all expectations of your lender is by far the most important first step you can take in satisfying his information needs. This also causes the lender to be specific in his requests and improves the overall communication with the borrower.

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2. Discuss in detail with your bookkeeper/CPA the process you both will follow in meeting the new reporting requirements.

Review the notes from your meeting with the lender and outline the process you will use to provide this information. Discuss what changes need to be made in the operation in order to meet any new requirements in areas like advance rates and liquidity.

Discuss if there are other people involved in the operation that will be impacted by these changes and, if so, what communication do they need going forward in order to help meet these requirements?

Once these items have been discussed in detail, a plan of action needs to be developed with input from all people involved with the changes. Again, communication with other team members is important so expectations are understood and there are no surprises down the road.

3. Implement the changes with all areas of the operation.

Once you have identified the changes needed in reporting, identified how those changes affect various parts of the operation and communicated the proper expectations with your team members, you are ready to move forward and implement the changes required.

After implementation, monitoring the process and results is a very important step to ensure the new reporting requirements and standards are being met. Following up with internal team members is an important part of this process, as is making sure the lender receives the information he has requested.

Events and trends over the last several years both in the dairy industry and the larger world have helped create the climate we have today in the banking industry. These events and trends have dictated the evolution of these institutions and resulted in changes in both the type of information dairy producers will need to provide, as well as new, more demanding reporting requirements.

Taking the time to understand these changes, along with developing and implementing new processes and monitoring the results, will bring about a continued strong relationship with your lender that will benefit you in the future. PD

PHOTO
Once you have identified the changes needed in reporting, identified how those changes affect various parts of the operation and communicated the proper expectations with your team members, you are ready to move forward and implement the changes required. Photo by PD staff.

Larry Davis

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