The author is the dairy development manager for Vita Plus of Madison, Wis. He is a member of the board of directors with Citizens State Bank of Loyal, Wis.
One day your son or daughter may be running your dairy, and that begs the question, what should my 18-year-old know about farm finances? It might be hard to admit but each year everyone gets a year older. The alternative takes a person permanently out of the business of milking cows. As the years keep mounting, the decisions on running a dairy keep getting tougher. Someone is going to successfully be milking cows in the future . . . and based on global demand . . . will be paid well for their efforts if they can handle the volatility. Not everyone will be up to the physical and mental task.

With the next generation in the family, for many the question begs, "What do they need to know and when do you start teaching them about the business?"

While there are many skills to acquire, one of the biggest talents is financial literacy.
While this may seem rather elementary, all young people need a good foundation of the three Rs. This starts around the kitchen table as youngsters with adult encouragement, along with talented teachers. For business preparation, reading comprehension is a must in any occupation. Writing skills to structure thoughts and reasoning on paper is important. Math skills open the door to financial understanding. Advanced mathematics sharpens critical thinking that is exercised every day.

Multiple steps needed

The financial road map of learning is best taught and understood if approached in steps. You will have to be the judge of when a young person has reached an age of understanding when they can comprehend this financial information. Also, make sure everyone has an agreement that personal and farm financial discussions must remain confidential. Here are some stair step options to grow financial literacy:

1. Checking accounts:

Teach them how to use a personal checking account. Then share the farm checking account so they can see the dynamics of the volumes of income and the huge amount of expenses.

2. Reconciling a checking account:

Once again starting with the personal checking account, then matching checks or transactions made to the invoices. Have them make sure the checking account balance agrees with the month-end statement.

3. Debit card:

Understand where the money is coming from and making sure receipts are compared and checked off with the account statement monthly.

4. Credit card:

These are useful tools that can easily be abused. Teaching the importance of paying them off when the statement arrives on a monthly basis will save a great deal of heartache in the future.

5. Terms of a loan or lease:

Interest rate, amortization and interest cost for the length of the loan all represent financial instruments on the borrowing side of a dairy. These should be discussed when loans or leases are being considered. The importance of staying current on the payments must be stressed.

6. Cash flow, with principal repayment:

Farm expenses including some wear and tear depreciation, family living, interest, principal, and lease payments divided by the hundredweight of milk sold in a year gives a dairy a snapshot of cost per cwt. of milk and what went into and out of the checkbook. (If year-end prepayments were made or income checks were deferred, these amounts need to be adjusted from year-end numbers.)

7. Income statement, with depreciation:

The difference here is the full depreciation is used with principal payments, plus operating farm expense, interest, lease payments and family living.

8. Balance sheet:

Help the young person do a personal balance sheet. After that, share the farms assets, liabilities and net worth on a larger scale.

9. Fair market value:

Cattle, machinery and farm real estate sells every day. Help the youth understand why a fair market value balance sheet is important to you and how the lender uses it for collateral values in borrowing money.

10. Book value:

Balance sheets show the depreciated value of assets. Explain why an accountant does this type of a balance sheet for a farm that is a corporation and why other farms may have a book value balance sheet, as well.

A long-haul tutorial

This level of financial understanding is not going to be absorbed in one sitting. It will take some longer-term planning along with "teachable" moments as decisions are made on the farm.
Do not miss the "moment" and be always conscious that someone is watching you. You will have help as well from accountants, financial consultants, lenders, nutritionists, crop consultants, veterinarians, and attorneys. Do not just rely on one teacher even though you have to be the main instructor.

This article appears on page 387 of the May 25, 2015 issue of Hoard's Dairyman.

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