|
|
News Releases
December 14, 2009
Milestones and Measurements by Greg WolfMilestones and measurements
I am writing this column belatedly on the day before Thanksgiving, which adds some thoughts to the subject for this month--milestones and measurements. First, I am past the milestone getting this column to my editor. Next, I am in the midst of a unique time period that I experience most years--the time period between my two birthdays. I was born on November 23, but in 1967 that was also Thanksgiving morning. So, most years I enjoy two birthdays with a few days between them. And birthdays are certainly milestones, so I have some extra time to ponder those. Milestones date back to early 'highways' used by the Romans and others, marked at the miles with stones. So they remain a good descriptor of opportunities along a journey, to consider where we are.
I'm convinced that while life doesn't actually pick up speed once we are out of school, it does seem that way. And that is because the annual school cycle doesn't constrain as much of our lives, and so it seems like a lot more happens between each stone. Some milestones, of course, are years, like a birthday. Others are emotional. Our family recently traveled to San Antonio for a conference. We had gone several years ago and had some incredible memories of the city that we wanted to experience again. What we found was that the trip was a lot different this time around, though still wonderful. Some of our best memories from the first trip were replaced this time by others.
Still other milestones are financial and, while "not everything that counts can be counted," it is with financial milestones and measurements that we can trace the trajectory of our family business or investment portfolio. In the years of my consulting work that I have done with Kennedy and Coe and our clients, I have done a lot of financial trend analysis, where we 'spread' financial data across several years, and analyze both key numbers as well as key ratios, which illustrate a relationship between key numbers. It is in the multi-year analyses that the most fascinating perspective comes, because the trends start to manifest themselves and tell a story about where we are and why. Sometimes it really is not as much about where we are at today, as where we have come from and why, that has brought us to this point.
A little over three years ago, I expanded on the theme of doing these financial analyses for clients by organizing a number of them into a collective study. In analyzing their information together, I not only derived some key measurements and, now in the third year, some trend milestones, but also a degree of comparative benchmarking among the group. We've had about 20 clients participate in the study each year, representing a larger and well-managed group of operations averaging close to 13,000 managed acres, and located in Kansas and Colorado. In the three years of the study, some of the observations would have been expected, but there were always a few surprises in the trends, both as a group and for individual participants. As expected, balance sheets have strengthened, which corresponds with most of American agriculture during this time period, especially for crop farmers, who make up the bulk of this study. And income has been pretty positive, and the 'story' of that income takes the shape of a mountaintop experience, with returns to equity fairly modest the first year at 5.7 percent, climbing to 19.1 percent in 2007, and settling back around 7.6 percent for 2008. As those numbers do not include any appreciation of asset values, ag returns, at least as measured by this group of producers, has been a real bright spot in the American economy.
Some additional data, while not really surprising, was nevertheless insightful. From 2006 to 2008, government payments dropped from about 10 percent of total revenue to just less than 5 percent, which makes the actual profitability trend of this group look even stronger. Average working capital numbers were extremely strong, jumping to a liquidity ratio of 228 percent at the end of 2008 from 126 percent, but looked even stronger at 38 percent as a percentage of annual revenue, up from 17 percent in 2006. That measurement mirrors what the story is in the financial markets--there is more money "sitting on the sidelines" awaiting investment opportunities. Again, the number is only a measurement--the trend tells the story. All financial measurements, some with more value than others, nevertheless help tell a story--the story of where a business is, where it has been, and why. That helps in making better informed plans for the future.
Earlier this week, on my "first" birthday of 2009, I was in a small meeting with a group of colleagues and an outside consultant who was helping us with a project. Surprised with a birthday cake and song, I shared my age when asked. The consultant impressed me by quickly sharing hers and saying she never struggled with sharing her age--"because it is such a blessing to be getting older." That's a good way to think about any milestone.
Editor's note: Greg Wolf is a consultant with Kennedy and Coe, LLC (www.kcoe.com) and works to help clients of the firm navigate toward better returns in all areas of their businesses. He is based in the firm's Pratt, Kan., office and can be reached at 620-672-7476.
Adobe Reader is required for viewing many of the materials posted. Please click here to download free.
|
