4 min read

No One Wants To Be A Mushroom

Picture of Sherry Lorton Sherry Lorton Jul 26, 2016

Mark-to-Market CFO Insights

In our last Grain Accounting class the discussion turned to the importance of having a good banking relationship. A lender in the meeting made the comment “just don’t treat me like a mushroom.” With a lot of puzzled looks staring back at him he went on to explain, “you know … keep me in the dark and shovel on the manure.”

While his comment got a good chuckle from the group it also rang with a lot of truth. It hit home not just with the lenders but all who are a part of the grain merchandising team … the merchandiser, the accountant, the lender and upper management. Sometimes it feels like you’re being left in the dark about what’s going on with the numbers.

Maintaining an open line of communication is difficult in many businesses but it can be especially so in a grain-focused basis trading operation. The challenge is that the different sectors of the operation seem to hold different pieces of the puzzle. Until all pieces are put together no one really has a clear view of what the picture looks like. Let me give you a few examples:

I spoke recently with the accounting department from a large multi-location coop. They had the responsibility of collecting the numbers from all the locations, doing the monthly mark-to-market entries and producing the monthly statements. They had the best most up-to-date accounting software money could buy. The routines and processes were down pat and there were no doubts the numbers were spot-on accurate. The challenge, the head of the department explained, “my team is really good at collecting and inputting the numbers; we know the computer software inside and out. We just don’t always know how to explain the outcome. Why we show a $50,000 gross profit one month and a $20,000 loss the next.”

This is the case with a lot of companies as the accounting process has become more automated. It’s great to have the software but somewhere along the lines we lost some of the understanding of why the numbers are the way they are.

The merchandisers in the operation have a different perspective on the numbers. They see the world in basis terms and are focused on managing open basis positions … the same positions the accounting team has to mark-to-market. This can, at times, be a point of contention.

Accounting is all about drawing a line in the sand at the end of each month and placing a market value on each individual piece of the puzzle. This is a value that is surely to change the next month but, for now, it gives a snapshot of where things stand at this moment in time.

Merchandisers on the other hand are focused on the outcome. They see the inventory in the bin bought at “fifty under the DEC” will be sold for “ten over the MAY” and make a .60 gross margin. These are the same bushels that might currently reflect a $20,000 loss on the financial statement. And, so the discussion begins, “how can you show I’m losing $20,000 on this trade when I know I’m making $50,000.” While the bookkeeper argues, “you just don’t understand how the mark-to-market process works!”

The conversations can be frustrating because they’re both right. The accounting numbers can show the picture one way while the merchandising outlook is for another. Coming to agreement as to what the numbers should represent is what’s needed … but before that can happen an understanding of each other’s point of view must be achieved.

Now add to the conversation yet another perspective on the numbers … that of the lender. In this world it’s all about working capital and ratios. Those precious monthly financial statements hold the key to your ability to obtain and maintain proper financing. And, while your eyes quickly go the bottom line of the P & L, the lender is scrutinizing your balance sheet. Do you know what causes him concern? It can be difficult to get the financing you need unless your lenders truly understand your business and you understand theirs.

Then there is the view of the numbers from upper management to consider. What the board, owners and stockholders are looking for is profits. When profits of the grain division increase by 100% or decrease by 50% they need to know why. “Is this a one time event or a long term trend?”

For a grain elevator operation the answer to their questions lay in the opportunities presented by the basis and spreads. But, unless these conversations take place and the situation explored from both an accounting and basis perspective management doesn’t have the complete picture to make informed decisions about the company’s future.

When you have each person looking at the same thing with a different set of eyes there are bound to be issues. Improved communication is the key to overcoming them. But not just talk for the sake of talking. It has to be a conversation where each person understands at least the fundamentals of what the other is saying. That means, the accountant needs to understand general basis talk, the merchandiser needs to understand the generalities of mark-to-market, and the lender and upper management need a big picture understanding of it all.

How does an organization develop this depth of understanding and communication amongst its grain team? One solution is getting your team involved in the “Mark-to-Market Grain Accounting course” offered by White Commercial.

The course started as a basic grain accounting class that taught the steps to doing monthly mark-to-market entries. It has since grown into a comprehensive training program on managing the financial side of a basis trading grain operation. Emphasis is placed on increasing knowledge and awareness of the merchandising side of the business through insightful team communications.

Find out how to get involved in the Mark-to-Market Grain Accounting course here on our website.

The fiscal year ends for many grain operations during the summer months and you have all those financial statements to ponder over. What a perfect time to take on the initiative to train your team to have more insightful conversations. After all, no one wants to be the mushroom!

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