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What Do You Care About

What Do You Care About?

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What do you care about?

In a conversation with a fellow business advisor recently, the topic was about how much demand for our services there would be this fall considering the drought, rising interest rates, a rising Canadian dollar, and volatile crop prices. He said to me, “The work we do is important; people need our help,” and then went on to say how he expects there to be significant demand from the marketplace for our financial advisory work.

I questioned whether the farming industry is “generally” ready to place enough importance on financial matters of cash flow, profitability, and leverage to create the demand he described. My experience is that there are pockets of business people who see the value and hire the help, but generally the financial woes faced at the farmgate have yet to cause enough pain to spur on action.

Change will only occur when the pain of change is less than the pain of staying the same.

It seems like there is always something more important.

His response, “People will tell you what is important, and very clearly too! It’s their behavior. Their actions show you very clearly what they care about most.”

Based on how farm equipment sales continue to be incredibly strong, despite challenges to cash flow and profitability, it’s not rocket-surgery to figure out what is a top priority among farmers…

Faced with a choice of one response over the other, how would you choose:
What do you care about?
a) Ensuring a profitable enterprise for long term growth and sustainability
b) Having a modern/late model fleet of machinery

a) Investing in the crop that provides your income
b) Investing in an “asset” that is a merely a cost and reduces your profitability 5 different ways

a) Getting bigger
b) Getting better

Years ago (WAY back) when I drove a fuel truck for a living, one of my customers always needed significantly less heater fuel (fuel oil) than any other customer on the regular monthly top-ups during one particularly cold winter. It’s not that his house was that new or air-tight; it was not that he didn’t have the money to pay for the fuel (they were a wealthy family.) It was that, by his own admission, he “kept it as cool as possible in the house, about 64 (degrees Fahrenheit).” This was a family of 6, with kids ranging in age from 10-18, whose comfort was less important than money. By his behavior, it was clear what he cared about most.

To Plan for Prosperity

If you feel like you might be facing a choice this year as you evaluate your financial performance, you won’t be alone. Hard choices need to be made by business-people everywhere, every year, all the time. When considering what choice to make, first ask yourself “What do you care about”. When what you care about is clear, the strategy and the action become obvious.

If you are having difficulty defining what you care about, look at past behavior: it will paint the picture for you.

Systems

Systems

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Last week, we discussed the importance of adding value to your business. It hinges on knowledge that allows you to see where your business is creating value or eroding value. Without the knowledge to see where value is positive or negative, we risk making decisions that are emotional or even irrational, but always uninformed.

The key to adding value in your business comes from knowledge about the goings on in your business.

Lately, one of the more common challenges I’ve heard from clients is the challenge of accurately reconciling inventory. Yield monitors are an acceptable guess, but certainly they cannot be taken as gospel (I cannot rationalize how a machine running at high speed can provide an accurate measure of yield without stopping to calculate the mass of the grain…but I digress). Many operations have scales on the grain carts, and while this technology is much more reliable, it is useless if the information is not being recorded.  We wonder why the old adage rings true, “You never get as many bushels out of a bin as you’ve put in.” And we haven’t yet touched on inputs (seed, chemical, fertilizer) nor how you manage returns and the subsequent credits…

You never get as many bushels out of a bin as you’ve put in.

With all the technology available to accurately reconcile inventory, the reason it remains a challenge is that the system of recording and managing information is broken…if it exists at all!

Here is a small sample of the systems you need in your business:

  • Managing/tracking cash and working capital;
  • Managing/tracking inventory (production, inputs, parts, fuel, etc.)
  • Managing/tracking staff (hours, vacation, sick days, etc.)
  • Managing/tracking equipment (operating efficiency, service, repairs, etc.)
  • Controlling Unit Cost of Production
  • Creating Profit.

To Plan for Prosperity

You wouldn’t jump into your combine without confidence that all systems are in place and working properly; in fact, the manufacturers now have systems and sensors in place for almost everything making it so you can’t operate if something “isn’t right.”

There are far too many variables in your business and leaving any of them unmanaged puts your profit and cash flow at risk. With little in the way of guarantees that profit and cash flow will sufficiently meet expectations each year, isn’t it worth investing in the right systems to garner full control of your enterprise?

top producer

Are You a Top Producer?

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Esteemed economist, Dr. David Kohl, is a fervent advocate of improving business decision making. In one of his recent speaking engagements, Dr. Kohl suggested that top producers can answer Yes to at least six of the following questions.

Top Producer Kohls questions

With only 10 questions on the slate, a positive response to only 6 of them would make you a top producer.
You’ll note that nowhere in those 10 questions will you find anything about actual production…

To Plan for Prosperity

If you are unable to answer YES to at least 6 of Dr. Kohl’s questions, then I suggest you do an internal audit on yourself and your business to determine why. If you are unsure about where to start in doing such an audit, or how to make the changes necessary to be able to answer Yes to 6 of 10 questions, then pick up the phone – I can help.

If six-out-of-ten makes you a top producer, imagine how strong your business would be if you hit 10/10…

Per Acre Equipment Investment

Per Acre Equipment Calculation

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In the June 8, 2017 edition of the Western Producer, columnist Kevin Hursh penned Per acre equipment calculation can be revealing. As is typical, Hursh hits the nail on the head with this piece by suggesting farms should know their equipment investment per acre. His column goes on to describe how new equipment has seen significant increases in SRP (suggester retail price) over the last few years, contributing greatly to the elevating of the “per acre equipment calculation.”

First, let’s figure out where you are at. Add up the current value of all your equipment, owned and leased. If that total is $2.5million, and if your farm is 5,000 acres, your equipment investment per acre is $500. If we compare that to a 2,500 acre farm with $1million invested in equipment (therefore $400/ac), who is better off?

Measure it against earnings

Last year, I had a client tell me about a meeting with his lender. This particular client is small acreage, relatively speaking (under 1,000ac in crop) and yet was quite well equipped for his acres. He carried minimal debt, and despite some cash flow challenges over the previous two years, his working capital was still very strong. He was seeking a high-clearance sprayer so that he could ensure timely fungicide applications for his lentils, and other high value crops. The feedback he received from his lender was that his “equipment investment per acre was to high.” On the basis of that single calculation, it most certainly was. What the lender failed to evaluate was the entire farm profitability. Because of the small acre base, my client was able to produce a rotation of high-management high value crops. His net profit per acre was almost double a typical grain farm. His ability to justify a high equipment investment per acre was evident. Needless to say, he acquired his sprayer (a used model valued at just north of $100,000) pushing is equipment investment per acre from $484 to $644.

Let’s go back to the 2 fictional examples above.
EBITDA vs Per Acre Eq InvIf we only looked at equipment investment per acre, we would likely conclude that Farm B is in a better situation by only having $400/ac invested in equipment versus Farm A having $500/ac. Yet when we dig further by bringing EBITDA into the calculation (EBITDA is Earnings Before Interest Taxes Depreciation & Amortization) we discover that Farm A generates stronger EBITDA per acre than Farm B, and is therefore possibly justified in having a higher investment per acre in equipment. In practical applications, even this doesn’t go far enough to determine which is better, but it’s a start.

To Plan for Prosperity

Delving into management calculations can be daunting and confusing. If we don’t know what to look for, how it compares, or even if we’re not measuring anything, we’re already behind before getting started. Begin by measuring the many facets of your business; in this case, “What is your equipment investment per acre?” How has is changed over the last five to ten years?

Relating back to my client, his EBITDA was a whisker under $120/ac, so his EBITDA to Equipment Investment on a per acre basis was about 0.186:1. This means that with his equipment investment of $644/ac will generate about $0.186/ac in EBITDA. Is that a good metric? As Kevin Hursh closed his column, “It’s unfortunate that more information isn’t available on the typical investment levels in each region. That would allow producers to make more relevant comparisons.”

passion

Passion

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“A business without passion is merely a job.

A passion without business is merely a dream.

Making a business of your passion is a bountiful success.”

This morning I was in an email conversation about “mastering your craft” with a fellow business advisor, an incredibly intelligent woman who also happens to be one of my best friends. It reminded me about one of the points I would make during my many speaking engagements over this past winter: sometimes passion is not enough.

We’ve heard it and read it before. It falls out of the mouths of motivational speakers everywhere. It is seen regularly on daytime talk shows, infomercials, and of course, the interweb. “Follow your dreams…harness your passion…” What if passion is not enough?

There are many who venture into “business” who are either ignorant or willfully blind of the financial and management side of “business.” Often they believe that their skill and their passion are all that is necessary to be successful in business. As Michael Gerber wrote in The E-Myth, “The Fatal Assumption is: ‘if you understand the technical work of a business, you understand the business that does the technical work.’ And the reason it’s fatal is that it just isn’t true. In fact it’s the root cause of most small business failures.”

Just because you’re a great cook does not mean you should open a restaurant.
Just because you’re a great welder does not mean you should start a manufacturing company.

This is not to discount the importance of mastering your craft. Realizing on your passion is a gift too few of us ever get to realize. BUT…if you intend to make your passion into a business, you need to know BUSINESS!

I don’t know anyone anywhere whose passion is “cash flow,” but it is an integral part of business that must be intimately known, or the gap from startup to liquidation could by mighty small.

To Plan for Prosperity

During many of my speaking engagements this past winter, I’ve suggested that a simplified strategy can be 1) Find what you are passionate about, and 2) Determine if you can make money doing it. Passion on its own is not enough.

There is a difference between “business owners” and “people who own businesses.” The former are entrepreneurs; the latter have bought themselves a job. Despite “The Entrepreneurial Myth” as Gerber defined it, all hope is not lost for those who have fallen into it. The people who will be most successful are those who can admit they need help in areas where their passion does not lie.

“Do what you do best, and get help for the rest.™”

 

 

Cycles

Cycles

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The weekly op-ed by Kevin Hursh in the Western Producer is a regular read for me. His recent column, Taking Risks OK, but prepare for the next downturn is another resounding piece clamoring for farmers to sit up and take note.

Bullet proof your balance sheet during the good times, so you can catapult ahead of your competitors during the bad times.
If you get greedy during the good times, you’ll likely be on your knees in the bad times.

-Moe Russell, Russell Consulting Group, Iowa USA

We’ve all seen enough charts and graphs over the years to be able to acknowledge and recognize the cycles of the past. Has anyone ever been able to consistently predict a cycle’s beginning, end, or severity? Certainly few, if any, in the energy sector could have predicted what they are going through right now…

Your business produces commodity, and in the commodity business you have no control over the cycles that affect it. Recognizing that cycles will always be present and will always affect your business is the first step. The next step is to prepare.

The future will always belong to those who see the possibilities before they become obvious.

-Danny Klinefelter, Honors Professor & Founder of TEPAP, Texas A&M University

Hursh writes, “While no one can predict the future, it’s probably naive to think that grain prices will always be this strong relative to production costs…it would seem equally naive to think that a world grain glut couldn’t cut grain prices by a third or even by half for a prolonged time period.
” If you follow ag-economic news from the US midwest, you’ll know that farmers there have been under significant pressure, land values are dropping, and lenders are reducing credit limits and tightening lending terms. I’ve asked on a number of occasions, “Who thinks this can’t happen here (in western Canada)?” (ref. Twitter)

Market cycles will hurt some, but offer opportunity to others.
The difference between who suffers and who prospers is…Who’s Ready.

– Kim Gerencser

To Plan for Prosperity

If adhering to the advice in any of the three quotes above, to “bullet proof your balance sheet” & “see the possibilities” in order to “be ready” for the next round of business cycles…well, you better get lean!

While LEAN is possibly best known as a system of techniques and activities for running a manufacturing or service operation, in the context here LEAN means “sans fat.” Trimming the fat from your operation is a primary step to solving cash flow challenges, increasing profitability, and reducing risk. Driving down your operating costs is key to consistent profitability in a time when yields, production quality, and markets are anything but consistent.

Next, reduce the impact of emotion on your business decisions. Two basic human emotions, fear and greed, often have the biggest impact on “why” and “when” bad decisions get made.

In closing, your pragmatic 3-step plan to prosperity during cycles in the commodity business are:

  1. Get lean;
  2. Eliminate “fear and greed” from impacting business decisions;
  3. “Do what you do best, and get help for the rest™”

 

Complacency

Complacency

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You may recall the anecdotal story of an old fisherman sitting on a pier casting and catching all morning. With each catch, he’d pull out a small ruler to measure it. Some fish he’d keep, while others got thrown back. Upon closer observation, we learn that the ruler is broken and only measures to 9 inches; on top of that, any fish that measures more than 9 inches is thrown back while the smaller fish are kept. When confronted, the fisherman admits that his frying pan is only 9 inches in diameter.

When I was farming, on a number of growing years we put up some huge yields, bigger than my dad ever grew. His feedback was, “It’s too much (crop). What are going to do with it? There isn’t enough bin space!”

In both stories, we see examples of where there is a lack of interest or intent to be better, bolder, etc. And if something did not fit the narrow view, it was discarded as being more work that it was worth. Yes, progress brings about new challenges that differ from those we are familiar, but the opposite (meaning status quo) will eventually lead your business into its death-spiral.

Complacency is an incredibly dangerous business condition. You can’t always see it coming. It may be contagious. Treatment is sometimes difficult if sufferers refuse to consider they may be affected. Complacency causes your business to stop growing. It creates an environment where too often heard around your farm are the 6 deadliest words in business: “We’ve always done it this way.”

To Plan for Prosperity

  1. Know what you do best, and keep striving to do it better and better.
  2. Acknowledge what you don’t do well and get professional help with it so that it doesn’t become your Achilles heel.
  3. Recognize that GROWTH is not just size and scale. Seek out multiple ways to grow.

“Do what you do best, and get help for the rest™” is one of the cornerstones of my advisory work with clients. Complacency can be dealt with quickly with the right help, positive results can be had, and the “habit” can be broken.

Commitment

Commitment

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Knowledge is recognizing that a tomato is a fruit.

Wisdom is not putting it in a fruit salad.

A fellow farm advisor called me last week to ask for my opinion. The scenario illustrated a farmer’s plight of whether to seed or not to seed.

More specifically, this 1,800 acre farmer, a bachelor nearing 60, had put together a 5-year plan before the 2011 crop to retire from farming after 2015. After the 2015 crop, a review of his plan indicated he would have yielded a comfortable $400,000 after total farm dispersal. For a guy with no family and a willingness to drive someone else’s tractor in the busy season, that’s not terribly bad.

Despite a plan being in place, despite a nice tidy sum to live on from the sale of farm assets, despite being at the brink of achieving his own stated goal, he felt he wasn’t sure if he could actually retire. So he put in another crop for 2016.

Now in early May 2017, after poor yields and quality on what he actually could harvest, with about 300 acres left to harvest before 2017 seeding can even begin, as the bank is not prepared to extend further operating credit, my colleague asked the farmer, “Do you even want to put in a crop in 2017?”

Let’s summarize:

  • About 16% of last year’s harvest is still in the field as of May 10;
  • What crop did come off was poor quality;
  • There are 1st and 2nd mortgages on owned farm property;
  • Working capital is virtually non-existent;
  • Operating credit has been denied.

Even if this farmer wants to seed a crop in 2017, I don’to see how he will be able to.
What to do?

To Plan for Prosperity

Why did this farmer not stick to the plan he initiated and helped build, that plan that would have left him in a reasonably comfortable spot? Did he review it over those 5 years? Was it adjusted? What changed?

It’s likely that he made the plan at the urging of his advisor, and that he himself was never really committed to it. If that is the case, then the effort, the document, and the strategy are about as valuable as durum with 20% fusarium…throw in all in a pile and burn it.

Collectively, farm advisors have been clamoring for years for farmers to put more effort into planning. Yet without commitment to act on the plan (for whatever the excuse,) any plan is absolutely worthless. It is, in effect, the same as not planning at all, except that we can pat ourselves on the back because we “made a plan.”

No one makes a crop plan then does not act on it. Why does the financial, transition, management, or capital expenditure plans not get the same commitment?

The plan exposes and elevates the knowledge, but it’s the wisdom to act that makes it valuable.

MISmanagement

Operational MISmanagement

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I recently had an experience on my least favorite Canadian airline which was so bizarre that laughter was all I could do in the moment.

The original plan was as follows:

  • 5:50pm Chicago to Toronto;
  • 2.5 hour layover at Pearson, relax, eat, maybe get some work done;
  • 10:55pm Toronto to Regina.

While waiting to board the 5:50pm flight, watching time tick on and on, and even though our plane was at the gate and empty, there was still no one boarding the aircraft at 5:50pm. Yet, the information screen at the gate insisted that our flight was “on time.”  I snapped this picture and tweeted it.Operational MISmanagement

At 5:55pm, an announcement was made: due to runway construction at Toronto airport, our departure from Chicago was being delayed until 9pm. We were instructed to go relax, find something to eat, and come back to the same gate at 8pm. (If you’re keeping track, that is a three hour delay which would have us landing in Toronto at 11pm…5 minutes after my flight home was to leave Toronto for Regina. Clearly, I’m not going to make my connection.)

After to speaking face to face with an airline “customer service agent” (you can infer that the quotes are meant to imply sarcasm) I was informed that there were no other flights on other airlines that might get me to Toronto to make my connection. When asked who would be picking up the cost of my hotel room in Toronto since it was clear my connection would be missed, the response was “We (the airline) don’t do that. But I can give you a food voucher for here (Chicago O’Hare), just be back by 8pm to board this flight.” He hands me a $15 voucher, which was about enough to buy a bottle of water and a piece of gum in O’Hare…

As I begin to circle around to find somewhere to eat, I find myself walking right past my gate, and see a line of people boarding the plane!! The information screen at the gate now says the flight will leave at 6:50pm (If you’re keeping track that is 1hr delayed from the original schedule, but a full 2hrs ahead of what was we were told 15 min earlier.) So I board the plane.

Despite the posted 6:50pm departure time, an announcement from the flight deck is made at 7:15pm: “We’re just waiting on a few passengers and then we’ll push back from the gate. Due to runway construction at Toronto Pearson, we will be unable to reach our gate in Toronto upon arrival. So we’re going to push back and sit on the tarmac in Chicago for 1 hour; we can sit on the tarmac here or in Toronto, it really doesn’t matter. So you know, it’ll be about 1hr from push back to liftoff.” I still can’t understand why we needed to board just to sit in the aircraft when we could have remained in the terminal and actually had something to eat…

Finally we have inched our way to the runway. Wheels up at 8:10pm. One hour flight to Toronto, plus the time change, and we touch down at 10:10pm. Because it’s Toronto, there is 15 minutes of taxiing; we’re at the gate at 10:25. I have 30min to clear customs, clear security, and make my connection home. Now if only the 22 rows in front of me on the flight had been courteous enough to let those of us with a connection off the plane first… To their credit, the airline did request that other passengers without a connection remain seated. No one complied.

long lineMy legs still ache from being at a dead run, with luggage and wearing a suit coat, for what seemed like a mile despite likely only being half that. My Nexus card allowed me to bypass the 308 people in line at customs (I was at a dead run, no I didn’t stop to count them) and thankfully at 11pm, there was no line at security. I am grateful to my fellow passenger coming from Chicago, just as late as I, trying to catch his connection to Montreal. He new where to go to get to our concourse (his departure gate was 2 down from mine.) I would have been lost had I not been following him.

They closed the doors to the jet bridge as I ran up to my departure gate. Through gasped breath, I explained in 2 sentences why I was late (regretfully, I may have used a few expletives.) The gate agent was without a doubt the best person I’d been in contact with from this airline on this day. She let me through, I boarded, and got home as planned.

 

To Plan for Prosperity

Operational MISmanagement costs airlines millions of dollars and immeasurable goodwill. Just have a look at United Airlines’ woes over time… Here are my questions relative to my experience described above:

  1. Runway construction at Pearson did not start unannounced on that day. The airline would have known about it for a long time. Why would we only be notified AT the time of original departure (5:50pm)?
  2. How can a 3 hour delay turn into a 1 hour delay in 15 minutes?
  3. Why rush to board only to sit on the tarmac for an hour before liftoff?
  4. People actually missed that flight, and in my mind it was because the airline told them to come back to board at 8pm but was now leaving the gate by 7:20pm. Part of the delay pushing back from the gate was because their luggage was being removed from the plane. I can’t even formulate a question for this, it is so asinine!!
  5. I was likely to miss my connection due to no fault of mine, yet the airline wouldn’t offer to pay for my hotel. How much do they value their passengers?

M-I-S is capitalized because if refers to your Management Information System. Your Management Information Systems, whether you’ve formally addressed them or not, are put to the test as you approach spring seeding. Tracking inventories (seed, fertilizer, fuel, parts, etc.), people (who is operating what & where), and cash (keeping vendors paid, moving grain as required) are all part of your M.I.S. Lose control of one piece of your M.I.S. and see how things are affected.
What are the impacts of seeding too soon, seeding too late, missing a pesticide application window, running out of fuel, or running out of capital…?

You have a system to get your crop seeded, to get it harvested, to manage all aspects of your business in between. It keeps your business running without a glitch, or in the case of a hiccup it provides adjustments to get back on track.

If Air Canada has any sort of “system,” it’s not working. I’m not sure how they stay in business. They could benefit from a good business advisor…

Who is your customer

Who’s Your Customer?

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Twitter was (are you ready for this) “all atwitter” recently over the forcible removal of a passenger from an overbooked United Airlines flight.
I recently picked up on a Twitter conversation where a farmer was railing on “family farms” that are bigger than the family can operate (his logic was around size & scale of a farm that needs hired help is no longer a “family farm.”) His argument focused on how consumers hear “family farm” yet see large businesses that are worth millions, and how that could affect credibility.
I spent this past weekend in Las Vegas; my first time. It was easy to spot variations in customer service that range from excellent to hardly adequate. (FYI: I specifically chose to not use the term “barely” adequate because in Vegas, that has no many other meanings…)

One might think I spend too much time on Twitter. Actually, I find myself spending less and less; I am not an ideal social media marketer.

Regarding United, they made the decision to overbook this flight (and probably hundreds of others in any given week.) They knew it would inconvenience their customers and might even lead to a firestorm on social media (which it did.) By these actions, United has done a poor job of understanding its customers.

The farmer twitter bit about how consumers might perceive the message of “family farms” has some merit. We’ve learned that consumer perception need not be confused with facts (this is known as the post-truth phenomenon) and no matter the message, truthful or otherwise, belief rules all. Notwithstanding all that, the agriculture industry has done a poor job of connecting with consumers to create sufficient trust to ward off this post-truth B.S. we’re now swilling in…

Service in Las Vegas, a city built on tourism, is varied. Cocktail servers in most casinos were terribly uninterested and submissive, while dealers were all pleasant and engaged. The hotel housekeeping staff always offered a smile and “Good Morning!” to everyone that passed by. Servers in restaurants were generally outstanding.

Recognizing who your customer is and how to connect with them stems from culture. Culture is driven by the organization’s leadership, and is reflected in the environment it creates for employees to interact with customers.

To Plan for Prosperity

It matters not if you are United Airlines, a farm, or a Las Vegas hotel & casino, your customer are not your shareholders, your employees, or your suppliers. Your customers are those who purchase or consume your product or service. Your customers are how you monetize the work you do. How are you making it easier for your customers to want to do business with you?