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Questions from Farmers

Over the winter, I do a number of speaking engagements, usually around finance and management. Here are some questions and comments from the audience, and excerpts of my response.

 

Farmer: How do I improve my working capital and current ratio?

Kim: Simply put, either reduce your current liabilities or increase your current assets…or both! Considering current liabilities, what makes up the lion’s share? Typically it’s lines of credit, cash advances, and loan payments due in the current year. So to achieve the goal of reducing current liabilities, over time (because it will take time) wean yourself off of operating credit. Protect, even hoard, your cash over time so that you can achieve working capital equal to 50% of your annual cash costs. By the time you achieve that level of working capital, your current ratio should be very strong.

 

Farmer: As someone who is still in growth phase, I can’t expect the kind of return on my cash costs that you’re suggesting. Isn’t it okay to run at zero because I’m in a growth phase?

Kim: First, your business and the industry are cyclical, so yes there will be years when your return is zero, but don’t accept being at zero year over year for any length of time. That being said, your growth phase is likely running your cash to zero, and what I’m prescribing as “return on cash costs” is a profitability measure; they’re different. A business can be profitable and have no cash because the cash might be immediately fed directly into the growth of the business. Yes, you’re going to run tight on cash during a growth phase, but don’t accept poor profitability.

 

The following are a sample of comments made by participants:

  • Mentioning “Mission” and “Vision” statements is interesting. I don’t think having one makes you more money, but it’s funny how those that have one are doing better than those that don’t.
  • I’m trying to figure out how to value unborn calves when looking at my working capital.
  • This current ratio figure is going to swing widely depending on when (what time of year) you do it.
  • Don’t buy (something like equipment or pick-up trucks) just because you have some cash.
  • We’ve got someone doing our books for us, and we review all our ratios monthly.
  • I never viewed HR as a risk before.
  • Every farmer should attend this seminar. Even if they know everything you’ve discussed, it’s a good refresher.

 

Plan for Prosperity

There is a reason I use the heading “Plan for Prosperity” for my closing comments: we need to plan our businesses. Whether that be our 10 year strategy, the next 18 months of cash flow, or determining how our growth aspirations would be affected by a rising dollar or rising interest rates, planning is key to your business. And the planning must, yes…MUST, go beyond the crop plan. That crop plan is but one aspect of your business. Don’t ignore the others unless you don’t want prosperity.

When considering how to approach the plans you must address in your business, consider the following three questions in order:

  1. Why do we do what we do?
  2. What do we want to achieve?
  3. How will we do it?

If you’ve managed to provide honest and detailed answers, the rest of the “planning” becomes much more clear.

 

Changing Paths

Changing Paths

Two summers ago, 5 friends gathered to undertake a 2-day back country mountain hike. All the plans were finalized well ahead of time. Everyone invested in proper gear for such an adventure: backpack, drinking water storage, hiking boots, etc. The weather was perfect. The gear lived up to its expectations. No one got hurt. The entire excursion truly was a success.

The best intentions ahead of such a trip were evident, yet preparations had to be made for unpredictable scenarios such as encountering a bear, inclement weather, or getting lost. There is no cell service in the back country…

In this case, everyone was prepared for challenges along the way.

Contrast the story above with a trip into the city, or even a longer trip to location out of province. If it’s a day trip or a short run, as long as there is enough fuel in the vehicle, all you might grab is a jacket on your way out the door. Longer journeys might lead you to give the vehicle a servicing beforehand, fuel it up, and load it with some luggage and possibly snacks for the drive. You know what route you’ll take and you know how long it takes to get there. Off you go…

Along the way,

  • you find your primary gravel road is getting a culvert replaced (forcing a 5 mile detour);
  • you drive through an unmarked rough patch on the highway that causes your coffee to spill on your lap;
  • you come up to a minor collision where the emergency vehicles (tow trucks, police) have slowed traffic which is now backed up one-eighth of a mile;
  • The total drive time of 1 hour (or 2 hours, or 7 hours) other than the 3 points above were “ideal driving conditions” with smooth roads, light traffic, and a tail wind.
  • You arrive at your destination 20 minutes later than planned but safe and sound.

We might describe this story as a terrible excursion where nothing went right. Yet, we did arrive safely, without injury (or worse.)

In the first story, about the mountain hike, the friends were later discussing doing another such trek in the future. It is good for the soul, after all. In that discussion, comments were made about not needing to “over-pack” next time (because the first trip had no significant challenges likes bears or snow.)

In the second story, unforeseen obstacles hindered progress and challenged our perspective of what a successful trip really is.

To Plan for Prosperity

The journeys above are a metaphor for your business.

When tackling something new, it is common to over-prepare. Then if the venture is successful, it is easy to shuck all the preparedness that wasn’t needed the first time around which could put you and your business at significant risk. What in your business is equivalent to running into a bear on a back country mountain path?

Conversely, when setting out on a familiar trek, any glitch (no matter how small) can cause us to get upset, even angry, and wonder “why is this happening to me?” We fail to recognize that we didn’t plan for any contingencies, and left ourselves at risk. What in your business is equivalent to a 5 mile detour, or hot coffee spilling in your lap?

How do you respond when revenue falls short of expectations, or when a key employee resigns? In business, and in life, we have to be willing and able to change paths, sometimes by choice while other times we are forced.

Our ability to adjust is critical to our success.

 

FOUR HANDS MALE AND FEMALE TOAST WITH MUGS OF BEER

Milestones

This is the 150th consecutive Tuesday that I have written and shared this weekly Op-Ed piece. Thank you for reading it each week. I am humbled by the number of subscriptions you have provided.

Truth be told, I almost blew right by this milestone. There is another piece I had written that was ready to be sent. It was only when preparing to load it into the emailing program I use that number 150 came to light. This gives a good opportunity to pause and reflect.

In January 2015, I was starting from square zero by going fully independent in my business advisory practice. I left behind all of the clients and prospects I had at the time to start with a clean slate and a clear conscience.

Here’s some of what I’ve learned over the last 150 weeks.

  1. Right when you think you know something, someone comes along and blows that “knowledge” right out of the water. Hence, one of the mantras I live by: Learn, Unlearn, Relearn.
  2. Success is not defined by how big your investment portfolio is, or how large your business is. As Alan Weiss says, “There Is Always A Bigger Boat™ – stop living by other people’s standards!”
  3. The greatest limiting factor in our businesses is usually ourselves. Our businesses are limited by our vision, our fears, our aversion to the right risk, or our propensity for the wrong risk. Coincidentally, this also applies to our lives.
  4. Far too many businesses continue to make decisions with inaccurate or insufficient information at best… or with emotion & a hunch at worst.
  5. Going by behavior and attitudes, the shift from farming as a “lifestyle” to farming as a “business” still has a long way to go.

What is your milestone in business? How has your business changed over that time? What is the next milestone you see?

To Plan for Prosperity

The path is never clear, there are always obstacles that will cause you to make adjustments. It is safe to say that someone else’s path may not be best for you since it’s their path, not yours, and you’re not them. Choose your path carefully, but give yourself the freedom to choose another when necessary.

  1. Clarify your definition of success.
  2. Establish specific goals that will lead you to success.
  3. Set out tactics to achieve your goals.
  4. Prepare contingencies.
  5. Execute.

I’ve revisited that simple 5-step plan more than once in the last 150 weeks. I expect I’ll revisit it several times more over the next 150. I utilize my business advisor to help me with that process; I am walking my talk…”Do what you do best, and get help for the rest™!”

Cheers to Success!

 

Complex Decision Making

Complex Decision Making

On October 21, 2017, Seth Godin wrote the following:

Decision making, after the fact

Critics are eager to pick apart complex decisions made by others.

Prime Ministers, CEOs, even football coaches are apparently serially incompetent. If they had only listened to folks who knew precisely what they should have done, they would have been far better off.

Of course, these critics have a great deal of trouble making less-complex decisions in their own lives. They carry the wrong credit cards, buy the wrong stocks, invest in the wrong piece of real estate.

Some of them even have trouble deciding what to eat for dinner.

Complex decision making is a skill—it can be learned, and some people are significantly better at it than others. It involves instinct, without a doubt, but also the ability to gather information that seems irrelevant, to ignore information that seems urgent, to patiently consider not just the short term but the long term implications.

The loudest critics have poor track records in every one of these areas.

Mostly, making good decisions involves beginning with a commitment to make a decision. That’s the hard part. Choosing the best possible path is only possible after you’ve established that you’ve got the guts and the commitment to make a decision.

 

With the benefit of hindsight, none of us is ever wrong. We can, without fear of reprisal, predict what just happened 5 minutes ago.

In business, we can not afford to avoid the complex decisions. Leaving it to chance or following the crowd is about as solid of a strategy as allowing “hope” to be your business plan…

In the next breath, we must cut ourselves some slack; large and complex decisions are daunting. It can seem easier to do nothing than to tackle a complex decision and risk making the wrong choice. But, as Godin wrote, “making good decisions involves beginning with a commitment to make a decision. That’s the hard part.”

To Plan for Prosperity

“Paralysis by analysis” is an old adage that accurately and humorously describes our inability to make a decision (and act on it) because we never stop considering different options. We might feel like a failure, or inept, if we don’t get the decision right.

In reality, more opportunities are lost from perfect inaction than there are mistakes made from imperfect action.

What Do You Care About

What Do You Care About?

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.

top producer

Are You a Top Producer?

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…

Better is Better

Better is Better…

Would you rather make $50/acre profit on 20,000 acres or $100/acre profit on 10,000 acres?

This is a question I ask any farmer who admits to pursuing aggressive expansion. As was aptly described in a recent edition of FCC’s AgriSuccess  in May 2017, journalist Kevin Hursh discusses cost effectiveness of farm expansion with Kristjan Hebert. Kristjan has been quoted in this commentary a number of times in the past because he is the first person I hear using the term “Better is better before bigger is better.” To his credit, he admits that it isn’t his phrase; he heard first heard it from someone else.

The question posed at the beginning of this piece is meant to evoke an admission of any business flaws that have crept in to the practices and decisions that drive aggressive expansion.

The point is acknowledge that for all the risk undertaken in the operations of any agricultural enterprise over the course of one year, the end result must recognize the effort involved and the risk taken. If you’re working harder and risking more, why would you accept less profit? True, the linear dollar profit is the same in this example, but the profit per unit (in this case, per acre) is half. Anyone who can prove that their whole farm costs, right to the paperclips, are also halved is welcome to step up and prove that bigger is in fact better. I’ll wait…

There are many advisors who have questioned why any commodity production business would want to rapidly expand before doing the best job they can on what they already have. The argument on what led to the mindset of expansion at all costs hasn’t been settled in over 20 years, and won’t be settled here today. But in the end, we can do better, we must do better, because now we know better.

And the words are true: Better IS Better…

To Plan for Prosperity

This week’s piece is purposefully pithy. It is meant to drive awareness of the “Costs and Effects™” of the decisions made in our businesses. Every choice we make has a consequence, and to truly “be better,” we must evaluate each business decision on its merit, not how it makes us feel.

While bigger can sometimes be better, it’s guaranteed that better is always better.

 

Discipline

Discipline

Over the last number of weeks, we’ve contrasted two fictional farmers and their approach to managing growth, and specifically an expansion opportunity. One failed in his aspirations, the other succeeded. One of the major factors contributing to the results of both examples is discipline.

“Fictional Fred” was lacking discipline. He shot from the hip, and ran his business in a reactionary fashion. He did not make it habit to consider the impact of the decisions he was making, whether it be adding another combine late in the season, or attempting to take on additional land that would equate to an immediate 66% increase in cultivated acres. He recklessly adds equipment to his business which has driven up his equipment cost. This has also come with the cost of damage to his relationship with his primary lenders. Fred behaves in a way that many people think is entitled. He’s done few favors for himself with his recent actions.

“Imaginary Harry” exercises great discipline in how he manages his business. He has a strategy that was constructed with the aid of his trusted advisors. He is confident that his strategy is the best way to achieve his family, business, and financial goals. As such, he establishes operating plans each year that follow his strategy; he maintains a capital expenditure (CapEx) plan that follows his strategy; he sticks with the cash flow and financing plan that follows his strategy. He’ll always politely listen to the pitch of those who are trying to sell him something (because everyone wants Harry to be their customer) but if it doesn’t fit into his strategy, Harry doesn’t buy.

Strategy is not written in stone. Strategy is a a concept as much as it is a plan, and as the CEO you need to be able to adjust your strategy when the environment changes.
Discipline is a character trait, a behavior, that equips a person to avoid distraction and stick to the plan, and as the CEO you need to be able to maintain discipline when warranted, but also be able to permit flexibility when needed.

To test your disciplinary mettle, the next time you face a distraction, ask yourself the following:

  1. How will this decision affect my strategy (my goal) of achieving ___________?
  2. Will this have a positive or negative impact on my cash flow and profitability?
  3. Is this a “want” or  a “need”?

To Plan for Prosperity

As defined by Merriam-Webster, strategy is “a careful plan or method for achieving a particular goal usually over a long period of time,” and discipline is “a way of behaving that shows a willingness to obey rules or orders.”

The strategy is yours, you created it. To not maintain discipline to your own strategy is aptly described by Marshall Goldsmith in his book Triggers: (you’re) failing a test that (you’ve) written!”

 

Expansion Plans

Expansion Plans

Harry* is one of those subtle role models that every farm community has. While no one treats him like royalty, nor does he act like it, everyone knows Harry is highly respected, not just here at home, but in the agriculture community across the entire province. He has quietly, and diplomatically, build his own little empire.

Most people wonder how Harry has done it. True, they are a little envious, but they cannot understand how Harry could be so well off compared to most others in the area when he gets the same weather, he farms similar soil, and grows similar crops as everyone else. Harry’s yard is always neat and tidy, his buildings are clean and kept up, and his “not new, but not old” line of equipment shines like a new dime despite some of it being over ten years old. There are three new 60,000 bushel bins going up this spring, and a concrete pad has been poured which, if you believe what you hear on coffee-row, is for a new grain cleaner.

Harry has expanded his crop acres a little at a time, never making a big splash in the market. Neighbors usually come to him because they know he is a character guy: he always pays his rent on time, he respects their land, and he keeps them informed. Through rent and purchase, Harry has taken the 1,200 acres he inherited from his parents in 1984 and has grown it to 8,600 acres today. He owns about 6,000ac and rents the remaining 2,600.

Harry heeded some sage advice when he started out. He was told that production is only part of the equation; the haughtily delivered quip stuck with him through the years, “Farmers don’t get paid for growing it, they get paid for selling it!” While production is incredibly important in the commodity business, Harry learned early that in the commodity business you have to produce as much as possible as cheaply as possible. Efficiency of finances and expenses, not just operations, would be key.

Harry has worked diligently to keep his costs down, especially equipment. Despite easy credit and low interest rates readily available, Harry has stuck to his guns when solicited with discounts and deals on newer equipment. He has drilled down on every operation on his farm, and can tell you quite accurately what his entire cost is per acre, including labor and depreciation, for seeding, spraying, harvesting, and trucking. He knows off the top of his head when he is better off hiring custom work or doing it himself by comparing the custom rate he is quoted against what he knows are his “all in” costs.

Harry recognizes that he cannot be an expert at everything. He knows he is an operations expert because he has managed his costs to their lowest reasonable point and because he manages his crew and makes all logistical decisions to get 8,600 acres seeded and harvested with greater efficiency every year. Harry knows he is not a human resources expert, so he’s taken coaching in order to improve his employee relations; he knows he is not an expert in international grain markets, so he’s hired an advisor and subscribed to market intelligence services, he knows he’s not a financial expert so he heeds his banker’s advice and has even hired a financial and capital expert to increase his confidence in the decisions he wants to make.

Harry has been thinking about expanding the farm for a couple years now. His two children, now in their early twenties, have shown a real penchant for the farm. After taking his advice to work somewhere else (either in or outside of agriculture) and to get a post-secondary education, Harry’s children have solidified their dedication to the family farm, bringing with them their outside work experience and their formal education: one with a Bachelor’s of Science in Agriculture, the other with a Bachelor’s of Commerce. The kids get along fine, and work very well together. Their differences in interests and education will bring a real synergy to the passion they share for the farm. Harry is incredibly proud.

Two of Harry’s neighbors have been thinking about retiring for a number of years now. Being the proactive strategist that he is, Harry has been discussing the possibility of expanding the farm with his advisors. Today, Harry is supremely confident that he knows exactly what upgrades need to be made to equipment and labor, and how it would affect his balance sheet, income statement, and cash flow, should he be successful in taking on more acres.

When Harry heard that Fred’s effort to rent the land of both neighbors came up short, he was honored when those neighbors came to Harry and asked him to rent their land. Having been planning for this opportunity for almost two years, Harry has been aligning his resources and as such he has abundant working capital to take on about 2,000 acres from each of his two new land partners. After having coffee with each neighbor for a couple hours, Harry has acquired the knowledge he needs and now knows what he will seed on which field. He calls his supplier to inform them of the additions to his original corp plan and procures the required inputs. Despite it being early April, Harry gets everything in place smoothly. He knows full well what a stressful mess this new land would be if he just tried to pull the trigger without planning for how to get it done.

To Plan for Prosperity

If the story above sounds too idyllic, please know that Harry’s last name is not “Perfect” (Get it? He’s not “Mr. Perfect”!) Harry hasn’t done everything right, and he doesn’t do everything right on a daily basis. What he has done different, what he does so well is that “he knows what he knows, and he knows what he doesn’t know,” and as such, he has equipped himself with the right help and advice to fill the gap. What might be the most important thing that Harry does well is that he makes a plan, and uses great discipline to not allow temptation to lead his plans astray. He avoids the temptation to increase his costs from high priced equipment or fancy yield-exploding elixirs. He maintains his strategy of keeping costs down, and protecting cash flow & working capital as the life-blood of his business that it is.

If you asked Harry, he’d admit that there are many decision he would have made differently from knowing what he knows now. But, being strategic and disciplined has allowed Harry to grow his business, not only in size and scale, but in efficiency, profitability, confidence, comfort, and lifestyle.


*Harry is a fictional character. The story portrayed above is fictional. Any similarity to a real person or situation is purely coincidental.

 

passion

Passion

“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.™”