roi

New Tech and its ROI

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“It wasn’t until 1954 that tractors finally outnumbered horses on prairie farms.”

I learned this interesting factoid from Steve Leibel from FCC’s Management Software division when he
spoke to our local CAFA chapter in Regina earlier this spring. The presentation was on technology, not
economics, so we didn’t examine why it took so long.

Maybe that wasn’t a long time for farmers to adopt the technology of mechanized horsepower versus
literal horse power, but I think it was.

Today, it’s a little different; we adopt technology almost as fast as it can be released. I find that even my
head sometimes spins at the advances of new technology, so I can’t imagine what my grandfather, who
broke land behind a team of oxen, might think.

Much of this technology provides an incredible economic benefit. Others only provide marginal
economic benefit. Who has done the math before investing?

Shouldn’t any investment provide positive return to your farm? Of course it should, but not only should
it provide a positive return, there should be a threshold for that return to meet as well. Surely anything
that provides less than 2% ROI is better off staying on the shelf in favour of a risk free investment. This,
of course, is an extreme example notwithstanding those investment that provide negative ROI.

This winter I listened to Lance Stockbrugger say, “I love technology as much as anyone, but if it doesn’t
make me more money, what’s the point?” How much money do you need to make to invest in new
tech?

For some, there is no concern to the economic benefit of new technology; they just need to have it! For
skeptics, any proof of economic benefit is cast aside as nothing more than salesmanship.

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ROI is a useful starting point for any investment. ROI is important to know because it not only indicates

the net benefit it will also offer insight into how long payback will take. Technology that offers 100% ROI
in the first year would “pay for itself”. Technology that offers an ROI greater than 100% in the first year
would pay for itself and provide positive cash flow above what would have been realized otherwise.
Technology with a 20% ROI would take 5 years to pay back your investment.

So let’s ask again, “How much money do you need to make to invest in new tech?” This also applies to
land, equipment, people, and professional services.

Direct Questions

How do you determine if an investment of your capital is worthwhile?

What is an appropriate ROI for different investment options?

How do you measure the success or failure of your decisions of how & where to invest your capital?

From the Home Quarter

Land investors want 3-7% annual ROI on their investment. Employees should be able to return 200% ROI
(their wage or salary times two) to their employer. What about iron, gizmos, gadgets, etc? Some of this
can be hard to measure: what was the ROI on hopper bins when they first came to market? While it can
be done, it’s not easy to put a financial value on efficiency, safety, and convenience, but those factors
certainly provide an intangible ROI.

I enjoy seeing the increase in confidence that my clients enjoy after we go through an ROI exercise as
they determine how to invest their capital. Reviewing realistic numbers to project the financial benefit
takes the emotion out of the decision.

I bet that early 20th century farmers didn’t do an ROI calculation on having a tractor on their farm versus
horses because if they did, I’d say that tractors would have outnumbered horses a lot earlier.

If you’d like help determining ROI opportunities on your farm, then call me or send an email.

assets

Avoiding Assumptions About Assets

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“If you’ve inherited an asset, you should act more like the custodian, not the consumer, of that asset.”
I was having coffee with Bill Allen, a Sun Life advisor and friend of mine that I met through CAFA
(Canadian Association of Farm Advisors; great organization, check them out www.cafanet.com) and as
we were discussing business, he used that statement above to illustrate his personal values as they
relate to estate planning. I asked Bill if I could write my next article around this statement, and he
consented.

The farm land that is expected to change hands over the next decade is projected to be somewhere
north of $50 billion (that’s >$50,000,000,000.) Much of the land will be sold (enter the farm land
ownership fray) but much of it will be handed down to the next generation. To the chagrin of farming
children, some of that land might get passed down to their non-farming siblings (enter the farm
succession fray.)

To those who inherit land, think about Bill’s statement above.

If You’re a Farmer…

There is blood in that land; the blood of your ancestors who risked it all to come west for a chance at a
new life. To think that it’s yours to do with as you please is…well, I’ll let you fill in the blank. Now land
that you acquired on your own with your own business savvy, hard work, and some good luck…you can
have at ‘er! It’s mighty short sighted to mortgage your “heritage” land for “personal wants.” What about
your legacy? What about your kids?

If You’re Not a Farmer…

The expectation of a financial windfall from the passing of your parents is simply unacceptable,
especially if you’ve been bequeathed the land that was passed down for generations. It is not yours to
sell to the highest bidder; it is an heirloom that must be cherished and made available for the next
generation again.

When my grandmother immigrated to Canada as a child, some of her older siblings stayed back in the
old country. Their descendants are distant cousins who we had kept in touch with many years ago. I
recall that the “flat” in which they lived was not owned, but was still passed down through generations.
Ownership of their own home, something which we take for granted in Canada, was not realistic for
them at that time in history. And yet what they had, despite unowned, was bequeathed.

When I began farming I promised my dad, who was a recent widower at the time, that I would never
allow the original land to be jeopardized for expansion or otherwise. Now that I’m no longer actively
farming, I can only hope that my siblings who are carrying on will stick to that.

There is a way to minimize the risk of inherited land being sold off: complete a succession plan.
Call it whatever you like: transition plan, continuity plan, longevity plan, whatever! No matter what you
call it, just get started. Getting started is the hardest part, and there is help available to get you started.
You will eventually secede from the farm, and the activity of planning for it will force you to talk to your
family about what they want.

Direct Questions

Does your entire family know what happens to the farm if you were to pass away tomorrow? Ask them.
If their answer doesn’t match yours, then you haven’t done a good job of this.

Do your non-farming children even want to own land? If they don’t, why burden them with it? If your
assumption is “Why wouldn’t they want land,” then talk to them…now.

Can you afford to hand down the land without needing the food bank in retirement?

From the Home Quarter

When I was a kid, the standing joke was “I can’t give my kids the farm; I’ll get charged with child abuse!”
Today, land is a hot and sensitive topic. Over a century of blood, sweat, and tears is awash in homestead
land and to trade it for a fat cheque seems an indescribable tragedy when something as simple as a
conversation with family could circumvent such heartbreak.

Succession isn’t easy. It forces us to consider a future that we may not be ready to face. But ready or
not, the future is near, so it’s best to be prepared.

Whoever said it, this rightly applies: “We do not inherit the earth from our ancestors; we borrow it from
our children.” Sounds like they were having coffee with Bill too.

If you’d like help planning your farm for business and personal success, then call me or send an email.

doit

Getting It Done

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Alan Weiss is my mentor’s mentor, so naturally I subscribe to Alan’s work. One of Alan’s recent
newsletters contained a short piece about The Human Condition: Procrastinating.

Let’s be honest, we’re all guilty of it at some point. Alan writes, “We procrastinate out of sloth (I don’t
want to get up); out of fear (what if it’s not good enough); out of lack of consequences (they won’t do
anything about it); out of ignorance (I didn’t know there was a financial penalty after that date). We all
do it, it’s not a matter of obliterating the habit, it’s a matter of priority.”

While all of the farmers I speak with (be they clients or not) have never procrastinated at getting
equipment ready for the field, many admit to procrastinating when it comes to management of their
business data, analyzing information, and pretty much anything to do with bookwork.

Is procrastination a matter of priority and not habit? No argument that doing books isn’t a lot of fun;
shuffling paper in an office (or at the kitchen table) isn’t a task that everyone is fighting to do. Yet it is
clear to all of us that there is significant, sometimes immeasurable benefit to keeping our business
information current and up to date.

I am very proud of one of my clients this week. He was facing a very uncomfortable situation that will
lead to further discomfort as time goes on. We had discussed an idea or two to possibly defer the
immediate pain, but in the end, he chose not to procrastinate. He faced this situation head on and took
what was coming his way. We’re working hard to deal with it even though seeding is ready to start on
his farm. He realizes that while getting the crop in the ground is highest priority, there is no benefit to
allowing this unpleasant situation to fall lower on the priority ranks. His approach to handling these
issues is an example for everyone.

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Direct Questions

Do you give yourself permission to let unpleasant tasks slide down the priority list?

Are you aware of the potential gains missed, or losses realized, from not giving financial matters greater
priority?

Are you allowing your conflicting priorities to pull you left when you need to go right?

From the Home Quarter

I make it my business to ensure you are keeping your financial management data up to date, current,
and usable in real time. Six-month old information is not valuable when making business decisions
today. Would you write a cheque today based on your November bank statement? I help farm
businesses realize the priority that needs to be placed on financial management practices and help them
understand the financial ramifications of improved or decreased efforts in doing this critical
management function. Alan Weiss writes, “I’ve never procrastinated about eating the lobster that I
ordered. We ought to treat our priorities in life the same way, as a great meal that can spoil if you just
let it sit.” Managing your farm’s information is certainly not akin to a lobster supper, but both will spoil if
you let them sit.

Keeping your information managed and up to date is a lot less painful that what my client faced this
week. He made it a priority when he didn’t have to. What’s your priority?

If you need help in prioritizing your financial management functions, determining your
True Cost of Production, identifying opportunities to reduce operating & overhead costs, or applying
analysis to your management data, then email or call me.

planning

Decision Making with Incomplete Information

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“We rob ourselves when we make decisions in the moment with no thought of how those decisions will
impact our futures.” – Andy Stanley

It’s easy to look back at decisions we have made and say we could have done better. Are you ready to
head down “Metaphor Avenue”? Hind-sight is 20/20, so don’t beat yourself up; next time you’ll knock it
out of the park!

Why can you say that you could have done better in making past decisions? It is likely because you were
working with incomplete information. However, considering the vast availability of information today
let’s also suggest that too much information contributes greatly to incomplete information. There is a lot
of noise out there, and sorting through it all can be overwhelming.

So how does one make better decisions when working with incomplete information? It’s difficult, and
risky, especially considering the financial repercussions each decision can hold. Yet these decisions get
made regularly often based on emotion, a hunch, or some gossip.

Stick with your Strategic Plan

The strategy you have established for your business should rule when attempting to make decisions
with incomplete information. Any option that leads you to deviate from your strategy should be quickly
discarded. If a decision takes you away from your original strategy then either there are extenuating
circumstances or business has changed and your strategy wasn’t changed with it. Either way, you’ve got
some more work to do.

Follow your Tactical Plan

Strategy is what you want to accomplish and why. Tactics are how you will get it done. These 2 plans
should be closely aligned. Don’t get caught using justification that is “tactical” in nature to permit a
decision that goes against your strategic plan. To paraphrase the quote above, how will this decision
affect your future?

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Get Advice from Trusted Sources

Ideally, a trusted source has no vested interest in one decisive outcome over another. Although, a
trusted source can be someone who may have a vested interest, but whose integrity is above any
question you may have about his/her judgement. When information is incomplete or confusing, seek
out someone who has expertise and knowledge to help you sort through the noise and clear your focus.
A naturopath will always have a miracle product that can cure anything that ails you; a surgeon’s advice
will always insist that surgery is the best option. Vested interests….get a second (or third) opinion.

Direct Questions

Do you make business decisions without adequate information, basing your choice on emotion, a hunch,
or gossip?

Do your major decisions reflect your strategic plan? (Do you have a strategic plan?)

Do you have trusted advisors who you can call on for help?

Are you contributing to incomplete information from your own habits of improper data management?

From the Home Quarter

If we waited for perfect information before making every decision, we’d never make any decision. We
have always had to proceed with the best information we had at the time. And the fact is information is
never perfect. But don’t let that fact be an excuse to allow yourself to not manage your own business
information adequately. You have a responsibility to ensure that you provide yourself with information
that is as complete as you can make it. Business moves at the speed of the internet, so we must be in a
constant state of information management. Advisors can bring immeasurable benefit to your decision
making by either removing emotion or by providing insight from a position of unique expertise. And at
the end of the day, your best allies in decision making are planning and discipline.

If you’d like help planning your farm for business and personal success, then call me or send an email.

20140309_143412

Life and Business Can Sometimes Be Like Snowmobiling

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I love sledding. I don’t get out nearly enough, but I can say the same about playing ball or golfing in the summer. I’m no expert at snowmobiling, but I learn something new each time I ride, and I really enjoy riding with people who, like me, are still learning how to be better.

Let’s go back to the late 90’s when I was getting more serious about sledding. I had just purchased a late model 500EFI; I was reading the magazines and watching the TV programs. One TV episode I especially took to heart and it saved my bacon that season.

The instruction in that one segment of that one TV episode was how to manage a steep hillside. Considering I’m way too much of a prairie dog to have deep desires to ride the mountains, I could have used that time to get another snack, use the washroom, change the channel, or whatever. But I paid attention.

Later that winter, I was riding with one other person in an area neither of us was familiar with. We were in the ditch of a gravel road when we came to a wide old creek bed. The bottom was probably 30-40 feet deep with a four strand barbed-wire fence running right where the base of the slope met the bottom of the ditch. Couldn’t go down, we had to ride the shoulder of the road.

I’m sure you can all picture what seemed like a 60 or 70 degree pitch with at least a 30ft drop; it was imminent doom should we lose control and start barrel rolling down that slope. But I remembered the lesson from the TV program about how to manage steep hillsides: both feet on one runner, lean hard, and stay on the throttle! About half way across I had visions of dying in the bottom of that creek as I felt my machine start to pull downward, but I hit the throttle, the machine rose back up, and I made it across.

It is human nature to pull back or slow down when we get into a trouble spot. We inherently want to be cautious when we see something that we believe to be dangerous. But is what we are seeing actually dangerous? Not always, and less so if you know what you’re doing.

Direct Questions

Is it your practice to always “pull back?” Is it your practice to always “push forward?” What’s been your level of success with either?

When you’ve committed to a decision, are you able to “stay on the throttle” through to completion, or are you inclined to pull back?

How confident are you in “assessing the danger” objectively without letting emotion impede your decision?

From the Home Quarter

No one can deny that our best decision that day on our sleds would have been to turn around. But we pushed ourselves through the fear of failure and grew our confidence by several multiples because of our success. Sometimes in business, pulling back is exactly the wrong decision. It has been said that you “cannot shrink your way to greatness.” But either way, if you don’t understand the degree of danger or trouble you’re facing, you’re likely to make the wrong decision. Staying on the throttle does not guarantee success; this is not a rule. Sometimes we need to pull back. The trick is to know when to pull back, and when to “Just Give ‘Er!”

trees

Always Growing…Growing All Ways

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“Think of your business like a tree. What is a tree doing all the time? It’s growing. And if it’s not growing,
what is it doing? It’s dying. Your business is the same: if it’s not growing, it’s dying.”

I made this statement to a <2,000ac farmer at Canada’s Farm Progress Show in June 2014. He gave his
head a quarter turn with the slight tilt that indicated he thought I was nuts. Remember, this was still in
the period where Main Street of many small towns looked like a drag strip when word got out that there
was land for sale. Farm trucks from all over the area were burning rubber to get to the banker as fast
they could to get the loan and make the deal before anyone else. It was a period of “growth at all costs.”
His reply was, “I don’t want to grow. I’m happy with my land base as it is. My debts are almost gone,
why would I want to get back into debt? Then I’ve got to buy more equipment, hire some help!”

So I quantified my statement. “Growth doesn’t have to mean acres. There are many ways a business can
grow. If a farm can increase gross margins from better marketing, isn’t that growth? If a farm can
increase profits from better awareness of cost control and management of those costs, isn’t that
growth?” Reluctantly, he agreed.

Ever since the boom in ag took hold in 2007, farmers have increased acres and increased equipment
lines faster than ever. The truth of that statement can be read in the smile of every farm realtor and
farm equipment salesperson on the prairie. But why when we think of “growth” do we limit the scope of
our thinking to “size?”

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Increase Operational Efficiency

This is purely process management. How can you make improvements to processes on your farm that
will increase overall efficiency? For example, on our farm we run a single shoot drill. In order to apply
the volumes of fertilizer that our agronomic plan requires, we need to cover the entire farm twice: once
with a fertilizer blend in a band, and a second pass with seed & the fertilizer blend for the seed row.
Increasing operational efficiency for us could be trading up for a double shoot drill (although I’d prefer a
triple shoot), using a larger cart to reduce the frequency of stopping to fill, add a liquid kit to the existing
drill, or even utilize the high clearance sprayer to apply liquid fertilizer later in the growing season. There
are more options, but you get the drift. Naturally, each option has pros & cons and must be evaluated
from a management perspective to measure cost versus benefit.

Increase Size and Scale

Bigger is better, right? Not always. Are you confident that your net profit per acre is linear? What I mean
by that is, if you currently enjoy a net profit of $75/ac on your 3,000ac, will your net profit per acre
change if you increase to 6,000ac? 7,500ac? 10,000ac? The answer is Yes, it will change. Net profit per
acre is not linear and if you haven’t created realistic and honest projections when considering scaling up
your farm size, you might be surprised at the end of the year.

I often get asked by people who grew up on small farms in the 60’s and 70’s about farm size and just
“how big is too big” when it comes to farming in current environment. Is it 5,000ac, 10,000ac, more? I
always answer the same way, “I can tell you exactly when a farm is too big. It’s the moment that a farm
has expanded beyond the owner’s management capability. For some that’s 400ac, for others that
40,000ac. It depends.”

Increase Gross Margin

This one is easy to identify, but not always easy to do. Easy to identify because this is where profitability
on your farm begins. Not always easy to do because there are many factors out of your control. But as
you’ll recall from Growing Farm Profits Weekly Issue #2, I won’t dwell on what we can’t control.
Focusing on what we can’t control is passive and it concedes that outcomes are beyond our control.
Plus, it’s total BS.
Increase your gross margin by doing one, or all, of the following:

  • Increase your yields and/or quality
  • Reduce the costs of your direct inputs (seed, chemical, fertilizer)
  • Increase realized prices for your crop

Reduce Costs

Beyond the direct inputs as described above, cost control is a major issue on a lot of farms today. It
begins first and foremost with knowing your costs. How much are you spending on equipment, hired
help, fuel, parts & repairs, interest, etc? These are all controllable costs, and if you haven’t had a handle
on them to date, the current environment of narrow margins dictate you better get on it soon.
Now I’m not suggesting that you eliminate these costs, because you can’t if you want to keep farming.
But knowing where you can “trim the fat” is critical, and it also relates to operational efficiencies.

Direct Questions

Have you limited your view of growth to only “size and scale?”

How many different growth metrics can you identify on your farm?

What is the threshold of your management ability? Have you exceeded it, or do you still have capacity to
expand?

If you reduced each of your controllable expenses by a mere 5%, how much would your net profit
change?

From the Home Quarter

Growth as it relates to business does not purely mean “get bigger.” Remember that the purpose of your
business is to increase wealth, and size does not have a direct correlation to wealth. Size is one factor,
but we must not ignore all the others. I believe in the mantra that “better is better before bigger is
better.” Growth can manifest itself many ways, and we must examine all ways to grow if we want to
always grow.

horizon2

3 Planning Fails

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Have you managed to take a breather from all the trade-shows lately? Why is the trade show season
scheduled as such (Jan-Feb)? Because this is when we’re planning the new crop season that is merely 8-10 or so weeks away now. Exhibitors want to influence your thoughts for when you’re making planning
decisions.

We know what you are planning, but what aren’t you planning? Here are the 3 biggest issues that
farmers tend to not plan, based on nearly a decade of my experience in the banking and financial
corporate world:

1. Anticipating Cash and Operating Credit Requirements
What is worse than running out of cash when you need to make a purchase? Running out of
credit when you need to make a purchase! With the incredible highs and lows of a farm’s cash
position through a one year cycle, this is a CRITICAL planning process to undertake. And once
that’s done, work with your banker so he/she is not getting a 5-alarm phone call begging them
to extend your limit.

2. Creating a realistic capital expenditure plan
CapEx drives as many urgent financing requests as anything else. “Hello, Banker? I just bought a
sprayer at the auction. Can you make sure the cheque clears? I’ll be in tomorrow to apply for a
loan.” CapEx should be part of the overall business plan, not a knee-jerk reaction in response to
that hair-trigger you pull when the auctioneer is looking your way.

3. Being Unaware of Family Aspirations
Can you picture what a combination of fear and obligation look like? It’s what a banker sees in
the face of a client who just came in advising that his/her son/daughter wants to farm, so “we
need to add land and equipment.” Fear over the volume of debt that is needed (likely requiring
the parents to co-sign.) Obligation because “the kid needs to get a start somehow.”

I wasn’t a family negotiator then, and I’m not one now. If you need that kind of help, speak to a
family coaching or mediation expert (I know some good ones, so I can help.) But for crying out
loud, please start talking to your family early about their intentions. A farm is more akin to a
barge than a ski-boat: it’s not highly responsive, takes time (and room) to maneuver, and can’t
hit top speed without a whole lot of things going according to plan!

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Direct Questions

Do you know how much operating credit you’ll need this year? Will you just rely on cash advances when
your line of credit is at limit?

When you acquire assets, is it “because it seemed like a good deal at the time” or because it fits your
overall business plan?

Do you assume you know what your family wants, or have you sat everyone down to talk? Don’t know
how to have that talk? Pick up the phone and get some help; your legacy (meaning your family and your
farm) are too important to let this slide.

From the Home Quarter

There are many factors that can affect your plans for the new crop year and if trade show exhibitors can
provide some of that influence, then they’ve succeeded in their plan. I’m suggesting that you have your
own plan in place, and whether you’re at the show or at your kitchen table, seek out the advice that
provides the most value to your business based on your plan.

horizon

Planning With a RESULTS Mindset

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I was listening to a local radio station the other night and heard an interview with the hockey coach of
the local junior team. What caught my attention was the comment “every game matters now, every
shift matters now as we try to make our way into the playoffs.”

So did every game and every shift matter less early in the season? Why would the team accept
mediocrity at the beginning of the season only to urgently try to find excellence at the tail end in a mad
dash to make the playoffs and maintain fan support?

It sounds to me like they didn’t have a plan when they opened Game 1 of the current campaign. If their
plan at the beginning of the season was to actually make the playoffs, then every shift and every game
would have mattered all season! Granted, that would not have guaranteed entry into the post-season,
but it’s about mindset. Did they have winning as a frame of mind all season? That is what I question.
How does this apply to your business? Simple: examine honestly and critically what is your frame of
mind going into the growing season.

Believe it or not, mindset will ultimately create your results.

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For example, a mindset of “don’t lose any money” will create an attitude of risk aversion, and a that would likely prevent you from forward pricing any new crop before it’s in the bin. The results would be lost pricing opportunities and likely lower profitability.

But if you are planning, I mean really putting effort into planning, the whole scheme changes.

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The essence of planning puts the focus on results. If you focus on results and therefore create a “results
mindset,” your attitude and your actions will reflect as such.

I contest that if that junior hockey team began this season with a results mindset, then every game and
every shift would matter right from the beginning of training camp. They’ll have about as much success
making the playoffs with a sub-.500 record in February as your farm will have in trying to turn an
average crop into a bumper in August.

Direct Questions

You are crop planning. Hopefully you’re market planning as well. Are you “business” planning?
Are you prepared to get dirty with some ground level business planning in 2015?

From the Home Quarter

In a recent issue of the blog, you were asked to think about how you define wealth,
because it would provide clarity in how you run your business. This week, you’ve been challenged to
think about your mindset at the beginning of this crop season. Intention sets direction. Clear goals set
the roadmap. As the CEO, you are the captain of your ship. Are you using any guidance tools, still
holding on to the compass and sextant, or consulting the GPS?

Over the next few weeks of Growing Farm Profits Weekly, we’ll dig deeper, and get a little dirty
regarding business planning. It can be messy, but it’s still cleaner than trying to deal with the unforeseen
when we’re not prepared.

Think about this: every enterprise that you do business with has a business plan.