excellence

Seeking Excellence

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This is a verbatim copy of Seth Godin’s daily blog from April 22, 2015:

Demand higher standards.

On a long flight a little while ago, I saw two couples watch movies while they let their six kids
run around like maniacs from take off to touchdown. A seven-year old actually punched me. (I didn’t return the punch).

A few days later, I saw the now-typical sight of kids in a decent restaurant eating french fries
and chicken fingers while watching a movie on a tablet.

And it’s entirely possible you have a boss that lets you do mediocre work, precisely whenever you feel like it.

I wish those kids had said, “Mom, Dad, raise your standards for me. I deserve it.”
And the sooner you find a boss who pushes you right to the edge of your ability to be excellent, the better.

Even if the boss is you.

I couldn’t help being captivated by this simple and direct message (Seth is famous for them.) In
agriculture on the Canadian Prairies, we’ve generally been just fine by being somewhere south of
excellent. We haven’t needed to be better in business because we use excellent production practices;
Canadian farmers are arguably the best producers in the world. We haven’t needed to be better in
business because money is cheap and easy to acquire; interest rates have never been lower and lending
terms continue to be very favorable. We’ve gotten away with being mediocre, or somewhere south of
excellent, in our business skills because “the average was just fine.”

We would be happy if every year we got average rainfall, average heat units, average weed pressure,
average yields, average prices, average input costs, etc. It would be easy to farm if everything was just
average.

But it’s not.

And if you’re average in your management of your business and all its risks, it is pretty tough to expect
excellent results. We’ve enjoyed a 7 year bull run on yields and prices which has permitted “average” to
disguise itself as “excellence.” Are we still comfy thinking that recent history is our new normal? I
listened to Dr David Kohl in person 4 years ago and he said then that these highs in yield and price are a
black swan, and not the new normal. “Normal” is “the average” and since the average has managed to
disguise itself as excellence over the last several years, what will happen when this black swan migrates
out of here?

When the black swan flies away and “normal” returns, “average” will not be sufficient. We will still be
excellent in production; we may still have cheap and easy access to money. As you read in Growing Farm
Profits Weekly on April 14, 2015, farming is a lot more than just production. And easy money is
dangerous when in the wrong hands. If there are no guarantees that Mother Nature will offer a growing
season to facilitate excellent production, it will take the excellent production practices for which we are
famous to just be average. That is “average” without its disguise.

As Seth wrote, the sooner you find a boss that pushes you to edge of your ability to be excellent, the
better. If you are your own boss, like you, like me, like all entrepreneurs, we must find a way to be
excellent.

Direct Questions

In what areas of your business is your proficiency less than excellent?

Have you greatly shifted the parameters of what you call “average?”

Considering all the risk you face each year as a farmer, can you afford to be anything less than excellent?

From the Home Quarter

The message here is not to suggest that anyone has intentionally done a poor job of running their farm.
What is being suggested is that the recent ag environment has permitted great success without
requiring excellence across all aspects of the business. I am supremely confident that will change, and
anything less than excellence through your entire farm will offer disappointing results.

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*The Innovation Adoption Curve www.b2binternational.com

Excellence is a choice. Have your competitors already chosen excellence? When it comes to employing
excellence in business proficiency, you want to be on the left side of the curve above. I have a mentor
who helps me to be and stay excellent. My mentor has a mentor who does the same for him. It’s not
easy, but it’s worth it. As I’ve said, and will continue to say, “Do what you do best, and get help for the
rest.”

If you want more than average, call me. The Department of Excellence is open for business!

information

How Good is Your Information?

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I’ve been staunchly encouraging (ok, pushing) my clients to up the ante on how they manage their
business information. As we look at 2015, it is clear that opportunities for profit will be harder to find
than in years past and we must use every tool at our disposal to make the best decisions possible.

Enter data management.

Why do you think retail spaces are designed the way they are? It comes from the retailer devoting
incredible resources to study the habits and behaviors of its shoppers. They take that information and
then design spaces in such a way that plays to the habits and behaviors of their shoppers so as to put
the desired products in front of their shoppers at the desired time and place during the shopping
experience. For example, they have learned that typically shoppers turn right versus left as soon as they
enter a store, and thus plan their store layout in a way that panders to a shopper’s subconscious
behavior AND the retailer’s intention to sell high margin items. Maybe it’s that shoppers turn left and
not right, but you get the point, so who cares? Business cares, that’s who.

Like that retail giant, you have the ability to make important business decisions based on specific
management data. You would use your historical agronomic data to decide which crop offers the best
profitability on each specific field (relative to rotation.) You review historical financial statements to
measure actual results versus projected results. You analyze soil test reports to determine how much
residual nutrient remains in your soil before making fertilizer purchases. This could go on and on.
I spend a lot of time working on True Cost of Production calculations and building Profit Curves for my
clients. I can only do a precise job with complete and accurate information. And when you’re using that
work to make important business decisions, it is imperative that you provide usable and accurate info.
The retailer will often hire out the collecting and compiling of data as well as the analysis and the
creation of a final report with recommendations. The final report can only be as good as the quality of
the data collected. The retailer could invest millions of dollars based on the information in that final
report.

Your business is no different: you collect and compile your own data; if you need the help, there are
qualified advisors available to help you decipher it and provide recommendations; you are then more
confident in future business decisions because you make the most informed choice available.

I am often asked for suggestions as to which data management platform to use. I liken it to exercise: you
can run, bike, jog, swim, whatever…as long as you’re exercising. Same with your farm data, there are
many platforms available; find the one that feels best for you…as long as you’re using it.

Direct Questions

Does your data management practice include data as precise as pounds of nutrient per acre by crop?
Are you retaining records of historical information to establish trend lines?
Are you recording your data at all, even if it is just a pencil and a ledger?

From the Home Quarter

There’s a lot of noise out there about “big data” and ownership/use of that data, and for good reason.
I’m not condoning the perceived risks relating to big data’s custody and/or use of your info, but in reality
we’ve been letting Google do it to us for a very long time already. Does that make it acceptable? No, of
course not. But do we let that be the excuse to not collect and manage our data? The actual harm done
to our business from not collecting data is greater than the risk of harm from potential illicit use of our
data. The cost of doing nothing in this case is far greater than the risk of doing the wrong thing.
I don’t care if you use a “big data” cloud based platform, or a spreadsheet on your Windows 95
computer. You owe it to yourself and to your business to make the most informed decisions possible.
The best decisions are made with good information. How good is your information?

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

sustainability

Sustainability

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I very briefly got into a Twitter discussion on Sunday with a few farmers when the question was posed
about sustainability, specifically if the ag industry in western Canada is actually advocating for
sustainability or just preserving the status quo. I waded in because “what is sustainability?”

My tweet was a question: How do you define sustainability? Is it agronomic, environmental, financial,
family? There are many factors to consider on the farm.

Sustainability means different things to different people. Kind of like the term “organic.” Neither are
clearly defined anywhere in a way that is unanimously accepted. Both then are open to individual
interpretation. I’m not treading into the organic/conventional battle here; I’m talking about
sustainability.

The responses to my tweeted question were all about soil and how if soil health is the primary focus,
everything else *should* fall in line. I respectfully disagreed. Good soil stewardship + poor financial
management ≠ sustainability. I was not trying to discount soil health, just hoping to expand their line of
thinking. I left the conversation at that point. The parties continued to banter about tillage, irrigation,
crop rotations, etc. I just wish we could see that there is more to farming than production.

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Agronomic Sustainability

If you don’t know what Cation Exchange Capacity is, what your C:N ratio means, or how to calculate
SBU, then hire an agronomist (of which I am not one.) Agronomic sustainability is as much an art as it is
a science, and if you’re not well versed in the art, or the science, of agronomy then being sustainable
might be a stretch.

Environmental Sustainability

This is a slippery slope with a whole lot of noise out there. Who should you listen to? I’m not touching it
with a 12’ pole. But all farmers know that the environment is critical to our success. ‘Nuff said.

Financial Sustainability

I could write a book on this. From cash management to proper use of leverage; from strategy to
operational efficiency; from knowing your numbers to management process, the pages would flow!
Same can be said here as for agronomy: if you’re not well versed, hire an expert!

Family Sustainability

This hits me directly right now. Since I made the decision to retire from active farming to focus 100% on
my consultancy business, the family dynamic has changed drastically. Looking back I can identify things I
should have done differently, but those choices were not apparent at the time. One choice that was
apparent was to set expectations very clearly on Day 1. It is safe to surmise that didn’t happen. Whoever
said “It’s never a problem until it’s a problem” is very correct in their vagueness. We all took for granted
that the family will work together and get along, a gross miscalculation as it turns out.

Direct Questions

When you hear the word “sustainability,” do you cringe expecting an environmental sermon?
How many distinct ways can you identify opportunities to improve or incorporate sustainability in your
business?

Are you putting in adequate effort to prepare for the unexpected so as to remain sustainable in all
aspects of your business?

From the Home Quarter

I fear for those who don’t recognize that their farm is about more than just production. I’m not
suggesting that production take a back seat because is it critical to success, but we must expand our
perspectives beyond the crop and the field to the markets, to the balance sheet, to macro-economic
forces, to family dynamics and HR issues, etc. This list could be endless, and everything on it must be
“sustainable.”

None of this is new news; we all know that we must be sustainable in all facets of our business to
survive. But I ask if we are all able to recognize the opportunities and threats to our sustainability in a
way, or in time, to do something proactive about it.

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

life

Life…Another Cost to Manage

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“Despite the high cost of living, you’ll notice how it remains incredibly popular.”

We enjoy many benefits from living on the farm. So many are intangible: peace and tranquility, open
skies, fresh air, etc. Many others are tangible: be your own boss, grow your own food, continue a family
legacy, etc. Then there are those benefits that are measureable but rarely measured.

Any farm business doing even the slightest degree of cash flow analysis must give full disclosure on
personal expenses paid by the farm. There, I said it.

We all know that the farm pays the power, heat, taxes, and maintenance on the house; it buys the
vehicles, insures them, and put fuel in them. These are legitimate business expenses, whether it be a
portion of each or the entire cost. The point is, “Are you measuring it?”

This hits home for retiring farmers who are trying to calculate how much they need to live on in
retirement. Many of them are not used to paying for all of that, and more, from their personal
income…and all of the sudden they realize that CPP and their RSPs are barely adequate (if adequate at
all.) Interestingly, the intention of gifting the farm assets to the next generation isn’t as likely unless
mom & dad are going to frequent the food bank in their golden years.

Farmers that are paying themselves a salary, wage, or dividend from the farm and are truly paying their
personal (as in “non-business”) expenses from that personal income already have a clear grasp on this
concept. They understand the “pay yourself first” mantra and won’t be surprised at just how much it
costs to live when they transition out of farming.

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I’m not saying that you must discontinue letting the farm pay for personal expenses; after all, it’s your
business. What I am saying is that you must measure it; you must know what that number actually is on
a monthly or annual basis. Picking a number that you “think” is close is not sufficient. Knowledge is
power; estimating is risk.

Direct Questions

Have you calculated how many personal expenses are paid by the farm? If not, why not? Saying that you
don’t want to know is not an acceptable answer.

If you are measuring it, what are you doing with the information?

From the Home Quarter

As a business owner, you have every right to operate your business how you see fit within the confines
of the law. But if you truly want to measure the level of success your business enjoys, this is one more
metric that must not be ignored. If you are afraid to know just how much you are spending personally,
that’s even MORE of a reason to do this, not less. In an era of tight margins, don’t we owe it to our
business, and ourselves, to manage every dollar appropriately?

interest

How Interesting is Interest?

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“The peak bank prime rate in the ‘80s was 22.75%…10x what it is now.” This was a tweet I read last
week from Lyndsey Smith while she attended the Smokey Lake Ag Conference. Interestingly, I heard
yesterday that there may be another rate cut ahead; we didn’t even see the last one coming.

Q.1 Take a look at the current amount you spend on annual interest, and multiply it by 10. How does
that number make you feel?

Q.2 If you faced interest rates that are 1000% higher than what you pay now, how much debt do you
think you’d have?

Is it accurate to say that we generally don’t give a lot of thought to interest costs? I mean for the cost of
about 600 gallons of diesel fuel, you could cover 2.75% annual interest (prime rate) on $100,000
principal debt. So for those who can burn 600 gallons of diesel fuel per day over 20 days of seeding, that
fuel cost matches the annual interest (at prime) on $2,000,000 principal debt.

What?

Yes, very few burn 600 gallons per day, and fewer yet can have prime rates on all their borrowing, but
you get the picture.

There are many farmers out there today that are still being held captive by the memory of paying 18-20% interest on their business debt. That nagging fear has likely lead to business decisions that are
overly conservative and risk averse, leading to missed growth opportunities and insufficient wealth.
Anyone who has loaded up on debt based on the low rate environment we currently enjoy may want to
take a look at things. If the business plan only works when grain prices are high and interest rates are
low, then it’s not a viable plan. We’ve already seen grain prices stumble significantly from a year ago…

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This just might be the best time ever to do an interest sensitivity test. What is the financial impact of
interest rate increases or decreases; use a few different values to compare. If you’re highly sensitive to
increases, your time to negotiate a favorable fixed rate is now.

Direct Questions

What is your borrowing strategy? Do you carry an appropriate ratio of fixed and floating rates?
How sensitive are you to changes in interest rates?

Are you able to determine how much of a spread you can weather if you were to move from floating to
fixed?

From the Home Quarter

Debt fuels growth. Growth (if you read last week’s issue of Growing Farm Profits Weekly) can be realized
many ways, but certain to say that growth fuels profits. Profits fuel wealth. The bridge between Growth,
Profit, and Wealth is built with the help of good debt; bad debt often leads to Retraction, Losses, and
Poverty.

GFP FI 4

Accounting, You Get What You Pay For

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I am NOT an accountant. Let’s put that on the table right away.

“Do what you have to do so I don’t pay any tax, or at least as little as possible. And nothing fancy is
needed from you, just the basics; keep your fee small.”

Sound familiar? If you’re an accountant, I’m sure you’ve heard this far more than you’d like. If you’re a
business person (in the BUSINESS of FARMING) and you’ve said something like this to your accountant, I
hope this leads you to change.

The work your accountant does in preparing quality historical reporting will provide you, the CEO of your
business, with tools to evaluate actual results against expected results.

What do you mean you look at this info for 10 minutes, forward a copy to the bank, and then file it? I’m
a huge proponent of looking forward (future planning), but if you don’t look back once in a while to
gauge performance, you’re probably going to repeat some mistakes from the past.

A comparison of results year over year and setting trend lines of results can be telling. But this can’t be
done accurately without accruing your statements. Let’s put this in perspective: you sold some 2013
crop in 2014, and carried some 2014 crop into 2015, right? This isn’t unusual, nor is it a bad idea. We
should manage the timing of our grain sales to match our cash requirements. But for the purposes of
evaluating your farm’s financial success in a given year, the grain carryover skews the reporting. Here’s a
way to fix that: accrue your financials!

It’s not a lot of work. All you need to do is assemble your:

  • grain inventory values
  • total prepaid expenses (like fertilizer, chemical, and seed)
  • accounts receivable
  • deferred cheques
  • accounts payable

Provide these to your accountant as they were on the last day of your fiscal year (and for the prior year
if you’ve never done this before.) You have to provide all of this to the bank anyway (or Agri-Stablilty,)
so there really is no extra work on your part.

Before anyone gets all panicky, I’m not suggesting you file your taxes on an accrual basis. Farmers can
still file on cash, so keep that up. Cash reporting for taxes. Accrual reporting for analysis.

Direct Questions

Do you view your accountant as a “necessary expense” or as a “strategic advisor” to your business?
Do you use your financial reporting to analyze actual results against projections?

Is the $2,000 you’re trying to save by “going cheap” with accounting worth the $1-2 million in financing
you WON’T get because your bank has “minimum reporting expectations” in order to approve credit?
Are you currently having your financial statements accrued? If not, please start now. A December 31
year-end can still be accrued. (So can historical statements if you have the info.)

If you don’t measure it, how can you manage it?

From the Home Quarter

Think about all the tools in your shop. Which one is your favorite? Could you see trying to get through a
major task without it? When you’re buying tools, do you shop at Wal-Mart, or do you buy Snap-On?
Your financial statements are just as valuable of a tool. And like any tool, its value is only evident when
you’re using it, not when it’s sitting on the shelf. Are you viewing your accountant like “Wal-Mart” or
like “Snap-On” based on the kind of “tool” you’re asking them to provide? And remember your
responsibility in creating quality reporting; the G-I-G-O rule applies. It’s up to you to provide your
accountant with thorough and clear information.

 

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.

Cost of Production

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I got a little worked up last week when I saw a tweet that read “Cost of production matters in 2015 –
The Western Producer” and included a link to the article. Even though that wasn’t the article’s title, I still
had to sit down and scribe this.

Let me be very clear: cost of production matters every year. Period.

Cost of Production is the most basic principle that must be employed when making marketing decisions.
If you don’t have a clear understanding of your COP, then you are putting the survival of your business
at grave risk. Why? Because how would you know if you’re selling for a profit or not?

 

venne2

The WP article states, “A 38 bu. (canola) crop and a $9.45 price could yield $70 per acre before labour
and equipment costs.” That’s nice, but why would we not include our labor and equipment costs? Will
the crop magically seed and harvest itself?

COP only begins with your seed, chemical and fertilizer costs. It must also include all other operating
costs AND your fixed costs.

Now work back from your actual, or projected, yield and we come to the real figure that matters: unit
cost of production.

If you know that it costs your farm $6 to grow a bushel of canola, isn’t a $9/bu selling price a nice
target? By the way, that’s 50% ROI.

 

Direct Questions

What was your gross margin per acre in 2014?

Do you include your fixed costs when working out Cost of Production calculations? If no, why not?
How do you know what is a profitable selling price for your crop if you don’t know what it cost you to
grow it?

Do you discover whether or not you’re profitable only when you receive the accountant prepared
financial statements?

From the Home Quarter

In the simple calculation of “Revenue – Costs = Profit,” how can we be expected to make profitable
decisions without intimately knowing our costs? Every business that produces anything, from ocean
freighters to widgets, knows exactly what it costs to produce one item. Why doesn’t every farm know
their costs the same way?

As a special offer to the readers of this blog, I will conduct a Farm Financial
Review™ for up to 5 qualifying farm businesses at $475 (normally a $875 value.) This will include a
review of your 2014 financial results and a Cost of Production Analysis. Work must be booked by the end
of January and completed by the end of February. Please call or email for details.