Discipline

Discipline

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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

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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.

 

Fail to Plan

Fail to Plan, Plan to Fail

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Fred* wants to expand his farm. He feels he’s getting left behind when he hears about each land acquisition made by some of his neighbors. It’s not like Fred hasn’t expanded his acres; he’s doubled up since 2005 when he farmed about 3,000. But he knows he can handle more. And by all accounts he needs to increase his acres to spread out his equipment costs; at least that what he hears at all the seminars and reads in all the farm publications. His banker keeps telling him that his costs are too high as well, but she wouldn’t give him a combine loan a couple years ago and the dealer’s financing program did, so what does she know…?

Drawing up plans to seed just over 6,000 acres this spring, Fred can’t let go of the notion that he needs to be at 10,000 acres. There are a couple of neighbors who’ve hinted that they might not put a crop in this spring, and if Fred could take on both, he’d be at 10,000 acres. That would feel pretty good driving through town letting everyone know he was now a 10,000 acre guy! Heck, he might even put it on the side of his truck like some companies do with their safety awards. They’re proud of their accomplishments and show them off, why not Fred?

As he goes over his crop plan, he starts wondering about where he’ll procure his inputs. If he maxes out the lines of credit at both input dealers in town, and the one at the bank, he’ll be able to get everything seeded, fertilized, and sprayed. “No problem,” Fred thinks to himself. He gets on the phone to get prices from each input supplier so he can decide what to buy from whom.

About a week into April, Fred gets the word he was hoping to hear: both neighbors who were considering retiring will not be seeding a crop this year and will be renting out their land. Fred immediately gets in the truck to pay his neighbors a visit to see if he can secure a rental agreement with each of them. To establish good-will and earn the opportunity, Fred offers each $5 per acre cash rent above what they were asking. They shake hands, and Fred excitedly heads home.

Upon sharing the news with his hired help, Fred is too excited about his “accomplishment” to recognize that his lead hand is not happy about what Fred is telling him: the seeding rig will have to run 24 hours since there isn’t time to buy another air-drill and get it field ready. Fred heads back to the house to update his crop plan and to secure more crop inputs.

Two days later, Fred’s world comes crashing down:

  • he is unable to get any more credit to acquire crop inputs for his additional rented land;
  • he has been denied a new cash advance because he was late paying back the old one;
  • he has lost his new rented land because he can’t get inputs and because the cheque he wrote to each landlord for upfront rent payment has bounced;
  • his lead hand just quit to go work for a neighbor who provides a “better work environment.”

To Plan for Prosperity

They key is in the heading title: PLAN

Fred doesn’t plan; he reacts. He is not able to expand his farm even though he thinks he is. He is not as financially strong as he thinks he is because he cannot get more credit when he needs it. He is now short on help to get seeded on his own current acres. Fred wants to be bigger, but he’s overlooked being better.

At risk of “over-flogging” this issue, Fred’s challenge has been lack of working capital. And it is that lack of working capital that has not only directly cost him an expansion opportunity, but indirectly cost him his lead hand.

It’s been said that “if you fail to plan, you’re actually planning to fail.” Fred has become the embodiment of those words. The ramifications of this story go farther than we have time to discuss.

You can avoid falling in with the likes of Fred by enacting control over your future: implement strategic growth using sufficient resources with discipline.

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

 

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.

shaking my head

Shaking My Head

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There are so many instances where I’ve heard someone say this to me in the last number of months. Here are some examples of what I’ve heard.

“I’m shaking my head…

  • wondering how we got talked into this.”
  • at these guys who push their rotation trying to get a big payday.”
  • trying to figure out how they can keep getting more credit when I can’t.”
  • at these guys who haven’t learned from the mistakes of others.”
  • at these guys who keep going full throttle when they don’t know their numbers. Do they even have a clue how they’re doing?”
  • at how some of these guys just keep spending. Where is it coming from?”
  • why we didn’t buy that land 5 years ago.”
  • why we paid so much to rent that land 2 years ago.”
  • trying to figure out how anyone can be profitable paying that kind of rent.”
  • at what it’s going to take for the people who need help the most to realize they need help!”

While these aren’t my words, I concur with most of them. We must not punish ourselves by berating yesterday’s decision because of today’s new perspective. We can’t change the past, we can only move forward. BUT, we can apply future risk management to today’s opportunities when determining what decision to make.

To Plan for Prosperity

Lately at most of the events which I’ve been speaking, I’ve been giving reference to “the ripple effect.” This pertains to the effect that today’s decisions will have on other aspects of our business, especially future results. We often see long term decisions being made (especially around land, buildings, and equipment) based on short term results (Eg. one year’s profitability.) I continue to be a proponent of “long term assets securing long term debt” and if you subscribe to that logic, then shouldn’t long term decisions be based on long term results?

farmfutures farm survival

Derived from Farm Futures “Survival Plan”

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This opinion piece was published on farmfutures.com on April 3, 2017. Titled What’s Your Farm’s Survival Plan, the author, Mike Wilson, describes how farm income in the US Mid-west is falling and thus challenging working capital to remain at adequate levels. As you have read here, and on my Twitter feed (if you follow me) is how borrowing  is becoming more difficult for US Mid-west farmers. I’ve posed the question several times is “Who thinks this can’t happen here” (in western Canada?)

Wilson lays out five practices that farmers can use to improve their chances of keeping a good relationship with their lender. Before discounting the suggestion by saying, “Yeah, well it’s different in Canada,” give it a read and appropriate consideration. Unless, or course, you believe it can’t happen here…

Snip Farm Futures Farm Survival The graphic is a screen capture of an excerpt of the article from the Farm Futures website. The text has been copied below, with my comments following each one:

What do lenders think when you walk through the door? If you do these five things, financing shouldn’t be much of an issue:

  1. Lenders will work with farmers who can communicate and execute a plan, whether it’s for marketing, cash flow, or both.
    *KG: we’ve discussed here many times over the years how important it is to communicate with your lenders who typically don’t like surprises. And while we’ve been preaching for years the value of planning, there is a key word in the statement above that, if ignored, makes planning the useless task so many farmers feel it is: execute.

2. Understand breakeven analysis and keep family living expenses low. Look for that extra dime in your marketing plan. Watch for opportunities to keep yields above average. A lot of that is just paying attention to details.
*KG: break-even analysis is one part of it. Utilizing Unit Cost of Production (UnitCOP) is critical not only to your break even analysis, but also your marketing strategy. It provides a built in sensitivity analysis to both prices and yields. It will clarify the importance of “that extra dime” in your marketing plan. It provides a level of detail that most farms still don’t employ in decision making…

3. Lenders need to know how you will pay them back. You can walk into their office, tell them about the 50 acres that just came up for sale next to your farm and expect to be approved — but that’s not how it works. They need to see that you’ve done your homework. They need to see your accurate balance sheet, income statement, accrual income adjustments, and other key financials. They need to see the numbers before they can pull the trigger.
*KG: Bankers make informed decisions; “they need to see the numbers before they can pull the trigger.” If the numbers are absent, it’s a hard stop. If the numbers are questionable, meaning that the credibility of the figures come into question, it’ll also be a hard stop. Several years ago, I witnessed a would-be borrowing get slammed by several quality bankers because the borrower provided sloppy info that was unverifiable. Lenders won’t make a decision to proceed without quality information; neither should you.

4. Be conservative with your money. “This will be a learning experience,” says Dan Gieseke, Missouri Farm Service Agency farm loan chief. “Many have not been through a tough time. They need to be conservative now, so they can be ready to take advantage of opportunities when they come along.”
*KG: The best time to be conservative with your money was 5 years ago. The next best time is right now. My old pal Moe Russell says, “If you are greedy in the good times, you’ll be on your knees in the bad times.” While shiny paint often feels better than a big bank balance, it is that bank balance (the life-blood of your business: working capital) that will not just help you survive the bad times, it will propel you through them; it’ll maybe even help you thrive during those bad times when your competitors are on their knees…

5. Use records to do analyses. “My fear is that farmers don’t use them,” says Purdue economist Freddie Barnard. “In the ’80s, we got beat up. But the tools to do the analyses then were not out there. There are tools now. Just use them, and try to make informed decisions.”
*KG: there are so many tools available, so much information available, that I would have a hard time arguing against someone who is admitting that “it’s overwhelming.” It is. While I would empathize, I wouldn’t accept that as an excuse. There are many qualified people in this industry who are ready, willing, and able to help you sort through the overwhelm, and establish a strategy to develop and implement a process to get you to a working level of comfort with data management, analysis, and decision making.

To Plan for Prosperity

“Do what you do best, and get help for the rest” is a cornerstone of my advisory work. If none of the five points above strike a chord with you because you don’t know how to do them, or don’t like doing what they suggest, then take a moment to ask yourself if the five points above are actually important to you.
If they are, but you’re not sure where to start, then start by picking up the phone and calling someone for help.
If they’re not, then good luck to you. You’re going to need it.

Your business, your family, and your legacy are too important to be left to chance.

intimate with EBITDA

Be Intimate with EBITDA

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No, not in the literal sense. This is a G-rated commentary…

EBITDA is an acronym for Earnings Before Interest Taxes Depreciation & Amortization. It is your business’ profit from operations. More than just understanding it, being intimate with how it affects your business is critically important.

EBITDA is pure because it does not include the effects of financing decisions (this is why is excludes interest,) accounting decisions (this is why it excludes depreciation & amortization,) and tax environments (this is why it excludes income taxes paid or payable.) It simply shows just how slick of an operator you really are.

ebitda calculation

If your accountant isn’t including this in your financial statements, you can figure it out pretty easily using the formula above. How has your EBITDA been trending over the last 5 years? Have you considered the reason why?

Your lender is keenly interested in your EBITDA. In fact, he or she will calculate it internally and measure it against your total debt payments required in the next 12 months. It is called “debt service coverage” or DSC for short, and is a deal breaker if it doesn’t meet your lenders’ minimum standards.

For many farms, net equity has been on a very positive trend over the last several years. While this is good news, like any news we can’t just take it at face value. What is the underlying story? If equity has been increasing from appreciation of asset values (namely land) and not from retained earnings, then it does not build confidence that the operation is profitable. If the operation is profitable, it is capable of growth and meeting loan repayment schedules (those same loans that help fund the growth.)

retained earnings

If a business is not retaining any earnings within the business, it limits its ability to fund growth, transition, etc.

To Plan for Prosperity

Recognize that EBITDA is the measure of your business’ operating performance. It has a key accountability in growing your business’ net equity. It is heavily relied upon by lenders.

  1. Calculate your EBITDA. Look at how it is trending. Acknowledge what it affecting the trend.
  2. Understand your lender’s debt service coverage (DSC) calculations.
  3. Decipher what has had the greatest inpact on your net equity: appreciation of assets, retained earnings, or both?

Your relationship with your EBITDA should be very, very close; some might even say “intimate.”