Average

Don’t Settle For Average

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It was the headline that struck me.

Don't settle for average _embedded

Settling for average in any aspect of your business will lead to certain demise. If everything was average (yields, quality, market prices, rainfall, heat units, weed pressure, disease pressure, input prices, equipment repair frequency, wages, overhead, etc, etc, etc…you get the picture) then farming would be easy.

But it’s not.

Fair to say that if you are projecting average yields and prices for 2017 you’ll be measuring those against higher-than-average costs. This is likely to total down to a negative bottom line.

I’ve never been a fan of “average.” As my old friend Moe Russell likes to say, “You can drown in a river that averages a foot deep.”

Average, to me, is nothing more than a feel good guide when looking to validate poor results. For example, acknowledging that yields were only a couple bushels below average means nothing Table for Averagewithout quantifiers like market prices (meaning we’ve calculated gross revenue), like input cost (meaning we’ve calculated gross margin), or like operating costs (meaning we’ve calculated profits from operations.) Here is a table to illustrate what I’m getting at:

If average is profitable over the long term, then we must acknowledge the need to adjust all facets of our profit calculation when one facet is below average. The problem is that generally we are seeing farms operate with higher than “average” costs and trying to pay for them with “average” yields.

To Plan for Prosperity

Our profitability is not determined by where it falls on a bell-curve, so why would we accept “average?”

 

scoreboard

Scoreboard

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We’ve just come out of an age where keeping score didn’t matter. Everyone got a participation ribbon. No one’s feelings got hurt. Maybe we’re still in this age, I don’t know.

Why do we want to keep score? “Because we want to win” is a good answer. But what if we’re not competing against an opponent, what then?

Keeping score is a form of measurement. Whether you’re measuring progress or efficiency, minimum standards or ultimate goals, a measurement is required. In your business, you’ll find the most critical financial measurements in your financial statements.

I’m not much of a golfer, but I do enjoy the game. While I don’t get out nearly often enough, when I do, I always keep score. My playing partners occasionally don’t care to keep their score, and that’s just fine. I’m not playing to compete against them; I’m competing against myself. I know how good I can play, and each round I strive to match that, and maybe get a little better. For the record, I’m about a 15 handicap; I am looking forward to the day I break 90.

You may not view your business as having competition that you need to “outscore.” But when it comes to finite resources like land and labor, make no mistake you are in competition and whoever is leading on the scoreboard is most likely to win the prize.

The scoreboard in sports shows who has most points. The scoreboard in Monopoly is simply who owns the most property and hoards the most cash. The scoreboard is what you make it, but it is worthless if you don’t use it (and check it once in a while…)

To Plan for Prosperity

Run your farm like a business, and it makes a great lifestyle.

Run your farm like a lifestyle, and it makes a terrible business.

If I knew who said it first, I could offer attribution. The analogy then is if you don’t want to keep score, are you happy with a participation ribbon?

Free Land

Free Land

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Getting farm land for free, whether it be purchase or rent, still won’t be profitable if operating and overhead costs are too high. If overall farm operations require high yields and prices to cover your break-even point, then you’re running way too close to the line.

Ask yourself if your 2017 break-even yield is near, or well below, your 5 year production average. If it is near, then there isn’t much wiggle room, is there? Everything needs to go right, including the external factors you cannot control, like weather.

Does your 2017 crop plan include a sensitivity test? What is your sensitivity to a 10% decrease in yield? What is your sensitivity to a 10% decrease is price? How close do either, or both combined, bring you to break-even?

To Plan for Prosperity

To quote my old friend Moe Russell, “What rabbits are you chasing?” Using Moe’s analogy, the rabbits you should be chasing are found in your operations costs: machinery, labor, repairs & maintenance, fuel, etc, and in your overhead costs: interest, carrying costs, etc. These are the internal factors, the factors that you can control.  And if these have gotten out of control, even free land won’t be profitable.

CYFF

CYFF (Canadian Young Farmers’ Forum)

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Greetings from CYFF

The Canadian Young Farmers’ Forum brings together farmers from across Canada. This past weekend in Ottawa, they held their annual convention and invited me to speak as part of their agenda.

There were many takeaways from the event; here are a just a few, with my perspective following in brackets.

  1. Agriculture is incredibly diverse right here in Canada. (We shouldn’t just stay in our little echo chamber with others who produce the same as what we do.)
  2. Even with such diversity, young farmers face similar challenges across all sectors and across all provinces & regions:
    1. Building and protecting adequate working capital is difficult (I’ll keep preaching the importance of this;)
    2. Profitability is cyclical (we may have heard this before;)
    3. Competition is increasing for land, labor, etc (and they’re stressed out trying to figure out how to handle it;)
    4. Small farms struggle to compete with large scale & well capitalized operations (yes, there are large potato, berry, vegetable, dairy, poultry, & egg farms like there are large grain and cattle farms, and competing with them for land and labor is just as tough;)
    5. Young farmers feel lost when trying to determine if/how their parents ever plan to slow down/retire (this also applies to every other family business, not just farms.)
  3. The desire to learn more and be better is strong (learn, unlearn, relearn.)
  4. The desire to take part in something bigger, such as industry groups with lobby or policy influence, is significant.

CYFF is for farmers under 40. Based on the passion of these young farmers, and their desire to learn & be better at everything they do, I think the future of agriculture in Canada is in good hands.

To Plan for Prosperity

The issues you face, the challenges you struggle with on your farm are the same as almost countless other farms. The relief and comfort seen on the faces of these young farmers when that became evident was obvious. They felt less stressed and less alone when they realized that they are not the only ones feeling the angst, the despair, or the helplessness that dogs their personal situation at home.
Don’t sit alone and wallow in your own anguish over what challenges you in your business. Sharing your trials and tribulations will not only help mentor the passionate successors to our industry, it may help you find comfort in knowing “you’re not alone.” It might even turn up a solution.

dashboard view

Dashboard

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What’s on your dashboard?

If you’re thinking about your trucks & tractors, the answer might be anything from gloves to a coffee mug to a clip for the rifle.

What I mean is “what are you watching on your dashboard?”Truck Dashbaord

  • Oil pressure?
  • Coolant temperature?
  • Exhaust temperature?
  • Seeding Rate?

All of these are important, and no doubt they all get significant amounts of your attention.

What are the consequences if any of these go into the RED?

 

What about your BUSINESS dashboard?

  • Working Capital?Financial Dashboard
  • Debt:Asset or Debt:Equity Ratio?
  • Unit Cost of Production?
  • Gross Margin?

What are the consequences if any of these go into the RED?

 

Which set of gauges get most of your attention? A failure on which set would be catastrophic?

When I was still farming, the first day of seeding in 2014 had one of these go into the red, only I didn’t know it because the gauge failed. In short, the tractor needed an engine overhaul because of severe overheating. Did it break the farm? No. Did it make seeding extra costly, and take longer than otherwise would? Yes. Did we survive? You betcha.

To Plan for Prosperity

We tend to do what we do best, what we like to do, and what we understand. Understanding the safe range, the limits, and the consequences of oil pressure or coolant temperature running into the red is something that is ingrained into us as youngsters who were imploring that we be able to run equipment. Yet, if no one teaches business owners the safe range, the limits, and the consequences of running their working capital or gross margin “into the red,” how will they know what to watch, or to watch at all?

For an intensive strategy on setting up and monitoring your business dashboard, call or email me anytime.

iconic backstop

Backstop

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What’s your backstop?

Recently, I read an article from some economist on interest rates. The premise was that interest rates have to rise in the short term, even though the economic signals aren’t yet supportive of an interest rate increase. The rationale: if the economy hits another pothole, and rates have remained at their historic lows, then there is little in the way of monetary policy options available to kick-start the economy. In other words, if rates stay low and the Bank of Canada (or the US Federal Reserve for that matter) needs to reduce rates to stimulate spending, how can they reduce rates that have no more room to go down? Do we toy with the idea of negative interest rates? It appears we have no backstop.

The challenge now is how to prepare for a potential future trouble spot when there is presently no wiggle room. To increase rates now will all but guarantee that our fragile economy will stumble. By not raising rates now leaves no room to reduce rates in the future (if needed) and all but guarantees that a potential trouble spot will be far more than a spot, it would be a huge stain. Damned if you do, damned if you don’t. I do not envy Governor Stephan Poloz’s job at all…

Does it seem as though there was too much confidence from policymakers, thinking like it can’t happen to me? Some might say that the policymakers didn’t want to to what it took to prevent fire and now may have to fight fire.

This thinking can also apply to child rearing. Kids who typically get what they want, especially after whining, usually fall into tantrums when parents offer a firm “No.” Without laying a baseline for what is acceptable and tolerable behavior from their children, tantrums ensue. In other words, the parents have left themselves with no backstop.

An effective backstop for your business can apply to many different facets: personnel, equipment, agronomic, risk management, etc. From the financial perspective, your backstop should be made up of several key pieces:

  1. Working Capital (especially cash)
    Strong working capital solves many problems, and prevents even more. It reduces cash flow risk, takes significant pressure off of market risk, and best of all it creates growth opportunities.
  2. Equity (and its relation to debt)
    If your business is weak in working capital and strong in equity, these low interest rates offer the best opportunity to recapitalize your farm. On the other hand, I smiled at a comment made by a client late in 2016 when he was postulating how fun and profitable farming would be without burdensome debt obligation weighing (him) down and pressuring (his) cash flow.
  3. Management Strength and Discipline
    Too often I’ve seen farm businesses that were strong in working capital and equity whittle away at their backstop to satisfy their expansion desires. Strength and discipline is required to not get caught up in the euphoria of more and more assets. It is also required for the business to keep growing (not just in size and scale;) large cash holdings and significant equity can sometimes be a sign of poorly allocated capital. Strength and discipline refers to avoiding both (opposite) extremes, and staying on task and on point with your strategic business plan.

Ideally, your financial backstop is a balance of all 3 points above. Too much, or too little, of any one point will be far less effective as a functioning backstop.

To Plan for Prosperity

Knowing your risks and actively managing them is the key step to understanding how much of a backstop you need. Under-emphasizing your risks or over-emphasizing your backstop both have potential to be detrimental to your business’ health.

Super Bowl Management Quality

Super Bowl Management Quality

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They should have seen it coming.

Didn’t some pundit declare something like a 99.9% chance of a Falcons victory with about 8 minutes left in the game? Somebody please clarify if that was actually the case.

A rather pompous thought that I kept to myself while watching Super Bowl LI, after Atlanta took a 28-3 lead, was “Brady’s just smiling at the bigger point differential that he’ll get to cover on his way to a win.” In hindsight, that comment would have been brilliant…had I actually said it.

They should have seen it coming.

Yes, it is easy to prognosticate in hindsight, but that’s not the point here. What did it take, what did the New England Patriots do to win another championship, aside from setting 24 new Super Bowl records and tying 7 others?

  1. People
    Bill Belichick has been the head coach of the New England Patriots for 17 seasons. He is in the top 5 winningest coaches in NFL history.
    Tom Brady has virtually cemented his place as the NFL’s greatest quarterback of all time. Based on the last 17 years of performance, he was a steal in the 2000 NFL draft, going in the 6th round (199th)
    The rest of the team contains very few “superstars,” yet when their superstar QB was suspended for 4 games to start this season, the team went 3-1.
  2. Management
    This starts at the top with vision. In the five seasons before Robert Kraft bought the franchise in 1994, the team was 19-61 (a .238 winning percentage). In 1994, the team made the playoffs, and did so 4 of the first 5 years under Kraft’s ownership.
    Management’s plan clearly put great emphasis on people. Since Kraft took ownership, the team has only had 3 head coaches, with Belichick, the current head coach, being in place for 17 of 24 seasons of Kraft ownership. The team is part of a privately owned family enterprise.
  3. System
    What words could you come up with to describe the system that has propelled, and maintained, team success for so many years, including the greatest comeback in Super Bowl history? Many had felt that the game was over at half-time: no team has ever come back to win the Super Bowl from more than 10 points down, Atlanta was dominating both sides of the ball (offence and defense,) and New England was making mistakes (turnovers, dropped passes, missed kicks.) Yet, the Patriots found a way to win. They had a system, and stuck to it, never giving up, never quitting. It would have been easy to deviate from their system in the face of such adversity; it would have been easy to lose motivation under what was deemed to be an insurmountable deficit.

The New England Patriots are by all accounts a highly successful business. How does your business compare? Can you reach top decile?
People: do you have the right people in the right place? It does not matter if they are family members or not, evaluate everyone, even yourself.
Management: does your management team have a vision and a strategy to achieve results that would put you in the top 10% of comparable businesses?
System: have you developed systems that are proven to work year in and year out, providing you with dependable efficiency and results? Or is every year a new roll of the dice?

Management has a vision, they put the right people in place, and everyone executes the system.

To Plan for Prosperity

Set yourself up for success. Model your business, and your approach to business, after other successful enterprises. We may not be New England Patriots fans because we envy their consistent competitiveness and success, similar to how we may not be oozing with adoration for the most successful farms in our area, but doesn’t that make them a great model to follow?

For the record, I’m not a Patriots fan, I am (at best) a casual NFL fan. I was actually hoping Atlanta would win Super Bowl LI (for no specific reason,) but I’m not disappointed with the outcome; it makes for some great storylines and it forces everyone to admit some admiration for an enterprise with the success rate of the New England Patriots.

paperclips

Paperclips

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Many farm offices and kitchen tables are buzzing right now doing crop plans and working out cost of production scenarios. What makes money? What doesn’t? What can we really yield? What are input costs going to be?

For too long, “cost of production” was “inputs.” Seed, chemical, and fertilizer were all that were considered when discussing “cost of production.” Slowly, the recognition of fixed, or operating, or overhead costs came into play. But even then, I still find that much is left to be desired.

Regular readers of this commentary know that I preach “Unit Cost of Production (UnitCOP).” The thinking behind UnitCOP is to evaluate what it cost your business to produce one unit, whether that be a bushel of canola, a tonne of barley, an “eight-weight” steer, a kilogram of butterfat, etc. Obviously, the more units you can produce without increasing overall costs lowers your UnitCOP, as does producing the same number of units but with a lesser total cost.

The mindset of including all costs and expenses when determining cost of production continue to evolve. When in discussions with anyone, client or stranger, about cost of production, I often need to look for clarification about their parameters by asking “Whole farm?” Even this leaves much open to interpretation: whole farm to some means “every acre.” To me, it means every acre, yes, but also every expense.

An example that makes me scratch my head is when I read new articles containing info or quotes from someone in Manitoba Ag. Recently, I read this article about management of agronomic economics, when as with other similarly sourced articles I’ve read in the past the content describes “break even prices and yields” for various crops excluding labor. Why? Will the crop magically seed and harvest itself?!?!

Every cost, every expense must be considered when calculating cost of production. Right down to the paperclips for the office.

To Plan for Prosperity

The business of farming is difficult enough without making it harder to define profitability by ignoring some of your costs. While paperclips may not be critical to “production,” as a farmer/rancher/dairy-person/etc, you are in the business or producing grain/beef/milk/etc. And the costs to run your production business includes things like paperclips.

When evaluating results that might not have met expectations, ask yourself if you remembered the paperclips.

Your 2017 Plan

Your 2017 Plan

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If it’s not done yet, you’re already behind.

They say to be a successful chess player, one must always be thinking 3 or more moves ahead, each with one or more alternatives on how your opponent will respond. The same can be said for business. Successful business owners are already thinking about 2020 and 2023, with a big picture vision of 2027 (that’s three, five, and ten years out.) They know that the decisions made today will affect their circumstances not only next year, but beyond.

This is a difficult focus to maintain when trying to get through the day to day challenges while under fire. Weather, break-downs, employee or family bickering can all make your days’s best plans worthless is a blink. And when days roll into weeks, weeks into months, and months into years, it is easy to not have the time (or not take the time?) to plan because we’re just trying to survive the daily onslaught, and maybe find time for an evening or weekend off…possibly even a short holiday in summer.

The most common objection to planning that I’ve heard over the years goes something like this: “Things change so much and so often that any plan is worthless in a month, or less!” That is an example of the mindset that I won’t work with (I’ve just given a hint at how I vet any prospective business engagement.)

A plan is not a binding document; it is more like a road map that you’ve built yourself.

Like a map:

  • your preferred path to your destination is clear;
  • your options, should you need to detour from your preferred path, are laid out;
  • what lies beyond your destination is illustrated for your consideration.

Unlike a map:

  • you’re not taking someone else’s word for what lies ahead because you build your own route.
  • you have the power to create your own alternative options, not just accept what is already there;
  • you can rewrite your plan if it isn’t working well; good luck trying to rewrite a map.

Understand that the total package of planning for your business is actually 4 parts: Strategic (what), Tactical (how), Operational (execution), and Financial (results & growth). Don’t let this scare you! To form a habit of planning, one does not need to complete all 4 tiers. Start with what you know (for most farmers, that is “operations.”) While you likely have your entire operations requirements in your head, putting it on paper and sharing with your team is highly likely to reduce inefficiencies and frustration this spring.

To Plan for Prosperity

Choose your destination (goals.)
Set your course (strategy.)
Decide who is driving, who is support, etc. Provide your team with the training and resources they need to do their job (tactical.)
Execute, but have preparations in place for the unexpected (operational.)
Be informed on how each alternative action will affect your results and growth potential (financial.)

There’s truth in the old saying, “If you don’t know where you’re going, how will you know when you get there?”

accounting

Accounting

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It’s nearing that time of year when you’ll be paying a visit to your accountant. Whether you are delivering a comprehensive report for final vetting and tax preparation, or a shoe box for “the works,” there are a number of questions and specific reporting attributes for which you should be asking your accountant. Of course, there are important actions you are responsible for as well. Here are three of the most important aspects to make a priority this year on your path to prosperity:

Inventory

Record your annual inventory accurately. This is important when reconciling your production and your sales to calculate your operating income. One of my more recent clients hadn’t implemented clear tactics for recording year-end inventory at the end of their 2015 crop year. Now, as we review past years, we are challenged to understand why they show an operating loss that year. There are anomalies in many income and expense categories when trended year over year. I challenged the accountant to explain, but since the accountant does not perform any type of “checks and balances,” only a compilation of client provided information, my clients are now facing the obtrusive task of reconciling each and every invoice & slip to see if there was a recording error. While you may be wondering, “What’s the big deal” the fact of the matter is that this “not a big deal” contributes to a reported $300,000 loss which is putting the banker at some discomfort. Would it still be “not a big deal” if the operating credit limit gets slashed because the financial reporting doesn’t support the existing borrowing limit? Is this as simple as an incorrect inventory figure provided by the farmer to the accountant because of slack or sloppy “estimates” of what’s in the bin?

Reporting

Readers of this weekly commentary have heard enough of my ranting about accrual adjustments and their importance to evaluating your business year over year. So let’s bypass the stated obvious and look down another path: what are you not seeing in your financial statement that would be beneficial for management purposes? I am a proponent of “more is better” when it comes to information (we can always discard what is not necessary much easier than trying to make decisions with vague information by yearning for what is not there.) As an example of a basic start, I support breaking the single line item of “Repairs & Maintenance” into two separate lines: one for equipment, the other for buildings. If you, as management, are trying to discern the subtleties of your various costs, would it be helpful to have this separation made?
There are many other suggestions that could be offered, but in the end, it’s your report so ask for what you want.

Depreciation

Hebert twitter depreciationIt continues to be the scourge of farmers to this day: income tax. It then is no wonder that farmers love depreciation. It’s a non-cash expense that reduces taxable income! But Kristjan Hebert tweeted a very valid concern that all farmers should think about. Depreciation is hidden…from sight. It is not hidden from the government, and the government has ways of collecting if you don’t manage your accumulated depreciation.
Accountants inherently assume that all farmers want to maximize depreciation expense to reduce taxable income, so rarely will your accountant initiate a depreciation conversation with you. This does not mean that if your accountant does not initiate the conversation that there is nothing to discuss! Talk to your accountant about your capital asset “depreciation pools.” Share your capital expenditure (CapEx) plan. Set the appropriate rate of depreciation that is in your best tax planning interests (HINT: you don’t have to take the maximum just because you can.)

To Plan for Prosperity

The financial statements created by your accountant is a package of some of the most critical management tools you need to make informed decisions. You not only have the right, but the obligation to create a report that is useful and meaningful to your management needs (and your accountant, as a strategic business partner, is more than willing to work with you…if you ask.)
1. You bear the responsibility for recording and reporting your inventory accurately.
2. Ask your accountant to create reports that are useful to you based on how you want to evaluate your business (within acceptable accounting practices, or course.)
3. Have a strategic discussion with your accountant about depreciation (HINT: it helps to have a strategy to discuss.)

It’s your business. Be accountable for it.