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Systems

Systems

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Last week, we discussed the importance of adding value to your business. It hinges on knowledge that allows you to see where your business is creating value or eroding value. Without the knowledge to see where value is positive or negative, we risk making decisions that are emotional or even irrational, but always uninformed.

The key to adding value in your business comes from knowledge about the goings on in your business.

Lately, one of the more common challenges I’ve heard from clients is the challenge of accurately reconciling inventory. Yield monitors are an acceptable guess, but certainly they cannot be taken as gospel (I cannot rationalize how a machine running at high speed can provide an accurate measure of yield without stopping to calculate the mass of the grain…but I digress). Many operations have scales on the grain carts, and while this technology is much more reliable, it is useless if the information is not being recorded.  We wonder why the old adage rings true, “You never get as many bushels out of a bin as you’ve put in.” And we haven’t yet touched on inputs (seed, chemical, fertilizer) nor how you manage returns and the subsequent credits…

You never get as many bushels out of a bin as you’ve put in.

With all the technology available to accurately reconcile inventory, the reason it remains a challenge is that the system of recording and managing information is broken…if it exists at all!

Here is a small sample of the systems you need in your business:

  • Managing/tracking cash and working capital;
  • Managing/tracking inventory (production, inputs, parts, fuel, etc.)
  • Managing/tracking staff (hours, vacation, sick days, etc.)
  • Managing/tracking equipment (operating efficiency, service, repairs, etc.)
  • Controlling Unit Cost of Production
  • Creating Profit.

To Plan for Prosperity

You wouldn’t jump into your combine without confidence that all systems are in place and working properly; in fact, the manufacturers now have systems and sensors in place for almost everything making it so you can’t operate if something “isn’t right.”

There are far too many variables in your business and leaving any of them unmanaged puts your profit and cash flow at risk. With little in the way of guarantees that profit and cash flow will sufficiently meet expectations each year, isn’t it worth investing in the right systems to garner full control of your enterprise?

Adding Value

Adding Value

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To actually add value to your business you must have profit from operations. Every dollar of retained earnings that is left in your business increases the value of your business. Simple concept.

In agriculture, when someone says “adding value” we typically hear “value-added” which means something like processing, milling, refining, etc, etc, etc. Basically we infer that it is anything one or two steps up the value chain that isn’t the actual farming.

At this point, many ears close and minds drift off…

What I’m referring to today is what adds value in your business. It matters not whether your business is production, processing, or any product/service that supports your business, there are aspects where value is insufficient and it is hurting your bottom line.

What Doesn’t Add Value

  • Anything that does not provide an ROI (Return on Investment) above 1:1.
  • Anything that doesn’t provide a measurable and quantifiable improvement to efficiency (which can be translated to ROI.)
  • Anything that uses more cash that it provides.

Examples would be a brand new pickup truck, renting land that (at best) will only break-even, chasing yield to the detriment of gross margin.

What Does Add Value

  • Cash flow and expense management
  • Driving down Unit Cost of Production
  • Empowering your people

Examples would be building and preserving working capital (especially cash), understanding total farm costs relative to production, building a team of competent people who can replace you.

Defining Value

Maybe this is the place to start? How do you define value in your business? What do you see as providing value? For far too many farms, value is centered around land appreciation (a passive boost to equity) and new equipment (a major draw on cash.) Interesting how these two focus points are conflicting in how they affect a business’ financial position…

Does value comes from biggest yield, biggest equipment, biggest acreage base? Or does it come from profit, efficiency, and control?  I might be swimming against the current here, but my vote is the latter…

To Plan for Prosperity

Knowledge is key. Without knowledge, determining value becomes emotional, a guess, or a hunch… To understand value in your business requires an awareness, a level of knowledge, that does not come from gut feel. Your systems for managing the operation and all the financial decisions that go along with it are what will provide the knowledge to help you determine where you are adding value, where you can create value, and where you’re letting value be eroded away…

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It’s Never a Problem Until It’s a Problem

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The first time I heard the phrase “it’s never a problem until it’s a problem” was from Elaine Froese. She is a sought after speaker with farm families on the topics of succession and family dynamics. I recall chuckling at the statement because it is equal parts truth and ambiguity.

Elaine uses this phrase to describe issues among family members, those issues we let smolder without drawing attention to the fire in waiting, those situations that irk us but don’t get discussed because we don’t want to create conflict. The statement applies across the board.

Over my career as a business advisor, commercial lender, and bank branch manager, I’ve seen hundreds and hundreds of financial statements, and one thing is consistent: it’s never a problem until it’s a problem.

Between 2007 and 2013, generally speaking, cash flow was not a problem on western Canadian farms: yields were strong, commodity prices were robust, profits were made. Yet anyone who didn’t consider that those boom times wouldn’t last forever likely didn’t prepare for the effects of the cycle turning downward. Those are the businesses who were most likely to make long term decisions based on short term results. Now there is pressure on cash flow from issues such as excess moisture, or as in the case of 2017, drought. As such, cash flow, which wasn’t a problem in the past is now a problem for many.

“The future will always belong to those who see the possibilities before they become obvious to the typical producer.”

Danny Klinefelter

Danny Klinefelter is the recently retired ag economics professor at Texas A&M University, and the founder of TEPAP. His words, if heeded and practiced, will head off most problems before they become problems!

To Plan for Prosperity

Being a visionary isn’t exclusively tied to seeing the future, it also applies to pragmatically looking at the present. Connecting the dots between the present and an objective (meaning realistic and not overly-optimistic) outlook for the future will help us all identify problems before they become problems. Then comes the hard part: taking action.

Shaking Hands

Let’s Make a Deal

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Here is an incredible opportunity for you!

You can invest in a business that has grown its assets by 100% over the last 6 years. It has doubled its production and its staff compliment in that same time-frame. Revenues have increased by over 130% since 2005.

Interested?
No…why not? The description is accurate of many farms, maybe even one you know.

We’ve purposefully made no mention of liabilities or retained earnings, nary a word on profitability or cash flow. Sadly, it is because ignoring those is typical when expansion is allowed to be the critical success factor.

Investing in a business that has inconsistent profitability and little (if any) controls over cash flow is beyond risky. Is it any wonder that industry lenders demand detailed and accurate information before investing in your business?

To Plan for Prosperity

Do up a Debt to Net Worth calculation. If your figure is 1 to 1, that means your creditors have equal ownership as you in your business. If your Debt to Net Worth is greater than 1 to 1, your creditors have more skin in your game than you do.

If you wouldn’t invest in a business that cannot prove reliable profitability and consistent cash flow, why would anyone else?

 

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™”

 

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.

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Control

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Happy New Year! My wish for your 2017, as I’ve extended to everyone regularly so far, is “peace and prosperity.” That may have been fortuitous as this, the first weekly commentary of 2017, carries a new name: Pragmatic Prosperity™.
Prosperity is not only my hope for the entire agriculture industry, it is my goal for every business I work with. Pragmatic describes the advice, strategy, and solutions we bring to each engagement. We are very excited about this evolution in our branding.

 

How do you employ control in your business? Is it over operations, people, cash flow? Those are quite broad descriptors, and when it comes to people, please recognize the difference between control and influence.

Here are the top areas to control in 2017 to achieve greater prosperity.

  1. Cash
    Working capital, especially cash, is a critical component of any successful business. Over the life of this weekly blog, you’ve read my constant rant about improving working capital. More and more important, the piece of working capital that needs focus, will be cash. A big part of working capital is inventory, but in a time when it is all too common for inventory to fall subject to grading issues, delivery glitches, etc, farms need the stability that comes from increased cash on hand.Expenses and debts unabashedly punish your cash. What are you doing to protect it?
  2. Marketing
    Even though we’ve had (generally) another banner year on the crop side, we have to give credit to the insulation from the commodity slide that we’ve enjoyed thanks to our slumping Canadian Dollar. Should the dollar strengthen, we’ll feel more of the pinch that our American neighbors are living with today. How would your cash flow look if you had to manage today’s expenses with 2010 prices?
    Far too many farms rely only on forward contracts. The reasons for it, I won’t speculate. Many tools and advisors exist to help you control your marketing (versus letting your marketing control you.)  When you’ve got full control over operating expenses (Point #3 below…keep reading) your marketing opportunities become more clear. This allows you to confidently price profitably.
  3. Operating Costs
    When we make more, we spend more (despite a contrarian strategy discussed here on May 17, 2016 – Spending Less is More Valuable than Earning More.) As farm incomes rose, so did farm expenses; what used to be “nice to have but could live without” has now become “must have” (in mindset anyway.) If we are to compare 2017 expenses to 2010 income (as suggested above,) why not look at 2010 expenses too? How have operating costs changed in your business over the last 7 years (2010 to 2016 inclusive)?

To Plan for Prosperity

You’ll note that the first item listed, cash, is at the top for a reason. However, if you start at the bottom, you’ll see how it is connected, how it flows and will get you to the results you desire, the results you may not think are achievable…but most certainly are.

Start with 3, it will have great impact on 2, which will lead to strength in 1. Control them all as you would control your equipment.
Make sense?
3…2…1…GO!

 

Over-Optimism (a.k.a “It Can’t Happen to Me”)

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Recently I’ve sensed great concern from some bankers regarding the effects on the cattle market because of this TB outbreak in Alberta. The effects are still not definitive but could prove devastating.
The fallout from this recent harvest in western Canada is still being measured. Creditors are in full disaster preparation mode so as not to be bombarded by voluminous delinquent payments over the next 5-6 months.

A valuable part of the work I do is to help clients make capital expenditure and credit decisions. After a number of difficult crop years from excess moisture, many farms have great concern over their financial stability and fully recognize that they have very little room for error. Pains are being taken to consider how every decision could affect the farm’s future profitability.

Many long term business decisions have been made on the premise of $12 canola and $8 wheat, or $2/lb weaned calves (as a kid, I sold my first calf for $0.80/lb.) Servicing debt on land and/or equipment payments during the high points of the cycle is easy, but as we’ve seen, the debt often outlives the business cycle.

Some farmers, especially those who are relatively new to farming, have never experienced tough financial times. They have no first hand experience of BSE or the 2004 frost; they know little outside of high yields, good quality and strong grain & cattle markets. Sadly, there are many who have first hand experience of those dramatic market influences yet have permitted themselves to have short memories.

I remember giving a presentation in 2013, in a community I won’t name so that I don’t shame them, where the audience was verbally angry with me for stating that we were a “global average crop, not a bumper crop but an average crop globally from $9 canola and $4 wheat.” They thought I was crazy because, in their opinion, canola had a new floor price and it was $12.

Regularly I am forwarded an article from some US agency (it varies week to week depending on who is forwarding it to me) that provides insight into the rapidly decreasing appetite for risk into grain farming from US lenders, or the sizable decline in land rent rates, and the reduction in land values. I often tweet these articles with the question, “Does anyone think this can’t happen here?”

I am encouraged by a shifting focus among farmers that centers more on ROI (Return On Investment) and less on size & scale. It bodes well with a saying (it’s not mine) that I like to lean on: Better is better before bigger is better.

Direct Questions

How do you view risk and its potential to affect business results when making business decisions?

Have you considered how a major market shock could affect your profitability, and if so, what have you done?

If your profitability will be sub-par in 2016, what adjustments are you planning to make for 2017 and onward?

From the Home Quarter

While no one can deny that “things are different now,” there is still much we can learn from history. Maybe the most important lesson from history is that major business-impacting events are very unpredictable. As such, maybe we should be more prepared for the predictable events so that the unpredictable ones aren’t such a major shock…