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Knowing Your Costs – Part 3: “The Present vs The Future”

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As a proud member of the Rider Nation, and loyal fan of the entire CFL (despite the goofy new rules for
2015,) I witnessed something happen on the weekend that blew up social media and has fans of the
Green & White frothing.

The struggling winless Riders have been devastated by injury and lack-luster performances on field,
especially defensively. The order of the game plan each week seems to be “who can we plug where?”
One of the criticisms from fans is that there has been inadequate planning on behalf of management to
bring in the right new talent to provide appropriate solutions at time of crisis (like injury.)

While the business of football is a mystery to me, the business of business is not. Like a football team,
your business will face crises and you’ll need to adjust quickly. It doesn’t have to be personnel related
(like a football team;) it could be asset related (like equipment catastrophe) or market related (like a
major price decline) or anything. The knee-jerk reactions that are commonplace during times of crisis
rarely bode well for outcomes.

In the case of my favorite football team, the knee jerk reactions have been to sign different players to
the roster regularly. This is meant to fill the gaps left by injury, unsatisfactory performance, etc. This
knee-jerk reaction creates an air of constant uncertainty among the remaining players, and rarely brings
instant results because new players need time to learn the system, and gel with their teammates so as
to function as a unit when on the field. Wouldn’t it be better to have developed some younger players
and keep them on a practice roster? Players who would have learned the system since training camp,
and who are just itching to get on the field and show their stuff?

Similar to your business when you face crises, you could follow the lead of this football team and simply
run to the marketplace to buy another combine, rent more land, hire more people, apply more spray,
etc. The knee-jerk reaction would feel good in the short term because of the band-aid effect, but what
about the future? How has the knee-jerk decision affected your future profitability? Will the lease or
finance cost of that combine be affordable for the next 2-5 years? Will the extra land grow anything, or
will it be flooded out or ravaged with disease? Will your new hire fit in with your existing team and
culture? Will that extra spray increase or decrease your profit? Wouldn’t it be better to have given these
potential crises some consideration before the season started with some planning? With planning, you
would be prepared and then make a timely and informed decision. No more knee-jerk reactions.

The biggest issue with my favorite football team came to light during the last game this past Sunday. The
head coach pulled a young quarterback from the game after he threw an interception. The young QB,
who is 23 years old and fresh out of college, started the season as 3rd in line yet found himself in the #1
slot for the last number of games because of injury. By all accounts, this young man has the skills to be
the future leader of this team…in several years, not now. He needs time to learn, to enhance his skills
and his knowledge. The best way to enhance those skills is with real life experience. On Sunday, the
head coach regressed that young man’s growth by killing his confidence when he got benched for one
mistake. The coach made a knee-jerk decision that can, and likely will, have a detrimental effect on the
future of the team.

While the future of this football team weighs heavy on the fans enthusiasm right now, your business
doesn’t have to be this way. Whether it be a crisis in personnel, equipment, weather, or markets, the
preparation and planning you put in ahead of time will save you time, anxiety, and money.
How does this relate to knowing your costs? It comes from planning. Knowing your critical crisis cost
points from investing time and effort in your management will clearly indicate where you have
sensitivities and where you have breathing room. The sensitive areas, where your return on investment
is tight, require more strategy analysis to better prepare for crisis.

Critical Crisis Cost Points

Personnel

o Key person quits mid-season (do you have a successor on the team today?)
o Injury, serious or minor (do you have a documented safety plan, insurance coverage?)

Equipment

o Does your current equipment cost per acre have room for an increase should there be
an equipment crisis?
o Is your current equipment line deficient or excessive based on your productivity,
efficiency, and cost expectations?

Weather

o Are you prepared for hail or frost, drought or flood? (i.e. do you have sufficient working
capital to handle the loss of gross margin?)

Markets

o Do you know your Unit Cost of Production so you can hedge for a profit?

Direct Questions

What have you done to prepare for crisis on your farm? Will you be making a prepared and informed
decision or a knee-jerk reaction?

What are you doing to understand your costs on your critical cost points to accelerate your ability to
make informed decisions during times of crisis?

From the Home Quarter

The planning that goes into putting together a successful football season resembles the planning it takes
to put together a successful growing season on your farm. You put together the best game plan you can
based on the assets at your disposal, tangible or intangible. You prepare for quandary by building depth
into your game plan for your critical crisis cost points. Sometimes you best plans aren’t enough;
sometimes the dilemma is greater than you could predict or the results are more damaging than you
could imagine. No matter how you slice it, your best bet is planning and being prepared by drawing the
distinction between risking your future on a quick decision in the present, or taking the charted path
keeping the long term success of your business always in mind.

The head coach of the Riders got fired before I could finish writing this article. I expect it was partly
because he refused to take any accountability for the team’s struggles. He routinely made decisions in
the present with a lack of regard for his, or his team’s, future. He arrogantly stated in interviews that
he’s a great coach and will find work if he’s let go. His unwillingness to look within himself as the leader
ultimately cost him his job. As the leader of your farm, please don’t get caught in that same syndrome.
Your future depends on it.

GFP FI 2

The Drought Dilemma

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The smoky haze we started inhaling yesterday drives home more than ever just how dry it really is.
#Drought15 is the Twitter hashtag to learn about how bad it is beyond our respective back doors. By all
accounts, crops are suffering and market prices are starting to reflect it. Those who are in an area that
has been, and/or remains, too wet just might be coyly denying that they ever complained about the
rain.

While it is too early to get a handle on any semblance of accurate yield estimates, people I’ve been
talking with have tossed around phrases such as “July harvest” on lentils, and described wheat crops
that are ready to push heads despite only being approximately 2 feet tall. What might be in those heads
if another hot dry windy week prevails?

As a farmer, you are an optimist. Even the most pessimistic ornery old codger you can imagine is still an
optimist if he’s a farmer. If he wasn’t, he’d never put a crop in the ground each spring. But as optimistic
as “Well, if we get one good rain in the next 4-5 days” sounds, it’s not going to make it rain. Despite the
drizzle we’re seeing today, one rain does not make a crop. If you’ve got payments to make, payables to
cover, even payroll to meet, you might want to start thinking about how that will all get done if
#Drought15 persists.

  1. Speak with your creditors.
    They’re not clueless; they hear the weather forecasts and read the crop reports. But they also
    won’t assume; they won’t assume that you’ll have trouble making payments because your crop
    is not going to meet expectations. As far as they’re concerned, you’ll be fully capable of
    satisfying the obligations you promised to make when you signed the loan or lease
    documents…unless they hear otherwise.
    And remember, your lenders are not problem fixers, so coming to them after the trouble gets
    real makes it far more difficult. They have more opportunity to help when they can be proactive.
  2. Consider your options.
    Do you remember Growing Farm Profits Weekly Issue #9? “Life and business can often be like
    snowmobiling: when trouble is ahead sometimes you need to pull back and sometimes you
    need to stay on the throttle.” What is your best option considering your crop’s development to
    date? I recently read an article discussing the possibility of reseeding barley on fields that have
    been froze out or droughted out. Considering the dire need for feed this year, cattlemen will be
    interested in green feed or silage barley. Is it time to consider how that might pencil out?
  3. Change your plans.
    The decisions you made last year and the year before were based on the best information you
    had at the time. The current situation differs greatly and probably requires a new decision.
    Swallowing pride and allowing yourself to change/reverse/discard old decisions could be exactly
    what your business needs. Nay, it IS what your business needs because your business is
    constantly changing and so should your decisions. Knowing when to do so is just as important.

Direct Questions

How would you rate yourself as far as being agile to your financial obligations in light of poor crop
conditions?

How would your stress level decrease if you took 10% of the time and effort you spend on worrying
about the existing crop conditions and used it to contact your strategic partners and advisors to amend
2015 expectations?

Are you staunchly sticking to your past decisions or are you being flexible and responsive to the needs of
your business?

From the Home Quarter

About 17 or 18 months ago, I blogged about how we need to reset what our expectation of success
really is. After the record 2013 crop, the 2014 crop year was poised to be a real disappointment in
comparison. Considering so far this year we generally went from adequate or excessive moisture in
March to a drought by mid-May, I’d suggest we look at 2015 for what it is and be realistic about what
we can call success. To give you a glimpse of what I mean, in 2014 I was working with a farm that
projected an operating loss due to the excessive moisture, crop quality issues, dropping grain prices, and
high fixed costs. The comment during planning was “OK, so we’re expecting to lose only about $300,000
in 2014; that’s decent considering what it could be.” They reset their expectation of success based on
what they saw.

Take a good hard look at your current year, be realistic with expectations, and make changes as
required. We can help make sense of it, take the emotion out of it, and assist with establishing new
plans.

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

farm

Accountant’s Work & Management Information

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In the last post, you read (again) about how important good accounting is to your business. If that wasn’t
enough, here’s more.

Do you ever find yourself tiring of all the financial hub-bub in the media? It seems like every 2 or 3
months the same banks, or automakers, or grocery chains are “reporting earnings.” Well, that’s because
they do. Every quarter, the publicly traded companies release an earnings report, financial statements
as it were, to the shareholders. The shareholders are the owners of the company, and they demand
information that is accurate and on time so they can make an informed decision about increasing their
investment, standing pat, or divesting. The company is in a constant state of flux, and owners want to
know by how much their risk profile has changed in the last 3 months. Accurate and timely information
is not only demanded by the shareholders, it is the law under securities regulations.

So why are farms OK to receive their info once per year, and often as late as 5-7 months past their year-end? If the answer is, “Because the owners (shareholders) aren’t demanding it,” then I have to ask,
“Why the ____ aren’t they?”

Does your lender put more emphasis on the timing and quality of your financial statements than you
do? If your answer is “Yes,” then please keep reading. Actually, print this off and read it weekly until
Christmas.

Quality accounting is more than just minimizing income tax and filing GST & Agri-Stability. Your
accountant should be tasked with generating precise and informative reports that give you, the owner, a
representation of the financial position of your business, and the changes year over year to your farm’s
overall financial health.

If the information in those reports is of little interest to you, or if you’re embarrassed to admit you don’t
understand what the contents really mean, please don’t fret. There are many people who are available
to help including your accountant, your lender, and your business advisor. All of them WANT to help, but
they won’t insult you by assuming you don’t know. For help, first you must ask.

As for all you wonderful accountants out there reading this, please note that I will be working with each
and every one of my clients to fully utilize the financial reports that you create. I will be helping each
farm CEO make informed decisions with help in part from your reports. That said we need reports that
are useful, readable, and easy to navigate. Combining several line items from client info into one line
item on the Review Engagement does not help management make informed decisions! For example, the
account we know as “repairs and maintenance” does not on its own distinguish between equipment
repairs or building repairs unless you break it down for us. When I work with clients to determine their
equipment cost per acre, we need to know just how much R&M is equipment and how much is
something else.

I encourage everyone to have a discussion with your accountant. It’s easy to just do what we do and not
take the time to talk about what we really want. Accountants need to know about your 3 year plan so
they can offer appropriate tax advice. They also need to know if the report they prepare for you is
meeting your expectations. Not everything is negotiable, but you don’t know unless you have the
conversation!

Direct Questions

How are you utilizing the financial reports that are prepared by your accountant?

Do you have questions when you’re exploring the contents, or do you even feel like you’re reading a
foreign language when reviewing your financial reports?

How do you make decisions about the future if you’re not taking the time to evaluate and understand
past performance?

Are you getting information to your accountant in a timely fashion?

From the Home Quarter

Management decisions, if they are to be informed decisions, need to be made with quality reporting and
realistic expectations; both are key components of a sound business plan. I recently witnessed a
financing deal go south because of the lack of quality information. The account manager aptly described
the financing request plan and supporting information as GIGO: garbage in, garbage out. Other factors
that are usually afforded consideration in a financing deal were never given a chance because the poor
quality information derailed the opportunity first.

It is up to you to work with your accountant, one of your key advisors, to put together the type and
quality of reporting that will not only serve you in making management decisions, but also support your
goals when seeking opportunities for growth.

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

emotion

Emotional Decisions: Business’ Achilles Heel

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I bought a used truck last week. Since I am no longer actively farming, I decided that my beautiful ¾ ton
diesel was more truck than I needed. It took me 2 years of searching to find that truck, so some people
are astounded that I would be selling it. It was still a terrific truck, and had nothing wrong with it.

During my search for another truck, I learned bits of info here & there about the good, bad, and
otherwise regarding the models I was interested in. It’s always a challenge to sort through the noise of
those who are die-hard loyalists who cannot see anything adverse about their brand and of those who
are inherently negative and cannot find anything good to say. How does a person decide?

I wanted the replacement truck to be in the 2011-2013 range. I faced the same challenge we all face
when considering a major purchase: can I find what I want within my price range, do I accept less than
what I want to stay within my price range, or do I pay more than I planned to get what I want? In the
modern age of “instant gratification,” our society typically pays more than planned.

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While some options on my list were important, others weren’t. When considering the Ford F150, I was
firmly on the fence over engine options: 5.0L or EcoBoost? As mentioned earlier, there is a lot of noise
about these engine options. I found a consistent message between 2 salesmen and felt that was the
most honest feedback I have come across. When describing what I need out of this truck, and why I was
on the fence, one salesman replied, “Well you’re just taking the emotion right out of this decision, aren’t
you?”

Yes. Yes I am.

The fundamentals of what makes a good decision are often clouded by emotion. We get so caught up in
the “want” that we blow right past the “need.” And since we as a society will typically pay more than
planned to get what we want, it creates a perfect storm. This storm has eroded balance sheet equity for
many, and left others upside-down on vehicle & equipment loans, but always negatively impacts cash
flow.

Direct Questions

How often have you let emotion take over your decision making process?

Do you avoid making a business case for each decision because it will prove the emotional argument to
be the wrong one?

What impact are you feeling from past emotional decisions?

From the Home Quarter

Removing emotion from business decisions is a key benefit that my clients enjoy. It allows my clients to
experience greater confidence in their decisions by having me filter through their emotions. I am not on
your farm each day, so the emotion of why you’re making the decision is not felt by me, thus allowing
me to see through it and keep you on track.

The truck I sold was rare because of its features and options. It had incredibly low kilometers for its age,
and needed nothing (I’d been through it front to back over the last 2 years.) What I felt for this vehicle
was almost on the verge of love (although I have never “loved” or “named” any of my vehicles, ever.)
And while it held a special place with me, it’s a truck, a tool, an inanimate object and completely
replaceable. I sold it when I did because I knew I could get maximum value for it now. A year from now
would be significantly less. It was advertised on Friday afternoon, it was sold by Saturday, and picked up
Monday. I found the truck I wanted the Thursday before, and picked it up a week later. I took the
emotion out of the equation.

Allowing emotion to influence your decision making is like putting on blinders: all that can be seen is
what you “think” you need and no other options appear available. Let’s take the blinders off, remove
emotion from the equation, and see if we can make a business case that offers an appropriate ROI.

If you’d like help removing emotion from the decisions you make for business and personal success,
then call me or send an email.

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!

planning

Decision Making with Incomplete Information

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

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

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

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

Stick with your Strategic Plan

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

Follow your Tactical Plan

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

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Get Advice from Trusted Sources

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

Direct Questions

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

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

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

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

From the Home Quarter

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

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

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.

20140309_143412

Life and Business Can Sometimes Be Like Snowmobiling

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

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

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

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

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

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

Direct Questions

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

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

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

From the Home Quarter

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

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Always Growing…Growing All Ways

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

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

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

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

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Increase Operational Efficiency

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

Increase Size and Scale

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

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

Increase Gross Margin

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

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

Reduce Costs

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

Direct Questions

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

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

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

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

From the Home Quarter

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