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Goal Congruence_LI

Goal Congruence

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Have you been beat up enough yet about “defining your goals”? Every article I read relating to business management and every presentation I attend relating to business management always brings up the need for you as the businessperson to “define your goals.” For the record, “business management” in the context of this piece also include business transition (succession) planning.

The beatings will continue. They’ll continue as until everyone doesn’t just listen to the advice, but acts on it.

More often than not, when I ask a client (or even a prospective client) what are their goals, I get a blank stare, as if the concept is a foreign language. Far too many business owners have given little consideration to what they are trying to achieve in the business.

If it’s just a place to work and/or a lifestyle to enjoy, then declare it as your goal.
If it’s a family legacy that has been left to you that you intend to leave to your children, then declare it as your goal.
If it’s to achieve the largest scale in your market area, then declare it as your goal.
If it’s to create financial wealth and prosperity for you and your family, then declare it as your goal.

Don’t just tell the advisor you’ve hired, and paid well, that your goal is “to make more money.” That’s everyone’s goal, whether employed for someone else or self-employed like you. Let’s get serious.

There are four sample goals described above. These four have been chosen because they are the most common goals I have identified in working with entrepreneurs for the last 15 years. What I mean by “identified” is that while some of these goals have been declared, it’s more common that the goal is insinuated by (or surmised from) the behavior of the owners. The problem is when business owners try to combine more than one of those four sample goals listed above; this happens almost all the time.

The first goal listed, lifestyle, is not congruent with any of the other three.
We’ve learned that largest scale does not automatically equate to increased financial wealth and prosperity; again, not necessarily congruent.
The only congruity among the four samples is between family legacy and financial prosperity.
– yet behaviors often do not follow those goals.

It is advisable to have multiple goals in business and in life. In business, none of the goals we may have can be achieved without prudence in financial management. Remember, profit feeds your business, it feeds your family, and it feeds your ability to spend time with your family & on other things you enjoy. If you feel uncomfortable declaring one of your business goals to be financial wealth because you don’t want to be thought of as a greedy person, then don’t declare it, but for the sake of your business’ and your family’s future, behave like it. If you’re not profitable, if you’re suffering under the pressure of non-existent working capital, or worse, then none of your goals are achievable. Period. Hard stop. I’m sorry to have to deliver that cold truth in such a harsh manner.

To Plan for Prosperity

The challenge I lay out for all entrepreneurs is this: be clear on why you do what you do, establish working parameters and behaviors that support it, and evaluate your progress & results regularly to ensure you’re still on track. How sad would it be to never check the map for the entire journey only to end up somewhere you never meant to be?

Not only must your goals be congruent, but your behaviors must be as well. You and your business face enough turmoil, challenges, and risks. Don’t create more challenges by making decisions that aren’t congruent with your goals.

Halloween

Happy Halloween

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Let me first get this off my chest.

In this age of hyper-political-correctness, to hear of some schools that are “cancelling” Halloween because of the risk that some costumes might “offend” or “scare” someone is taking us down a path that we may not be able to come back from. I’m not a proponent of Halloween, but I’ll gladly encourage anyone who wants to take part in it to do so, and anyone who doesn’t can also do so. What we need to remember is why we do it, even if we don’t love it…IT’S FOR THE KIDS!
It’s THEIR imagination and THEIR excitement that must not be squelched just to satisfy our guilt over ________ (fill in the blank).

Thank you; now onto the real business at hand.

Getting dressed up in a costume creates an outlet for us to be something we’re not, or maybe something we wish we could be. (As a kid, I wanted to be a pro-football player and might have dressed up as such for Halloween.)

Over the last several years in western Canadian agriculture, “average management” has been dressed up in a costume of “excellence.” With high yields and high commodity prices, even average managers were more profitable than they had been in the long term…maybe ever.

Dr. David Kohl uses the term “black swan” to describe the recent commodity super-cycle because, like a black swan, it is “not the norm.”

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict;

Source: www.investopedia.com

While we might be inclined to associate black swan occurrences with negative deviations from normal, in the case of the last 10 years in agriculture, we’ve experienced a positive deviation from normal. The danger came when many participants in the industry believed that what was happening wasn’t actually a black swan but “the new normal.” Many long term decisions were made based on short term results. True to the black swan definition, the onset of the commodity super-cycle was predicted by very few, and even fewer still predicted it would last as long as it did. Maybe it was the fact that it did last longer than a year or two is why people started to believe it would never end…?

The unpredictability of this black swan continues to cause angst among players in the industry. Some are soldiering forward as they have for the last several years with full expectation that the black swan will return. Others are are in full damage control mode, or even panic mode. Others yet are patiently waiting for the opportunity that always follows the economic cycles.

Market cycles will hurt some, but offer opportunity to others.
The difference between who suffers and who prospers is…Who’s Ready.

– Kim Gerencser

I started making that statement way back in late 2012. The message then was to take advantage of the current up-cycle to solidify your business in preparation for the upcoming down-cycle (because bulls are always followed by bears, which are followed by bulls…it is how cycles work.) Being greedy during an up-cycle brings up another old adage, “Pigs get slaughtered.”

To Plan for Prosperity

When preparing your 2018 projections, compare your projected expenses to your worst revenue in the last 10 years. Is there a negative gap? How big is it? What needs to be done to cover it? Alternatively, is there a positive gap? How big is it? What needs to be done to protect it, or even to leverage it so as to make it wider?

The exercise proposed above is comparable to removing a Halloween costume. While things look one way outwardly, what is actually happening underneath, at the surface, can sometimes be much different and will tell the true story.

Happy Halloween!

PS. Don’t wear your Halloween costume to your banker meeting.

Test Your Outlook

Test Your Outlook

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Price vs. Cost

*The following three lines are excerpted from Seth Godin’s Blog, October 16, 2017*

Price is a simple number. How much money do I need to hand you to get this thing?
Cost is what I had to give up to get this.
Just about every time, cost matters more than price, and shopping for price is a trap.

Does what Godin writes above strike a chord with you? When I hear of farmers selling out their long time input supplier to buy fertilizer for $5 per metric tonne cheaper from the dealer 20 miles down the road, I can easily understand that this is someone who does not understand price vs cost.

Expense vs. Investment

Too often there is confusion about what constitutes an expense and what constitutes an investment. An investment will provide a return over what you’ve paid, an expense will not.
Examples of investments are crop inputs, land, hired help, and quality advisors.
Examples of expenses are repairs, fuel, and equipment.
Sadly, when profitability is at risk, the first place many farmers look at is what falls under investment.

Price vs. Value

Price is what you pay.
Value is what you get.
And while it seems simple to distinguish one from the other, when emotion enters the equation we find that value is often seen where it does not actually exist.

Profit vs. Cash Flow

When I was still farming, the first year that dad wasn’t actively farming on his own any more and had rented us all his land, I was negotiating with him on when he wanted to get paid the rent (in the current year or after January 1). When he offered to defer to the new year since he had enough old crop sold already, I thanked him while admitting that it would help us since we were tight on cash for the next couple months. His reply was, “I thought you said this farm was profitable.” I told him it was, yet he wasn’t able to recognize that even though we weren’t flush with cash at that moment, we were profitable.

Often times when working with clients, I am offered a projection that they might have built on their own. Whether they call it a profit projection or a cash flow projection, it usually is a combination of both: it contains cash flow items like loan payments as well as expense items like (non-cash) depreciation. Doing so makes the result of the exercise look much worse that it actually might be.
Profitable businesses run into cash flow challenges at times; unprofitable businesses run into cash flow challenges most of the time. To rectify the issue, one must first know whether the problem is profitability or cash flow.

Problem vs. Opportunity

Recently, I read an article written by a farm advisor that described the panic of a client who hedged 30% of his new crop production at a profitable price. The panic was because the market had moved higher. His view was that this was a problem, but the advisor patiently guided him through the reality that this was actually an opportunity to price more crop.
The producer viewed the situation as a problem because he felt he “missed out” on selling for a higher price.  The reality was that he was already priced at a profit (a meager one, but still a profit) and now had the opportunity to price in even more profit. Sadly it seems he would have been happier if the market had moved down because his hedge would have been even more in the money despite the fact that the remaining 70% of his new crop was unpriced and might then be unprofitable…

To Plan for Prosperity

Objectivity can be difficult to maintain when making business decisions. I know; occasionally I have the same difficulty in my own business, and that is why I have a business advisor.

As entrepreneurs, we get caught up in what we’re doing, what we’re trying to solve, or what we’re working to create. We can get so engrossed in our own ideas that we sometimes fail to see what is blatantly obvious, that which can bring faster results, a more desirable outcome, or just less stress. Garnering the perspective from someone outside our business is a great way to test our outlook.

 

What Do You Care About

What Do You Care About?

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What do you care about?

In a conversation with a fellow business advisor recently, the topic was about how much demand for our services there would be this fall considering the drought, rising interest rates, a rising Canadian dollar, and volatile crop prices. He said to me, “The work we do is important; people need our help,” and then went on to say how he expects there to be significant demand from the marketplace for our financial advisory work.

I questioned whether the farming industry is “generally” ready to place enough importance on financial matters of cash flow, profitability, and leverage to create the demand he described. My experience is that there are pockets of business people who see the value and hire the help, but generally the financial woes faced at the farmgate have yet to cause enough pain to spur on action.

Change will only occur when the pain of change is less than the pain of staying the same.

It seems like there is always something more important.

His response, “People will tell you what is important, and very clearly too! It’s their behavior. Their actions show you very clearly what they care about most.”

Based on how farm equipment sales continue to be incredibly strong, despite challenges to cash flow and profitability, it’s not rocket-surgery to figure out what is a top priority among farmers…

Faced with a choice of one response over the other, how would you choose:
What do you care about?
a) Ensuring a profitable enterprise for long term growth and sustainability
b) Having a modern/late model fleet of machinery

a) Investing in the crop that provides your income
b) Investing in an “asset” that is a merely a cost and reduces your profitability 5 different ways

a) Getting bigger
b) Getting better

Years ago (WAY back) when I drove a fuel truck for a living, one of my customers always needed significantly less heater fuel (fuel oil) than any other customer on the regular monthly top-ups during one particularly cold winter. It’s not that his house was that new or air-tight; it was not that he didn’t have the money to pay for the fuel (they were a wealthy family.) It was that, by his own admission, he “kept it as cool as possible in the house, about 64 (degrees Fahrenheit).” This was a family of 6, with kids ranging in age from 10-18, whose comfort was less important than money. By his behavior, it was clear what he cared about most.

To Plan for Prosperity

If you feel like you might be facing a choice this year as you evaluate your financial performance, you won’t be alone. Hard choices need to be made by business-people everywhere, every year, all the time. When considering what choice to make, first ask yourself “What do you care about”. When what you care about is clear, the strategy and the action become obvious.

If you are having difficulty defining what you care about, look at past behavior: it will paint the picture for you.

Know the Signs

Know the Signs

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When you see a cow that is limping, you check her out to see what the ailment is. A prudent cowperson can quickly recognize foot-rot and will tend to the cow to make her well again.

When you see yellowing bottom leaves and/or thin, spindly plants in the canola crop, you know it is lacking nitrogen. If you see the signs in time, you can top dress nitrogen fertilizer onto your crop and see a positive benefit.

When we see a tire is low, we fill it.
When we see windows are dirty, we clean them.
When we find the level of fuel in storage is low, we order more fuel.
When cash flow is abundant, we spend it in ways we wouldn’t usually spend it.
Yet, when working capital is depleted, when cash flow is tight, or when profitability is dicey, we typically soldier on…doing what we’ve always done.

This makes no sense. The last two sentences above make no sense at all.

When the bank account is empty and the line of credit is nearly full, do you:
a) Apply for more credit, at your primary lender or elsewhere?
b) Evaluate your cash outflow to date and reexamine your plans for the rest of the year?

When working capital as slipped down so low it would barely cover the crop inputs loan, do you:
a) Analyze what caused the current situation?
b) Seek action to rectify your working capital position?
c) Both a) and b) ?

The case for “knowing the signs” is made by acknowledging the impact of each risk that is identified.

In the crop, the yellowing of canola leaves won’t spur any action if the risk to yield potential is not understood.  If the risk is understood, then an informed decision can be made to act or not act. If there is no effort put in to understanding the risk, then the decision to act or not act falls somewhere between apathy and laziness. Being ignorant to the specifics of the risk and its implications is no longer an excuse now that we have access to all of humankind’s knowledge in our pocket…

If you’re unaware of what are the signs of nitrogen deficiency in canola, if you’re unaware of what are the risks of foot-rot in your cattle herd, you are best to seek advice from an expert.

To Plan for Prosperity

The risks of maintaining insufficient working capital, and the risks from shortfalls in cash flow, are obvious to those of us who specialize in the financial side of business. We know the signs. We know what it takes to fix it. We know what should happen to ensure the situation isn’t repeated.

 

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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.

top producer

Are You a Top Producer?

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Esteemed economist, Dr. David Kohl, is a fervent advocate of improving business decision making. In one of his recent speaking engagements, Dr. Kohl suggested that top producers can answer Yes to at least six of the following questions.

Top Producer Kohls questions

With only 10 questions on the slate, a positive response to only 6 of them would make you a top producer.
You’ll note that nowhere in those 10 questions will you find anything about actual production…

To Plan for Prosperity

If you are unable to answer YES to at least 6 of Dr. Kohl’s questions, then I suggest you do an internal audit on yourself and your business to determine why. If you are unsure about where to start in doing such an audit, or how to make the changes necessary to be able to answer Yes to 6 of 10 questions, then pick up the phone – I can help.

If six-out-of-ten makes you a top producer, imagine how strong your business would be if you hit 10/10…

Better is Better

Better is Better…

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Would you rather make $50/acre profit on 20,000 acres or $100/acre profit on 10,000 acres?

This is a question I ask any farmer who admits to pursuing aggressive expansion. As was aptly described in a recent edition of FCC’s AgriSuccess  in May 2017, journalist Kevin Hursh discusses cost effectiveness of farm expansion with Kristjan Hebert. Kristjan has been quoted in this commentary a number of times in the past because he is the first person I hear using the term “Better is better before bigger is better.” To his credit, he admits that it isn’t his phrase; he heard first heard it from someone else.

The question posed at the beginning of this piece is meant to evoke an admission of any business flaws that have crept in to the practices and decisions that drive aggressive expansion.

The point is acknowledge that for all the risk undertaken in the operations of any agricultural enterprise over the course of one year, the end result must recognize the effort involved and the risk taken. If you’re working harder and risking more, why would you accept less profit? True, the linear dollar profit is the same in this example, but the profit per unit (in this case, per acre) is half. Anyone who can prove that their whole farm costs, right to the paperclips, are also halved is welcome to step up and prove that bigger is in fact better. I’ll wait…

There are many advisors who have questioned why any commodity production business would want to rapidly expand before doing the best job they can on what they already have. The argument on what led to the mindset of expansion at all costs hasn’t been settled in over 20 years, and won’t be settled here today. But in the end, we can do better, we must do better, because now we know better.

And the words are true: Better IS Better…

To Plan for Prosperity

This week’s piece is purposefully pithy. It is meant to drive awareness of the “Costs and Effects™” of the decisions made in our businesses. Every choice we make has a consequence, and to truly “be better,” we must evaluate each business decision on its merit, not how it makes us feel.

While bigger can sometimes be better, it’s guaranteed that better is always better.

 

Discipline

Discipline

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Over the last number of weeks, we’ve contrasted two fictional farmers and their approach to managing growth, and specifically an expansion opportunity. One failed in his aspirations, the other succeeded. One of the major factors contributing to the results of both examples is discipline.

“Fictional Fred” was lacking discipline. He shot from the hip, and ran his business in a reactionary fashion. He did not make it habit to consider the impact of the decisions he was making, whether it be adding another combine late in the season, or attempting to take on additional land that would equate to an immediate 66% increase in cultivated acres. He recklessly adds equipment to his business which has driven up his equipment cost. This has also come with the cost of damage to his relationship with his primary lenders. Fred behaves in a way that many people think is entitled. He’s done few favors for himself with his recent actions.

“Imaginary Harry” exercises great discipline in how he manages his business. He has a strategy that was constructed with the aid of his trusted advisors. He is confident that his strategy is the best way to achieve his family, business, and financial goals. As such, he establishes operating plans each year that follow his strategy; he maintains a capital expenditure (CapEx) plan that follows his strategy; he sticks with the cash flow and financing plan that follows his strategy. He’ll always politely listen to the pitch of those who are trying to sell him something (because everyone wants Harry to be their customer) but if it doesn’t fit into his strategy, Harry doesn’t buy.

Strategy is not written in stone. Strategy is a a concept as much as it is a plan, and as the CEO you need to be able to adjust your strategy when the environment changes.
Discipline is a character trait, a behavior, that equips a person to avoid distraction and stick to the plan, and as the CEO you need to be able to maintain discipline when warranted, but also be able to permit flexibility when needed.

To test your disciplinary mettle, the next time you face a distraction, ask yourself the following:

  1. How will this decision affect my strategy (my goal) of achieving ___________?
  2. Will this have a positive or negative impact on my cash flow and profitability?
  3. Is this a “want” or  a “need”?

To Plan for Prosperity

As defined by Merriam-Webster, strategy is “a careful plan or method for achieving a particular goal usually over a long period of time,” and discipline is “a way of behaving that shows a willingness to obey rules or orders.”

The strategy is yours, you created it. To not maintain discipline to your own strategy is aptly described by Marshall Goldsmith in his book Triggers: “(you’re) failing a test that (you’ve) written!”

 

Expansion Plans

Expansion Plans

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Harry* is one of those subtle role models that every farm community has. While no one treats him like royalty, nor does he act like it, everyone knows Harry is highly respected, not just here at home, but in the agriculture community across the entire province. He has quietly, and diplomatically, build his own little empire.

Most people wonder how Harry has done it. True, they are a little envious, but they cannot understand how Harry could be so well off compared to most others in the area when he gets the same weather, he farms similar soil, and grows similar crops as everyone else. Harry’s yard is always neat and tidy, his buildings are clean and kept up, and his “not new, but not old” line of equipment shines like a new dime despite some of it being over ten years old. There are three new 60,000 bushel bins going up this spring, and a concrete pad has been poured which, if you believe what you hear on coffee-row, is for a new grain cleaner.

Harry has expanded his crop acres a little at a time, never making a big splash in the market. Neighbors usually come to him because they know he is a character guy: he always pays his rent on time, he respects their land, and he keeps them informed. Through rent and purchase, Harry has taken the 1,200 acres he inherited from his parents in 1984 and has grown it to 8,600 acres today. He owns about 6,000ac and rents the remaining 2,600.

Harry heeded some sage advice when he started out. He was told that production is only part of the equation; the haughtily delivered quip stuck with him through the years, “Farmers don’t get paid for growing it, they get paid for selling it!” While production is incredibly important in the commodity business, Harry learned early that in the commodity business you have to produce as much as possible as cheaply as possible. Efficiency of finances and expenses, not just operations, would be key.

Harry has worked diligently to keep his costs down, especially equipment. Despite easy credit and low interest rates readily available, Harry has stuck to his guns when solicited with discounts and deals on newer equipment. He has drilled down on every operation on his farm, and can tell you quite accurately what his entire cost is per acre, including labor and depreciation, for seeding, spraying, harvesting, and trucking. He knows off the top of his head when he is better off hiring custom work or doing it himself by comparing the custom rate he is quoted against what he knows are his “all in” costs.

Harry recognizes that he cannot be an expert at everything. He knows he is an operations expert because he has managed his costs to their lowest reasonable point and because he manages his crew and makes all logistical decisions to get 8,600 acres seeded and harvested with greater efficiency every year. Harry knows he is not a human resources expert, so he’s taken coaching in order to improve his employee relations; he knows he is not an expert in international grain markets, so he’s hired an advisor and subscribed to market intelligence services, he knows he’s not a financial expert so he heeds his banker’s advice and has even hired a financial and capital expert to increase his confidence in the decisions he wants to make.

Harry has been thinking about expanding the farm for a couple years now. His two children, now in their early twenties, have shown a real penchant for the farm. After taking his advice to work somewhere else (either in or outside of agriculture) and to get a post-secondary education, Harry’s children have solidified their dedication to the family farm, bringing with them their outside work experience and their formal education: one with a Bachelor’s of Science in Agriculture, the other with a Bachelor’s of Commerce. The kids get along fine, and work very well together. Their differences in interests and education will bring a real synergy to the passion they share for the farm. Harry is incredibly proud.

Two of Harry’s neighbors have been thinking about retiring for a number of years now. Being the proactive strategist that he is, Harry has been discussing the possibility of expanding the farm with his advisors. Today, Harry is supremely confident that he knows exactly what upgrades need to be made to equipment and labor, and how it would affect his balance sheet, income statement, and cash flow, should he be successful in taking on more acres.

When Harry heard that Fred’s effort to rent the land of both neighbors came up short, he was honored when those neighbors came to Harry and asked him to rent their land. Having been planning for this opportunity for almost two years, Harry has been aligning his resources and as such he has abundant working capital to take on about 2,000 acres from each of his two new land partners. After having coffee with each neighbor for a couple hours, Harry has acquired the knowledge he needs and now knows what he will seed on which field. He calls his supplier to inform them of the additions to his original corp plan and procures the required inputs. Despite it being early April, Harry gets everything in place smoothly. He knows full well what a stressful mess this new land would be if he just tried to pull the trigger without planning for how to get it done.

To Plan for Prosperity

If the story above sounds too idyllic, please know that Harry’s last name is not “Perfect” (Get it? He’s not “Mr. Perfect”!) Harry hasn’t done everything right, and he doesn’t do everything right on a daily basis. What he has done different, what he does so well is that “he knows what he knows, and he knows what he doesn’t know,” and as such, he has equipped himself with the right help and advice to fill the gap. What might be the most important thing that Harry does well is that he makes a plan, and uses great discipline to not allow temptation to lead his plans astray. He avoids the temptation to increase his costs from high priced equipment or fancy yield-exploding elixirs. He maintains his strategy of keeping costs down, and protecting cash flow & working capital as the life-blood of his business that it is.

If you asked Harry, he’d admit that there are many decision he would have made differently from knowing what he knows now. But, being strategic and disciplined has allowed Harry to grow his business, not only in size and scale, but in efficiency, profitability, confidence, comfort, and lifestyle.

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