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.
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…