balance sheet

Balanced View of the Balance Sheet

Like any piece of business information, the balance sheet is only as useful as the quality and accuracy of the information presented in it. In my experience, the balance sheet either gets too much emphasis or not enough. Too much when a business is not profitable, but always falls back on “Well we (they) have strong equity.” Too little when a young business is in high growth phase and is focused on nothing more than the next expansion opportunity, usually at all costs.

The construction of a balance sheet is quite simple: assets on the left, liabilities plus owner’s equity on the right. As the name implies, the two sides must balance. So when liabilities are greater than the assets, there is negative equity. Yes, you can have negative equity, but not for long unless you have an incredibly patient banker.

When describing the instances above where the balance sheet gets too much emphasis, the focus is clearly on the bottom half of the balance sheet, specifically the long term assets & long term liabilities and the owner’s equity. The equity is usually provided by appreciation of long term business assets, and if the equity is built almost solely on that and not retained earnings (net profit from operations) then there is definitely too much emphasis put on the bottom half of the balance sheet, namely equity.

The top half of the balance sheet is where most of the trouble starts. The top half is where we find the current assets and current liabilities; the difference between the two is working capital. Current liabilities have grown to dangerous levels from ever increasing loan and lease payments, cash advances, and trade credit. When current liabilities exceed current assets, you have negative working capital.

If your balance sheet has negative equity and negative working capital, you are the definition of insolvent, and the next phone you make is likely 1-800-AUCTION.

Ok, so there is equity on your balance sheet, more than enough to cover off the negative working capital. A patient and understanding lender might be willing to help you tap into that equity to “recapitalize” the business.  Do that once if you need to. By the time you’ve gone to that well two or three times, you’re likely closer to needing the classifieds to find a job rather than the next deal on equipment.

Equity doesn’t pay bills. Cash does.

Why punish your cash and working capital by rushing debt repayment to create equity?

Plan for Prosperity

The next time you catch yourself, or anyone else for that matter, leaning hard on the bottom of the balance sheet, namely the equity portion, think long and hard about why the focus is not balanced between the top half and bottom half of the balance sheet.

Not only do the left and right sides of the balance sheet need to balance, but so does the top and bottom.

Heat and Light

Heat and Light

Heat comes from energy. Emotion creates energy. Therefore, emotion provides the heat.

But, emotion can also cloud our judgement. It can lead us to act irrationally, and even in ways we would not normally behave.

Light, however, provides perspective. By illuminating more than what is right in front of our nose, we are able to recognize more options than emotion alone would have permitted us to see.

Light is awareness. Awareness allows us to think.

Heat with no light is raw, unbridled, emotionally charged nonsense.

Light with no heat is cold, calculating, and rigid to the point of inaction.

“Logic makes us think, emotion makes us act.”

– Alan Weiss

 

Plan for Prosperity

Like everything in life, too much of anything is not a good thing. Your business needs a balance of heat and light.
You, as the business owner, no doubt, have an abundance of heat. Where do you source your light?
I, as a management adviser, am hired to provide light. That light is awareness to options and strategies that can benefit your business.

But without your heat, no amount of light will make a difference.

Super Bowl

Contrasting Behaviors in Outcomes

Seth Godin recently wrote a blog titled The Super Bowl is for losers. In it, he describes the reasons why the only winner in Minneapolis’ bid to host Super Bowl LII is not the city or its residents, but the builder of that new $1,129,000,000 stadium. In this particular piece Godin contrasts the decision to pursue grandiose “stadiums” that often lead to a loss versus investing in projects with purpose that would have a less conspicuous result. His description of the human behavior that allows these types of decisions to keep happening is insightful and can be applied to the small-to-medium sized enterprises, the family businesses, that you own and operate.

Below are three of Godin’s version of “valuable lessons about human behavior” (as excerpted from his blog being referenced above) with my insight in how it applies to family business.

  1. The project is now. Investing in long term strategy or knowledge/practice improvement takes time, the results are aren’t always obvious from a quick glance, and usually requires some “not fun” work for the owner/manager. Whereas, that new pickup truck out front or that bigger tractor in the field has immediate impact to our image and our ego. One is tangible (you can see it, smell it, percolate in the feeling you have when driving it) and one is not (no one can see it immediately, or touch it ever…)
  2. The project is specific. We have been conditioned to believe that our businesses must get bigger to survive. This is not absolute. Yes, our businesses (and ourselves) must always grow (and grow all ways) but don’t let yourself get pigeon-holed into the thinking that growth is only “size and scale.”
    Analyzing the opportunity to increase in size is fun (and easy if you limit your parameters) because it’s usually done to justify the desire (IE. we can lower our fixed costs per acre.) Whereas, the work required to analyze the opportunity to “Be Better™” is less intriguing, often subjective, and less sexy. 
  3. The end is in sight. It is easier to sell ourselves on something where we can see the final result. A building, an upgraded fleet, new computers…versus…creating a culture, implementing systems, strategizing cash flow. 

Godin’s final thought: “For me, the biggest takeaway is to realize that in the face of human emotions and energy, a loose-leaf binder from an economist has no chance. If you want to get something done, you can learn a lot (from) the power of the stadium builders. They win a lot.”

To paraphrase, we get caught up in what some people call “shiny object syndrome.” Our decision to chase that which is new and appealing versus what is boring but meaningful is what contributes to results that are less than what they could potentially be.

Plan for Prosperity

As an advisor to business owners and managers, it is my job to draw out the desired results my clients want for their business. While everyone says they want stronger cash flow and improved profitability, behavior often indicates otherwise (Ref. shiny object syndrome.) When actions deviate from what are declared desired outcomes, then we shouldn’t be surprised when actual outcomes deviate from what was desired.

Last week at a presentation I was giving, a woman in the crowd tearfully shared that her farm profitability was not as high as it could be, but the fact that her teenage children could live and work on a farm to develop life skills and work ethic was something she felt was more valuable. This is an example of how different each business owner views success, and will therefore determine what is a desired outcome. Understanding what is most important for you and your family in business is most often discovered when working on…

(wait for it…)

…A PLAN!

 

 

S&P500

Don’t Panic

The markets are on a wild ride over the last week. After an elongated bull market, we’ve seen huge drops in the value of the S&P500, which have created ripples in Canada as well as in foreign markets. Right on cue, we hear investment advisors insist that staying the course and not panic selling is the best thing to do. The markets always go up and go down. After every crisis, brighter days returned which left us to quickly forget how we felt during said crisis.

“This, too, shall pass,” I heard an investment advisor say today in the media.

“Markets take the escalator up, but the elevator down,” is what I’ve heard from many commodity market advisors. This also applies to equity markets it would seem.

It must be asked, “Why is the best advice to hold? Why not get out before the market falls any further?”
The answer: because staying in the market is part of your PLAN!

*Anyone getting tired of hearing about planning yet?

If your PLAN is to buy and sell, in other words trying to time the market to maximize return and even “outperform” the market, then you’ll probably have to go it alone because no investment advisor would work with you. CyclesBut your PLAN, when beginning your investment activities, was to create wealth from long term growth. If that wasn’t your plan, you’d need to be a day-trader; I’m going out on a limb here, but if you’re reading this blog, you’re probably not a day trader.

Back to your PLAN: jumping in and out of the market looks more like this graphic, because as weak humans we’re emotional creatures who make dumb decisions when emotion creeps into the equation.

How does this apply to your business? Have you made emotional marketing decisions in the past? Have you tried to time the market? Read through every point on the graphic; tally up how many apply to you (as in, how many of those have you said in your career?)

 

Plan for Prosperity

If you find yourself wandering, unsure of how much you might benefit from planning in your business, consider the metaphorical genius found in the children’s fairy tale Alice in Wonderland.

When Alice asks the Cheshire Cat, “What road do I take?” his reply is, “Where do you want to go?”
When she says “I don’t know,” his apt response is, “Then it really doesn’t matter (which way you go), does it?”

In essence, what the Cheshire Cat is telling Alice is that “if you don’t know where you’re going, any road will take you there.” There are many different people who have been attributed to that specific statement, so I cannot confirm who said it first. But nonetheless, it applies…to life and to business…to your investment strategy and to your business strategy…

Don’t panic, just decide where you want to go.

Rayglen 2018_2019 proj crop returns

The Great Profitability Challenge of 2018

The graphic seen above was shared at a recent CAFA chapter meeting (Canadian Association of Farm Advisors) and forwarded to me by one of my fellow CAFA colleagues who was in attendance. By coming from a reputable commodity trading entity, there is a level of trust we can have in the data presented.

And the (projected) data looks bleak.

With only four crops expecting a net profit to exceed $50 per acre by any respectable amount, the profitable options for 2018 are few and far between. No wonder the common sentiment this winter is “I don’t know what to grow this year; doesn’t look like anything will make a profit.”

Considering the four crops in the Rayglen projection that are close to abundantly profitable are 1 variety of chickpeas and 3 varieties of mustard, it’s pretty clear that your geography becomes part of your challenge. Yes, wheat, barley, flax and canola are also projected to be positive, but are any of them sufficient based on the risk and/or your personal circumstances on your farm?

Here are some questions that I feel must be asked:

  1. Is crop rotation holding you back from loading up on what few profitable options are available?
    I recently heard a lender suggest that those who blow up their crop plan to chase the perceived winner, by his account, usually miss out.
    This can be often true because of the long cash conversion cycle in production agriculture. Farmers bet on a crop plan that they expect will make them money, but a lot can happen between February and harvest…the market giveth and the market taketh away! If there is one thing Western Canadian grain farmers can do, it’s produce! We can overproduce a commodity in as little as one crop cycle, and as such in July or August drive down what was a winning price back in February!
    The lender referenced above went on to say that sticking to your proven crop plan is the way to hit a winner most years, maybe even multiple winners!
  2. Is $50 per acre or even $75 per acre net profit realistic, or even sufficient?
    How much was expected yield and/or price “padded” in that projection? How much were total costs “softened”? Were there 4-6 applications of fungicide built in to those chickpea projections?
    Generalist type of prognostications like this one need to be taken with more than just a grain of salt. Do the “variable” and “total” expenses displayed reflect your farm? What is included in each category? Are they including all expenses, including the PAPERCLIPS? There is much ambiguity in figures like these.
  3. Do whole farm expenses reflect the capability of the crop plan, or is the crop plan now expected to meet the ever-increasing farm expenses?
    Recently, I’ve overheard a couple of pundits suggest that whole farm expenses are now nearing $400 per acre. If true, that relegates many crop plans into the underworld of “operating loss.” I’ve gone on record several times suggesting that the elongated commodity boom recently ended has allowed many bad habits to form at the farmgate. The habits in question surround the insatiable appetite for newer/bigger farm equipment, larger land base, and higher living standards. It wasn’t long ago that top tier farmers kept their operating costs (described by some as labor, power, & equipment) in the range of $90-$100/ac, and these pundits now suggest that the best of the best are in the $140-$150/ac range. That $50/ac increase in what is the most controllable facet of farm expenses clearly has shaken the profitability potential to its core on many farms. And that only applies to those whose operating costs have increased by ONLY $50…

Plan for Prosperity

The recipe for profitability is simple:

  • Have a plan (how/why/what you do);
  • Run lean;
  • Know your numbers & market to your numbers;
  • Maintain discipline.

Of course, if it was as simple to do as it is to describe, everyone would simply do it. Also, did you notice that nowhere was there anything in that recipe about production or farm size? In the commodity business, the winner is the one who produces at the lowest cost per unit of production; the best way to achieve that is to have a plan and maintain discipline to it, get lean and stay that way, and finally market your production to your numbers (not to your emotion.) If you’re have challenges with any of the four ingredients in that recipe, why haven’t you picked up the phone and called for help already?

 

Financial data

Questions from Farmers

Over the winter, I do a number of speaking engagements, usually around finance and management. Here are some questions and comments from the audience, and excerpts of my response.

 

Farmer: How do I improve my working capital and current ratio?

Kim: Simply put, either reduce your current liabilities or increase your current assets…or both! Considering current liabilities, what makes up the lion’s share? Typically it’s lines of credit, cash advances, and loan payments due in the current year. So to achieve the goal of reducing current liabilities, over time (because it will take time) wean yourself off of operating credit. Protect, even hoard, your cash over time so that you can achieve working capital equal to 50% of your annual cash costs. By the time you achieve that level of working capital, your current ratio should be very strong.

 

Farmer: As someone who is still in growth phase, I can’t expect the kind of return on my cash costs that you’re suggesting. Isn’t it okay to run at zero because I’m in a growth phase?

Kim: First, your business and the industry are cyclical, so yes there will be years when your return is zero, but don’t accept being at zero year over year for any length of time. That being said, your growth phase is likely running your cash to zero, and what I’m prescribing as “return on cash costs” is a profitability measure; they’re different. A business can be profitable and have no cash because the cash might be immediately fed directly into the growth of the business. Yes, you’re going to run tight on cash during a growth phase, but don’t accept poor profitability.

 

The following are a sample of comments made by participants:

  • Mentioning “Mission” and “Vision” statements is interesting. I don’t think having one makes you more money, but it’s funny how those that have one are doing better than those that don’t.
  • I’m trying to figure out how to value unborn calves when looking at my working capital.
  • This current ratio figure is going to swing widely depending on when (what time of year) you do it.
  • Don’t buy (something like equipment or pick-up trucks) just because you have some cash.
  • We’ve got someone doing our books for us, and we review all our ratios monthly.
  • I never viewed HR as a risk before.
  • Every farmer should attend this seminar. Even if they know everything you’ve discussed, it’s a good refresher.

 

Plan for Prosperity

There is a reason I use the heading “Plan for Prosperity” for my closing comments: we need to plan our businesses. Whether that be our 10 year strategy, the next 18 months of cash flow, or determining how our growth aspirations would be affected by a rising dollar or rising interest rates, planning is key to your business. And the planning must, yes…MUST, go beyond the crop plan. That crop plan is but one aspect of your business. Don’t ignore the others unless you don’t want prosperity.

When considering how to approach the plans you must address in your business, consider the following three questions in order:

  1. Why do we do what we do?
  2. What do we want to achieve?
  3. How will we do it?

If you’ve managed to provide honest and detailed answers, the rest of the “planning” becomes much more clear.

 

blindspot

Blind Spot

The bigger the rig, the bigger the blind spot.

For those of us who drive or have driven semi (a.k.a. highway tractor) the blind spot is a reality we must be vigilant of every time we roll. Most “4 wheelers” have never experienced the challenge of maneuvering a vehicle of that size.

Small cars have blind spots too. They are, however, much smaller and therefore easier to manage. It does not matter how big your vehicle is, your blind spot is dangerous if you don’t turn your head to have a look.

With multiple mirrors, and now even with on-board cameras, managing the blind spot has come a long way. Tools and technology have made blind-spot management far more effective.

But the blind spot is still dangerous if you don’t use the tools.

What blind spots do you need to manage in your business? Some blind spots that I’ve seen cause problems for business owners include making decisions with short term emotion versus long term vision, complacency, and entitlement, just to name a few.

All the tools and tech in the world won’t eliminate the risks coming out of your blind spot, especially if you don’t turn your head and have a look…

Short Term Emotional Decisions vs Long Term Vision

Everywhere I look, I see growing examples of business owners making short term decisions based on emotion that ignore any long term vision. In agriculture, it’s applying last year’s factors, such as drought, hail, or disease to this year’s plan. To paraphrase an astute and highly intelligent young farmer I spoke with in the last wee, “many farmers will put big hail insurance coverage on land that saw hail last year for the first time in over 10 years, or they’ll build a 2018 crop plan that is suited to a lack of moisture because of the drought in 2017…”
I see examples in cash flow management where business owners will spend frivolously after one or two good years in a row instead of building a war chest of working capital from recalling the tough times of recent memory (“recent” being a relative term that would extend to as few as 10 years ago.)

Complacency

We’ve heard all the anecdotal evidence of how we must be adaptable to change, change is the only constant, innovate or die, etc. etc.  Or the cringe-worthy, six deadliest words in business: “We’ve always done it this way.” Complacency in business is a killer. Just ask Kodak, Nokia, and Blockbuster Video.
We are in the digital age where automation, the Internet of Things, and machine to machine communication will continue to rapidly move from concepts we read about in industry publications to standard fare. Indoor plumbing and color TVs were once outlier ideas too…

Entitlement

At TEPAP, I listened in on a discussion contrasting nepotism, which usually carries with it a negative connotation, and entitlement. “Entitlement” ranks way up there on the list of my most despised words. Admittedly, I’m not a fan of “nepotism” either, but it is not inherently bad. It is when entitlement infiltrates the nepotism that things can go bad.

nepotism
ˈnepəˌtizəm
noun: patronage bestowed or favoritism shown on the basis of family relationship, as in business and politics;
http://www.dictionary.com/browse/nepotism

 

Plan for Prosperity

These are but three blind spots that can cause you problems in business. There are more, but each business and family are different, so none can apply to everyone every time. Ignoring your blind spot will allow a risk to sneak up on you. Yes, even if you’re in your semi-truck and a motorcycle is in your blind spot, you won’t likely be fatally injured if you collide, but your rig will be damaged and your trip disrupted. In this metaphor, the truck is your business, the motorcycle is the unforeseen risk you didn’t notice because you failed to check your blind spot. The damage to your rig may be financially insignificant, but still requires attention that is taken away from your business. The trip that was disrupted is your cash-flow, potentially your profit, and maybe, ultimately, your success.
What if you were the motorcycle and it was a semi-truck in your blind spot?
Drive safe…
Top Shelf

Top Shelf

Top Shelf.

It’s a phrase best known for describing the highest quality wines, spirits, and liqueurs.  Those who produce such fine beverages are known to maintain unwavering quality in their attention to detail, ensuring that each bottle meets the highest standard for which they’ve become known. Connoisseurs know which brand is “top shelf” by its reputation.

Same can be said for restaurants. At a client reception, I witnessed great care from our service staff to ensure every order was correct, on time, and to their diner’s expectations (even better to be above those expectations.) The entertainment factor was brought into play during desserts when special coffees that donned towering flames were prepared right in front of us. Everyone had a wonderful time, and the tip showed our appreciation.

“Top Shelf” is synonymous with quality. This moniker can be applied to almost anything from cars to clothes to food or to service. We all aspire to enjoy something “top shelf” once in a while.

Of course, top shelf does not matter to all people all the time. Some things in life just need to be economical. Would you pay $5 for a can of “top shelf” soda pop from a boutique brand when you can drink Coke or Pepsi for under $2? It’s unlikely you’d get in line to pay premium rates on your electricity bill, and no one would choose to pay $15 per pound for bologna…”top shelf” or not.

The contrast is determining where we will settle for “economical” and where we desire “top shelf.” In the commodity business, and yes if you produce grains or livestock you are in the commodity business, it is easy to get into a pattern of “everything economical.” This is because you sell the commodities you produce at the lowest price the market is willing to pay that day…because it’s commodity! And so, that thinking permeates through your entire business driving you to search for the cheapest option: fuel, fertilizer, parts, insurance, repairs, professional services, etc. You’ll notice that equipment did not make that list; somehow equipment remains the anomaly that defies the theory of “everything economical.”

Would the management of your business be considered “Top Shelf”? If it was to be rated by experts and evaluated by professionals, how would you measure up? Are you okay with “everything economical”, or when it comes to your legacy, your family and your business, should “top shelf” be the minimum requirement?

To Plan for Prosperity

If you deserve “top shelf management” in your business then elevate your skills or seek it out externally. Relentlessly adhere to consistent “top shelf” quality in your management systems, information, and decisions. Recognize where in your business you should be “economical”…but (spoiler alert) it should not be in your management.

Like top shelf booze, you too can be known as a top shelf manager by reputation…if you develop the habit of “unwavering quality in attention to detail” just like those whose product is found on the top shelf.

Changing Paths

Changing Paths

Two summers ago, 5 friends gathered to undertake a 2-day back country mountain hike. All the plans were finalized well ahead of time. Everyone invested in proper gear for such an adventure: backpack, drinking water storage, hiking boots, etc. The weather was perfect. The gear lived up to its expectations. No one got hurt. The entire excursion truly was a success.

The best intentions ahead of such a trip were evident, yet preparations had to be made for unpredictable scenarios such as encountering a bear, inclement weather, or getting lost. There is no cell service in the back country…

In this case, everyone was prepared for challenges along the way.

Contrast the story above with a trip into the city, or even a longer trip to location out of province. If it’s a day trip or a short run, as long as there is enough fuel in the vehicle, all you might grab is a jacket on your way out the door. Longer journeys might lead you to give the vehicle a servicing beforehand, fuel it up, and load it with some luggage and possibly snacks for the drive. You know what route you’ll take and you know how long it takes to get there. Off you go…

Along the way,

  • you find your primary gravel road is getting a culvert replaced (forcing a 5 mile detour);
  • you drive through an unmarked rough patch on the highway that causes your coffee to spill on your lap;
  • you come up to a minor collision where the emergency vehicles (tow trucks, police) have slowed traffic which is now backed up one-eighth of a mile;
  • The total drive time of 1 hour (or 2 hours, or 7 hours) other than the 3 points above were “ideal driving conditions” with smooth roads, light traffic, and a tail wind.
  • You arrive at your destination 20 minutes later than planned but safe and sound.

We might describe this story as a terrible excursion where nothing went right. Yet, we did arrive safely, without injury (or worse.)

In the first story, about the mountain hike, the friends were later discussing doing another such trek in the future. It is good for the soul, after all. In that discussion, comments were made about not needing to “over-pack” next time (because the first trip had no significant challenges likes bears or snow.)

In the second story, unforeseen obstacles hindered progress and challenged our perspective of what a successful trip really is.

To Plan for Prosperity

The journeys above are a metaphor for your business.

When tackling something new, it is common to over-prepare. Then if the venture is successful, it is easy to shuck all the preparedness that wasn’t needed the first time around which could put you and your business at significant risk. What in your business is equivalent to running into a bear on a back country mountain path?

Conversely, when setting out on a familiar trek, any glitch (no matter how small) can cause us to get upset, even angry, and wonder “why is this happening to me?” We fail to recognize that we didn’t plan for any contingencies, and left ourselves at risk. What in your business is equivalent to a 5 mile detour, or hot coffee spilling in your lap?

How do you respond when revenue falls short of expectations, or when a key employee resigns? In business, and in life, we have to be willing and able to change paths, sometimes by choice while other times we are forced.

Our ability to adjust is critical to our success.

 

Complex Decision Making

Complex Decision Making

On October 21, 2017, Seth Godin wrote the following:

Decision making, after the fact

Critics are eager to pick apart complex decisions made by others.

Prime Ministers, CEOs, even football coaches are apparently serially incompetent. If they had only listened to folks who knew precisely what they should have done, they would have been far better off.

Of course, these critics have a great deal of trouble making less-complex decisions in their own lives. They carry the wrong credit cards, buy the wrong stocks, invest in the wrong piece of real estate.

Some of them even have trouble deciding what to eat for dinner.

Complex decision making is a skill—it can be learned, and some people are significantly better at it than others. It involves instinct, without a doubt, but also the ability to gather information that seems irrelevant, to ignore information that seems urgent, to patiently consider not just the short term but the long term implications.

The loudest critics have poor track records in every one of these areas.

Mostly, making good decisions involves beginning with a commitment to make a decision. That’s the hard part. Choosing the best possible path is only possible after you’ve established that you’ve got the guts and the commitment to make a decision.

 

With the benefit of hindsight, none of us is ever wrong. We can, without fear of reprisal, predict what just happened 5 minutes ago.

In business, we can not afford to avoid the complex decisions. Leaving it to chance or following the crowd is about as solid of a strategy as allowing “hope” to be your business plan…

In the next breath, we must cut ourselves some slack; large and complex decisions are daunting. It can seem easier to do nothing than to tackle a complex decision and risk making the wrong choice. But, as Godin wrote, “making good decisions involves beginning with a commitment to make a decision. That’s the hard part.”

To Plan for Prosperity

“Paralysis by analysis” is an old adage that accurately and humorously describes our inability to make a decision (and act on it) because we never stop considering different options. We might feel like a failure, or inept, if we don’t get the decision right.

In reality, more opportunities are lost from perfect inaction than there are mistakes made from imperfect action.