KYN Know Your Numbers

KYN: Debt Ratio

You have probably been told that knowing your numbers is critical to your business management success. Truer words are rarely spoken. However, it is not lost on me that there are A LOT of numbers at play, and numerous measurements you can take…it is easy to become overwhelmed! The question then begs, “Which numbers are the important ones to know?”

If you are in business, you have heard about KYC: Know Your Customer. Well this is “KYN: Know Your Numbers™” and we begin with the Debt Ratio.

The Debt Ratio (also known as Debt to Asset Ratio) is a leverage ratio, meaning it is a measurement of the debt your business holds. The calculation is “Total Liabilities divided by Total Assets” and the result of the calculation tells you how much of your assets is financed. For example, if you have $5million in total liabilities and $10million in assets, your Debt Ratio is 0.5 : 1 (or just 0.5 for simplicity.)

Each industry has a “comfort zone” for where a debt ratio should be. This comfort zone is also flexible (to an extent) depending on where you are in your business’ life cycle. Knowing what the comfort zone is for the industry in which you operate is important.

Why I am Cautious About the Debt Ratio

  1. Because it lends itself to subjective information. Here is what I mean: when buying something, we want the price to be lower; when selling something, we want the price to be higher. While compiling the value of all your assets (a “selling” mindset) it is easy to value what you have at a premium, because A) it is yours, B) you love it, and C) you want to show that it was a good decision to acquire it.
    If the value of business assets is “padded,” then the calculation presents a skewed result to the positive.
  2. Off Balance Sheet Items. Over my 15 years as a lender and business adviser, I couldn’t even count the number of “off balance sheet items” I have had to discover. Whether it be trade credit from a vendor (which would lower the total liabilities), leases and leased equipment (which lowers both the total assets and total liabilities), or “forgotten” accounts payable (which, again, lowers total liabilities), the figures that somehow do not get included in the calculation can lead to a profoundly different result
    If the value of the liabilities is incomplete, then the calculation presents a skewed result to the positive.
  3. Appreciation of asset values “support” increasing levels of debt. Assets that have experienced an appreciation in value (such as real estate or quota) will lower the Debt Ratio with all other things being equal. This can provide an false sense of security to then take on more debt because “the debt ratio is strong and improving.” This is especially dangerous when the new debt is short term/operating debt. Should the value of those assets decline, there will quickly be pressure put onto the business by creditors.

These examples are not to suggest that there is malicious intent when providing information to do this ratio, but merely to draw attention to a subconscious behavior that is affected by emotion.

Plan for Prosperity

Knowing your numbers is critical, but only looking at current numbers may not tell you enough. What has been the trend of your debt levels, your assets values, and subsequently your debt to asset ratio? What has led to the changes in your asset values? Was it asset appreciation? Do your assets now include far more depreciating assets than before? What has led to the change in your liabilities? Was it debt paydown, or new long term debt? Was it additional short term debt/operating debt? Are your current liabilities making up a greater portion of your total liabilities than 5 years ago (or 10 years ago?)

In the next KYN commentary, we will discuss the trend of short term liabilities & long term liabilities, and how it affects Debt Structure.

The Uncontrollables

The Uncontrollables

There are many factors at play which affect your business each day. (Oh, look…I’m a poet and didn’t even know it.)

How is your business affected by:

  • NAFTA
  • Trade Wars
  • Real Wars
  • Geopolitical strife
  • Interest Rates
  • Income Tax
  • Sales Tax
  • Foreign Exchange
  • Oil Prices
  • Commodity Prices
  • Utility Prices
  • Inflation
  • Deflation
  • Theft and Vandalism
  • Weather and Natural Disasters
  • The 4 D’s (Death, Divorce, Disagreement, Disability)
  • Physical, Emotional, Spiritual, and Mental Health

You have full control over none of these. At best, you might have partial influence over two or three on that list. Yet you, your business, and ultimately your family will all feel an effect that falls somewhere between minimal and profound.

The way to minimize the negative effect of any of The Uncontrollables is to prepare. You wouldn’t head out on a road trip with an empty fuel tank and no spare tire, would you?

A strong balance sheet (meaning low Debt to Equity along with surplus Working Capital) will mitigate the negative effects of The Uncontrollables. Conducting sensitivity analyses on the likes of tariffs, interest rate changes, tax changes, and foreign exchange will provide your business with the critical knowledge needed to make informed decisions in the face of The Uncontrollables.

Plan for Prosperity

We can scream and holler, protest, or pout all we like in the face of The Uncontrollables; it will change nothing.

God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.

-Reinhold Niebuhr

Having the wisdom to know the difference between between what you can control and what you can’t is merely the fist step; acknowledgement of what you cannot control on its own will not mitigate the effect of The Uncontrollables. Action will trump intention every time.

Take action to protect your business, your family, your legacy. You need not be a rudderless vessel helplessly surviving on the mercy of the sea. There is no need to be stranded on the side of the road with no fuel, no spare tire, and no phone.

Elasticity

Elasticity

Elasticity is an economic term that assesses the change in demand of a good or service relative to changes in other factors, such as price, consumer income, or supply. Goods and services are said to be elastic when they are more sensitive to changes in other factors. Examples of elastic products and/or services would be new home construction, extended vacations abroad, and (sadly) savings accounts. Inelastic goods and services have very little change in demand when other factors, such as price, are changing. Examples are gasoline, utilities (natural gas, electricity, water) or an ambulance ride (no one dials 911 for an ambulance, but then shops around for the best price…)

When considering what your business provides, whether it be products or services (or both), what types of elasticity affect the demand for your offerings?

The most common type of elasticity is price. How does a change in the price of your product or service affect demand?
Another type is supply. How does a change in supply affect demand for your product or service?
Another type is customer income. How does change to your customers’ income affect demand for your product or service?

One factor that contributes to elasticity of your product or service is the availability of a substitute product or service. Who are your competitors? What makes you different from them? Are they local? Do they operate online? Etc.

A business that had exclusive distribution rights on a high quality brand name product felt that its business was immune from price elasticity. While not over-charging, they did become complacent in their marketplace because they believed that their competition provided inferior products. When competition arrived in their marketplace which their customers felt was better value (price vs quality), the business suffered.  At this point, they were forced to react to their market’s pressures. Reactive is never as good in business as proactive.
(How many specific examples can you think of that are aptly described by this generic story?)

If you have experience recent changes in the demand for your product or service, one of the many factors to consider is elasticity (customer service and product/service quality are the foremost factors to understand in this realm.) However, this will be very difficult to quantify without sufficient business record keeping and information.

Plan for Prosperity

There are many factors that affect your marketplace and your position in it. This becomes even more complicated in the current age of technology. How are you planning to stay relevant? Or better yet, how are you planning to innovate, to lead the market and not just keep up with it?

Understanding the elasticity of your product or service is an important piece of knowledge that accentuates your ability to position your business in your marketplace. It will give you more power to prepare for how those multiple factors (such as price, supply, and customer income) will affect your business.

Elasticity is not a perfect function, nor is it the only measurement you should employ. There are anomalies: I think it is sad, and a little dangerous, that new electronic devices (like smart phones) and consumer debt appear to be inelastic, yet should be highly elastic.

Vision

Vision

Where are you looking?

As an entrepreneur, there are numerous issues clamoring for your attention. Which ones get your time and focus?

If your business is a vehicle hurtling down the highway, where are you sitting in the vehicle and where are you looking?

  1. Driver’s Seat
    The now defunct automaker, Pontiac, once used the tag line “Built for Drivers.” Many years ago, a good friend owned a Pontiac Grand Prix. As I got in, and looked for the seat adjustments, I found that there were not many and they were manually controlled; whereas his driver’s seat had full power adjustment and more. As I poked fun at the lack of amenities in his car, he casually fired back, “Built for drivers.”
    The driver’s seat is command central. There is little that cannot be controlled from the driver’s seat, and practically nothing can be controlled elsewhere which is not controllable from the driver’s seat. The control is centered here.
    In your business, the metaphor of the driver’s seat is not just a seat for one (I am sure you do not want a culture of autocracy in your business). With whom are you sharing control? Do you all have the same goal for where the business is going, or are you all tugging at the wheel trying to change direction, arguing over heat versus air conditioning, or fiddling with the radio?
    Maybe you are sitting in the passenger seat, providing navigation assistance and influencing the decisions of those in the driver’s seat? Just be aware that if you are in the passenger seat, it takes a more concerted effort to see what the driver sees. Read on…
  2. Dashboard
    Truck DashbaordThe more comprehensive the dashboard, the better. Personally, I am highly frustrated at vehicle dashboards that have only three gauges and a plethora of warning lights. By the time any of those warning lights appear, it’s too late, the damage has been done. Whereas a a dashboard full of gauges allows me to monitor all the critical functions of my vehicle (my business.) My ideal dashboard looks more like this photo.
    Are you looking at your dashboard? Is your dashboard full of gauges or warning lights? If you have ignored the gauges, you will still get a warning light (and possibly an alarm) indicating your working capital is depleted, your staff is unproductive (maybe even leaving your employ), or your overhead has gotten out of control. These alarms could come from your banker, your key managers, or your accountant. But once the alarm has sounded, is it too late? It is much easier to proactively respond to an overheating engine by watching the gauge on the dashboard rather than getting an alarm telling you “it’s too late, now pull over and stop.”
  3. Rear View Mirror
    While most drivers fail to look in their rear view mirror enough, entrepreneurs tend to look there too much. While it is human nature that our past experiences shape our future decisions, it is impossible to move forward if you are only looking back. (Notwithstanding, I continue to be amazed at how many drivers do not look back, even when their vehicle is in reverse!)
    Take a look back regularly. Acknowledge the decisions that created the path left behind. Learn from them. Make better decisions going forward.
  4. Out the Windshield
    New drivers tend to look down the hood of their vehicle at the road immediately in front of them. By doing so, they often fail to recognize a hazard up ahead. This practice can result in severe reaction to avoid a hazard which may put the vehicle out of control which may result to a collision, injury, or worse.
    New entrepreneurs often have the same behavior: they tend to look only at what is immediately in front of them. Like the new driver, this can result in extreme adjustments from a reaction to avoid a hazard whether perceived or real. Does this apply only to new entrepreneurs? Sadly, no.
    By keeping your eyes up and on the road ahead, the driver can identify potential hazards early and adjust strategically. She can scan the landscape to the left and right for wildlife and intersecting traffic. Doing so allows her to be prepared to respond quickly and accurately versus panicked and severely.

Plan for Prosperity

Whether you sit in the driver’s seat or the passenger’s seat, you have the best perspective to see what is ahead. Discuss the observation and decide how to respond. (Vision/Strategy)
There is a reason the rear view mirror is a fraction of the size of the windshield. Use each of them accordingly. (Progress)
Build yourself a dashboard that allows you to quickly and easily monitor the most critical functions at a glance. This dashboard information is only useful if current and accurate. (Monitor & Control)

Where are you looking?

Adding Value

Sub-Topics of Growth (Part 3)

In this final installment of our discussion on the multifaceted growth opportunities that exist in your business, we will touch on Information Management and Management Capacity. One more time, here is another look at the graphic that has laid out the basis of our conversation.

Facets of Growth 1 Information Management

This refers to the information that you need to run your business day to day, month to month, year to year, production cycle to production cycle, project start to project end, etc. Whatever the scope and duration required for your specific business is subjective and will be determined by you and the needs of your business. Have you given much thought to the type of information you need, what form you need it in, and how often you need it? Far too many businesses have not given this question sufficient thought.

How does a business make important decisions without sufficient information? Has your lender ever granted you new or additional credit without sufficient information? Of course they haven’t! Doing so increases risk, and banks are exceptional at managing risk.

Depending on your business and the industry in which you operate, the information you deem most critical will be different from others. For example, a business in the service industry may need to track client contacts per employee per day whereas a business in the construction industry may want to track re-work (work that needs to be redone because it wasn’t right the first time.) Critical information that is industry agnostic would include current and accurate information on liquidity, productivity, and profitability.

What systems do you currently use to compile your business information? Remember, systems do what they were designed to do, so if your system is not providing you with the results you want then there is a flaw in your system! Taking a look at the graphic below, your management information system(s) should collect raw data from business operations (whatever business, whatever Information Managementindustry) and produce the data into a useful form, typically a report of your preference, so that management can analyze the results of what has happened in your business over the last period of time (week, month, quarter, etc.) Business decisions get made which affect operations, and those decisions get made anyway, even if out of necessity. So why not make informed decisions that are impactful, progressive, and positive?

If working capital is tight, would it be helpful to learn that your customers take 3 weeks longer to pay that you thought? If profitability is not meeting expectations, would it help to know that profit margins have been shrinking? If productivity is under budget, would it help to know that employee sick days have been on the rise? What you think are problems in your business (tight working capital, shrinking profit margins, decreased productivity) are actually symptoms of the real problem (which in this case could be lengthy accounts receivable, poor inventory control, or lack of staff morale…)

If you are going to step up from trying to treat the symptom by first learning what actually is the problem, then you need good management information.

Management Capacity

Coming from the farm and having spent most of my professional career working in agriculture, I often get asked a specific question by people who grew up on farms in the ’50s or ’60s but have left the farm as young adults and never got involved in farming. They ask, “These farms are getting bigger and bigger; how big is too big?” My response is, “I can tell you exactly when. It’s when the farm has expanded beyond the owner’s/manager’s ability to manage it! For some, that is 40,000 acres; for others, it’s 400 acres.”
**NB: Not looking at corporate city limits but actual development, 40,000 acres is slightly less than the size of Regina, Saskatchewan. In contrast, 400 acres is approximately the area used by the Tor Hill Golf Course.

Management Capacity Business owners/managers (these roles are not synonymous, by the way) must be proficient in many different aspects of their business. One might say that business owners “need to wear many hats.” Being an expert in the work your business does is important, but if that is where your capacity ends, then you surely have “fallen prey to The Fatal Assumption” that Michael Gerber wrote about in The E-Myth Revisited. Just to name a few, strategist, controller, marketer, recruiter, trainer, collector, innovator, and leader are but a smattering of the hats a business owner must wear at some point or another. If your capacity while wearing any of those hats is less than “expert”, then you might be inhibiting growth!

“Do what you do best, and get help for the rest™” is a cornerstone of my advisory work with clients, and as such, I’ve trademarked it. If we spent our entire lives trying to improve on our weaknesses, we would reach the end of our lives with a bunch of strong weaknesses. However, if we spend our lives utilizing our strengths and utilizing the strengths of others in areas we are weak, then we create a synergy that provides incredible leverage not only for our business, but for ourselves and the people we have hired!

Take a moment this week to perform a self-audit on where your capacity is reaching its limit. Growth is about breaking through limitations, and this becomes an exceptional opportunity for growth, both in your person and in your business.

Plan for Prosperity

Growth is about more than just size and scale, but it is about expanding. Growth is expanding our view, our skills, and our attitudes. Growth is about expanding our network, our credibility, and our place in the market.  We’ve just completed a three-part journey that coursed through the many facets of growth. In summary:

  • Your customers give your business a reason for being. How do you find them and keep them?
  • Your product or service can be your boom or bust. Are you innovating how your deliver your product/service? Where is your link in the value chain?
  • Pursuing growth from a position of financial weakness is a recipe for disaster. Are your finances putting in the position for growth, or are they hindering growth opportunities?
  • How are you investing in your people? Are they being trained? Are they provided with increasing responsibility? What type of culture does your business have?
  • Accuracy of your management information is critical. Is your information system up to par? Are you making critical decisions with outdated or inaccurate information?
  • If you are the heart and soul of your business, is your capacity in any of the critical management functions you perform a limiting factor in your business’ growth?

You business is like a tree: if it is not growing, it is dying. But unlike a tree, your business has many ways it can grow. Always grow, and grow all ways.

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?