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.

marking a bench 4

Benchmark Against the Best

Who do you look up to? It doesn’t have to be another business like yours, it can be anyone or any business. Why do you look up to that person or entity? What have they done that you want to emulate?

“If you benchmark yourself against the average you’ll be out of business in 5 years.”

Dr. David Kohl

What Dr. Kohl is referring to is that “average” is not success. As one client said this past week, “Average is the best of the worst, or the worst of the best; either way it’s not where we want to be.”

Personally, I’ve never been a fan of using averages when analyzing business performance. The sample pool will skew the calculation up or down; extenuating circumstances create anomalies in year-over-year business results; the list could go on. In my opinion, average is a useful tool to make yourself feel better about where you’re at. I prefer to make clients uncomfortable about where they’re at so that they are motivated to “Be Better™”.

Here’s someone we all know about who is never not trying to be better: Warren Buffett. Now don’t get me wrong, I’m not suggesting the Oracle of Omaha is without flaw or that he is somehow worthy of unwavering praise, but it cannot be denied that his approach to building wealth has enjoyed success beyond most of our wildest dreams. Recent articles in the Financial Post indicate that Berkshire Hathaway is currently sitting on about $116 Billion in cash and other short term investments. This cash is sitting idle for the purposes of making acquisitions, but Buffett has admitted that he’s struggled to find acquisitions at sensible prices. Also, the article states that Buffett is unwilling to load up on debt to finance deals at current prices.

“We will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own,”

Warren Buffett.

It has been written in this series of commentaries that during the elongated commodity super-cycle which ran from about 2007 to 2015 we could find many “average” businesses who appeared to be “excellent”. The appearance of excellence was fed by strong yields and high commodity prices. To translate: everybody was making money, even the worst managers and the high cost operators. To paraphrase Dr. Kohl: when the bottom 20% of producers become profitable, we’re in trouble! It didn’t take much prudence to be profitable during the boom; how did you compare during the boom? How do you compare now?

So when considering who you want to mirror, is it one who has been racking up debt balls-out on the expansion train or one who has been quietly amassing a war-chest of financial strength that can be deployed when the right opportunity presents? Is it one who operates with reckless abandon, or strategic execution? Is it someone who is average, or is it the cream of the crop?

Plan for Prosperity

Benchmarking data is hard to come by; not everyone is willing to share the details of their successes or failures. So to start, benchmark against yourself. How did your most recent year stack up against your best year ever? How do your 2018 expense projections compare to your 2003 expenses? What has been the 10 year trend of your working capital, EBITDA, net profit, total debt, and total equity? Is it something you’d be proud to share? Let me know; I’d love to hear from you on what you learned from this exercise.

push pull

Push and Pull

Push and pull.

Passive aggressive.

Proactive or reactive?

Okay, passive aggressive doesn’t REALLY apply…or does it?

A recent conversation with a banker had him using terms & phrases such as:

  • they have no idea what they owe, to whom, or what their payments are;
  • they leave out information in what they send to us;
  • after a year of battling over their lack of cash management, the bank is viewing their risk profile as ‘high.’
  • the promised to put together a plan months ago, but it seems there was always ‘something more important’ to do. Now that the bank is downgrading them, they’re in a hurry to get the plan in place.

The borrowers that this banker was speaking of have consistently displayed a behavior that is reactive. They:

  • only provide info to their lender when threatened;
  • do not follow the terms set out in their borrowing agreement;
  • only got serious about making a plan when the bank indicated that their credit risk profile was being downgraded.

Situations like this are, sadly, not uncommon. All too often, financial professionals see impending challenges and offer advice that is pertinent based on their experience. Whether the advice is heeded or ignored is out of our control.

What can be done? At risk of sounding like a broken record…

  1. Preserve cash by building strong working capital;
  2. Do not acquire capital assets with working capital…borrowing is still incredibly cheap!
  3. Drive down overhead costs so you can produce at the lowest Unit Cost of Production.

The challenge, of course, is now during a period of low commodity prices, how does one go about preserving cash to build working capital. A pessimist might say “that ship has sailed” with the end of the commodity boom. Notwithstanding any significant production issues somewhere on the globe, this may be true. And to bring it back around to the open of this commentary, proactive or reactive, it seems that by and large farms are reacting to the profitability challenges and positive cash flow challenges of the day. Proactive would have acknowledged that the good times were cyclical and would not last forever…

Plan for Prosperity

PUSH yields. In commodity production you need the bushels, but focus on optimum yield for profitability, not maximum yield for coffeeshop bragging rights!

PULL efficiency. You need to do more with less in low margin environments.

PUSH costs down. The lowest Unit Cost of Production (UnitCOP) wins. Period.

PULL management effectiveness to new heights. During times of questionable profitability, it is management that will rise to the top.

 

 

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!

 

 

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?

 

It Can't Happen to Me

It Can’t Happen to Me

Have you heard?

Things aren’t all roses in agriculture lately. Sure there are some who are doing quite well, and of course the recent drought gets the credit for any 2017 results that were sub-par, but what about those who still did okay during the drought? What about those who are still sub-par when everything is firing on all cylinders?

A recent article on DTN titled Skating on Thin Ice summarizes the message of Dr. David Kohl, renowned ag economist, at the National Agricultural Bankers Conference earlier this month. Dr. Kohl has been advising ag bankers for over 40 years. He’s got some chops.

His prediction (in summary): there will be clear winners and losers, the losers being the bottom 30% of all producers.

What makes the bottom 30%? They barely make a profit, have burnt through most (or all) of their working capital, and are beginning to burn through their equity. Dr. Kohl suggests that a farm in this position consider exiting before all equity is gone.

It was back in 2016, over a year ago now, that rumblings were coming out of the US Mid-West about farm lenders tightening up on credit approval criteria. I tweeted the following:

We’ve already seen an increase in interest rates from the Bank of Canada, and we are to expect more according to messages from our federal government. But do not think that your interest rate can only be changed by the BofC. Lenders set interest rates according to how your business is risk-rated. If you’ve already burnt through your working capital and have moved on to burning equity, you are considered to be high risk and will be charged interest accordingly.

Land value appreciation has propped up many farms that have a history of poor operating profits.

Remember when we talked about how the commodity super cycle (2007-2013) allowed below-average management skills to generate above-average results? (Ref. Vol.3 /No.44 Happy Halloween) Even those producers who were not able to produce a profit from operations could still show that equity levels were increasing because their land was appreciating. This created a false sense of security, and a false sense of accomplishment.

Notwithstanding what is going on in US ag lending, the landscape in Canadian ag lending can change.  The bank’s desire to support businesses that cannot generate profit from operations is limited. Are you on the radar?

To Plan for Prosperity

Allowing your relationship with your lenders to be anchored by land value appreciation only, and not profit from operations, could make you a subject for a change to your borrowing terms. How would your business be affected if your interest rates increased by 1%, or if your credit limits were reduced by one-third? If your current lender views you as high risk, other lenders will too…

 

Halloween

Happy Halloween

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.”

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

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.

 

profit

Is Profit a Part of Your Strategy?

Recently I met a confident cattleman who clearly displayed zero interest in what I do for clients and how they can benefit. He was very direct in describing his costs, and knew his break-even on his animals (right to the paperclips.)  He received a compliment from me on being ahead of many of his competitors.

To test me (or so I think this is why) he asked what he should do with his heifers this fall. After admitting that I am not an astute cattle market advisor since most of my work with farms are grain farms, I asked what his thoughts were if he and I weren’t having this conversation. He said he’d keep them and only cull a handful of cows. Doing so would increase his breeding herd by one-third. This, at a time when we’re coming off a serious drought which has left feed stocks and pastures in tight supply and at premium prices.

He sold fed calves this fall for enough to make a tidy profit. In the same breath he bemoans the price insurance premium he paid this year. I wouldn’t have thought that creating enough profit from operations so as not to need risk management programs was a bad thing…

Further to his question about what to do with his heifers, I said that I’d first need to know where the market is headed by taking a look at the futures market for beef and for the Canadian dollar. This was a lead-in to ask him if he does any hedging. His response was, “No, we’re not on the right side to do that.” Puzzled, I asked him to explain. He described how “lots of guys out there hedge the dollar, price all their barley, and contract their sales…basically they’re doing everything to lock in a profit.”

I let that statement stew for a moment; I wanted his own words to sink in.

Then I just blurted out, “That sounds fantastic! Why wouldn’t everyone do that?”

There was no response.

It was at that moment that I knew there was no point berating the issue further. Here was a cattle operator who knew his costs but refused to use that knowledge to his betterment. There was nothing I could say in that moment that would lead him to take a different action.

To Plan for Prosperity

Profit is not a bad thing, it is a very good thing and business must do everything possible to maximize it. The story above is real, and more of the story includes a decision on whether this cattleman should pursue off-farm employment because the cattle alone aren’t providing sufficient income.

I’m puzzled at how off-farm employment along with the cattle herd simply creates more work and is an option being considered, yet more work to maximize profitability in the cattle herd (hedging strategy) isn’t work that is desirable.

Profit feeds your business, it feeds your family, and it feeds your ability to spend time with your family & on other things you enjoy.

Profit is not a bad thing, it is a very good thing.

Is profit a part of your strategy?

Perspective

Perspective

What do you want to accomplish between now and Oct 1, 2018?

If I had asked many of you that question one year ago, you might have provided a response that would make you cringe using the lens of today. Last year, may farms were suffering from excess moisture, and long drawn out harvest. On this date one year ago, there were millions of acres yet to be harvested in western Canada. If one year ago you were hoping for a hot dry 2017, well…you got it.

How has your perspective changed over the course of a year? What is affecting the change in your perspective? If you’re more concerned about short term fluctuations rather than big picture issues, such as a recent market correction versus the tax changes currently proposed by our federal government, then you’re probably looking down the hood of the truck instead of down the road.

If you’re more concerned about short term fluctuations rather than big picture issues, then you’re probably looking down the hood of the truck instead of down the road.

My best client relationship has evolved from our original work of clarifying Unit Cost of Production by drilling down operating and overhead costs, so that we are now pursuing 5 year expansion strategies and establishing tactics for handing off management activities as part of a transition plan that is still 5-10 years away.

In the next breath, when asked “What is the greatest challenge on farms today,” I regretfully cutoff whoever is asking the question by blurting out “cash flow.”

I see numerous farms who do not suffer cash flow challenges. They experience the same weather, the same markets, the same interest rates. Yet somehow these farms do not suffer under the same cash flow pressure. Why is that?

Perspective.

Successful businesses have a long term perspective. Those businesses recognize the variability in the aspects affecting their business that they cannot control (like weather, markets, interest rates), and as such, they prepare themselves and their businesses for what’s coming “down the road.”

Looking down the hood instead of down the road doesn’t give you time to prepare and react to what’s coming up ahead.

Here is an easy recipe to help prepare for what’s coming up “down the road”:

  1. Understand cost of production, right down to the paperclips.
  2. Get lean in how you manage your operating and overhead costs.
  3. Maintain modest personal drawings.
  4. Eliminate unnecessary assets and the debt they bring with them.
  5. Build working capital to a minimum of 50% of annual cash costs.

By implementing these 5 steps into your action plan before spring, you will instantly be miles ahead of your competitors one year from now.

To Plan for Prosperity

There is no crystal ball in my possession, so I cannot predict what is coming down the road. What I can tell you is that I have seen the effects of business cycles on the unprepared, I have seen the effects of poor perspective on the oblivious. Conversely, I hold great admiration for the business people who had the foresight to control all that they were able to control, including how they were affected by that which they couldn’t control.

What’s your perspective?