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.

Bubbles2

Bubbles

One of my investment advisers forwarded an article to me recently that contained an especially compelling paragraph. The entire article is US focused, penned by a US writer and published in a US publication (reprinted in Canada in the Financial Post.) Still, the applications of these two sentences are broad and deep:

“…it (recent economic growth) is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption.”

– Steven Pearlstein, June 15, 2018

The comparison was being made to the US housing crash that kicked off the global financial crisis in 2008. We all know what happened there; no need to rehash it here.

Yet here we are, barely 10 years later, standing at what some people feel is the precipice of another recession.

“Those who cannot remember the past are condemned to repeat it.”

– George Santayana (Ref.)

The statement from Pearlstein referenced above does have application locally: the recent rapid appreciation of farmland has provided a financial backstop to farm businesses that would have otherwise found themselves painted into a very tight corner. The present consumption, elevated operation costs and living costs driven by high priced equipment and higher living standards, is what, in this space, is leading to the sacrifice of future growth. Here is what I mean…

Les Henry recently penned an article titled Saskatchewan Farm Income and Land Prices which was published in Grainews. He compares farm income and land prices having converted both to 2018 dollars to quantify his position. An example Henry uses in the article describes how a friend of his purchased a brand new loaded Lincoln in the mid-1070’s and how the equivalent number of bushels of wheat, the staple crop in those days, was approximately 1,500 bushels needed to purchase that car. My dad used to make the same argument using the example of the only new tractor he ever bought: a 1974 CASE 970 that arrived in the yard with the plastic still on the seat. The qualifying statement was that it only required 2,870 bushels of wheat in 1974 to buy it; about 7 bushels per acre on his small farm. What does 7 bushels of wheat get you today on your farm?

Les Henry believes that current land prices are unsustainable. If he is correct, then we are almost certain to experience a bubble, even if it is a small one simply because of the amount of “equity” being used to backstop present consumption. Equity is in quotes because it was not earned equity from retaining profits in a business, but rather windfall equity from land value appreciation (similar to what set off the US housing crisis.) The rise in land values created the equity that, in many cases, has been turned into debt. Should land values pull back, lenders will be quickly re-evaluating their security and making some difficult phone calls where warranted.

If there is a bubble happening here, all that “equity” that was converted to debt has certainly helped create it.

Plan for Prosperity

We have dedicated a lot of space to discussions on growth here recently. It saddens me to think that future growth may have been sacrificed for current consumption. However, unless the wolves are near the door there is still opportunity to right the ship. Profit opportunities can be found, but it will take work, intention, and likely having to answer some uncomfortable questions.

The last five weeks we have discussed business cycles, elasticity of demand, the power of a network, intentionality in your business, and your vision in your business. It is no surprise that each of these topics, if parlayed into tangible action within your business, translate into a stronger entity that would likely provide a view from high on “success mountain” looking from a safe vantage point well above the “precipice of economic recession.”

If you want some ideas on how to climb higher up onto Success Mountain, please call or email.

 

Cycles

Cycles

“It’s cyclical.”

This statement applies to so much in our world. From interest rates to fashion trends, from climate to markets, so much of what we see, hear, do, say, and feel is cyclical.

In meeting with commercial bankers recently, here are some of the points I took special note of in the conversation:

  • Many of our clients are struggling through a slow-down right now.
  • Very few applications are for growth. Most are to restructure, especially in preparation for increases to interest rates.
  • So many of our clients do not understand their balance sheet or how it affects their business.

The first bullet above led to a longer portion of the total conversation. The banker who made this statement went on to describe how the boom years we have recently enjoyed led many people (entrepreneurs and employed folks alike) to create some bad habits, such as not preserving cash (working capital) and increasing their debt. When things slowed down and business got tight, the debt payments still need to be made, as does payroll, and utility bills. Somehow, the elevated lifestyle expenditures that cycled up during times of easy prosperity did not cycle back down when profitability and cash flow did.

A similar sentiment was gleaned from an ag banker (who asked to remain nameless while granting me permission to include the response below) serving North West Saskatchewan and North East Alberta. When I asked about what the trend has been in that part of the province for farm land prices and rent rates, the response included the following:

“Profitability and cashflow has been squeezed the past 3 years, due to a combination of the weather anomalies (in most cases, more moisture than needed), increase in production costs, and financing needs (and in some cases may be “wants” vs actual “needs”).  Those producers/files with the stronger balance sheets and working capital positions, have fared better through this, compared to some others.”

For any of you who think that your business (or industry) is the only one to have to manage cycles, please understand that cycles are industry agnostic. The market does not care what you’ve been through, what your plans are, or what your name is. Your business plan needs to include M.O.C. – Management of Cycles.

Long time readers of my commentaries know that I have referenced Moe Russell of Panora, IA on more than one occasion. It was from Moe that I first heard the term M.O.C. – Management of Cycles. Moe tells the story of how he picked it up during a chance conversation in an airport with Matthias Grundler, the then Head of Procurement for Daimler. When asked, Grundler admitted that M.O.C. (management of cycles) was his greatest concern.

What cycle are we headed into right now? If we knew, if anyone truly knew, business would be so much easier! The risk, of course, is that we tend to get caught up in recency bias:

Recency bias occurs when people more prominently recall and emphasize recent events and observations than those in the near or distant past.
By putting more credence into recent successes rather than recognition of impending change, we set ourselves up for what is happening in many small to medium sized businesses right now: financial stress leading to major upheaval in the business.

Plan for Prosperity

Trying to fight against the market cycles (or industry cycles as it may be) is like trying to fight gravity. Like it or not, it will affect you. Cycles have been happening for a lot longer than you’ve been in business, and will continue to occur long after you are gone!

“Bullet proof your balance sheet during the good times, so you can catapult ahead of your competitors during the bad times.
If you get greedy during the good times, you’ll likely be on your knees in the bad times.”

Moe Russell
President, Russell Consulting Group

Look back to the response above from my ag banker colleague; those (businesses) with the stronger balance sheets and working capital…have fared better through this…” The businesses that built a balance sheet to protect them during a down cycle are the businesses that are ready, and as such will take advantage of the opportunities presented by a down cycle. Those opportunities range from additional labor (that may have been laid off from a financially weaker competitor), picking up assets (land, equipment, or buildings) that may have been relinquished during the down cycle (and are likely far cheaper now,) or possibly even buying out a competitor who has been left in a weakened state by the market cycle.

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

– Kim Gerencser (March 2013)

Which side of that line do you want to be?

goal planning

Intention

It has been said that whoever enters the room with the greatest intentionality will win.

While I disagree emphatically with any win-lose proposition in business, the heart of the message shines through: intention wins the day!

What type of growth has your business experienced over the last 5 years? Was it intentional, or did it just happen? We have stated in recent commentaries that accidental growth is not sustainable, and the reason it is not sustainable is because more often than not the credit for the success is misplaced.

My friend, Tom Stimson from Dallas, TX, works exclusively with audio-visual companies and writes a newsletter he has titled Intentional Success®. 

“Does your business grow or decline seemingly outside of your control?

Do you wonder whether there will be any profit left at the end of the year?

Is success something you hope for, or are you actually doing the things that cause success to happen?”

-Tom Stimson, owner of The Stimson Group

Prophetic words.

So, to decipher whether the growth your business has recently enjoyed has stemmed from intentionality or luck, one must do a post-mortem.

project post-mortem is a process, usually performed at the conclusion of a project, to determine and analyze elements of the project that were successful or unsuccessful.

Source: Wikipedia

This definition assumes that there was a specific project involved, which would have had goals, objectives, parameters, and timelines all clearly defined. Such a project would illustrate clear intentionality. In the absence of such a project with its defined benchmarks, how do you conduct a post-mortem?

(HINT: It is pretty tough to find what you don’t know you’re looking for.)

Suffice it to say that if we don’t know what to look for to conduct an accurate post-mortem, then our growth was most likely unintentional.

My big questions regarding unintentional growth are:

  1. Who/what gets the credit for the success?
  2. How do you replicate this success if you don’t know what led to it?
  3. If attempts to replicate the success fail, what gets credit for the failure?

This circles back around to the most simplistic of questions that many entrepreneurs have difficulty answering: Why are you in business? What do you want your business to accomplish?

These two questions are foundational in my work with privately held businesses. Without the clarity these questions provide, setting direction and establishing growth goals, is quite difficult.

Plan for Prosperity

Intentional growth requires a number factors to be present:

  1. Specific outcomes declared.
  2. A plan to achieve those outcomes.
  3. A review of actions and outcomes to determine if expectations were met or not, and why.

To satisfy these factors, simply have a vision to establish goals, build a business plan describing what you’ll do to achieve those goals, and maintain a system to compile information along the way so that you can measure your progress.

In the absence of those factors, growth is, at best, accidental.

facets of growth

Facets of Growth

It’s been said that we should think of our business like a tree…
“What is a tree always doing?”
“Growing.”
“If it’s not growing, what is it doing?”
“Dying…”

The analogy ends there. A tree can only grow one way: bigger. Our business must grow many ways.

“Better is better before bigger is better.”

-Danny Klinefelter, Professor and Extension Economist, Texas A&M University

Over my nearly 15 years as a lender and business adviser, I have seen dozens of examples of businesses that grew in only one way. These businesses are not industry specific, they are quite agnostic actually. From construction to farming, from trucking to consulting, many businesses drive themselves straight into the arms of failure simply because they overlooked getting better before they rushed out to get bigger.

Facets of Growth 1The graphic represents a snippet of the numerous facets that drive growth. All have a significant effect on the success of growth aspirations. This graphic is certainly not exhaustive; we are merely dipping our toes in the water. However, each spoke in that wheel has numerous sub-topics, and like a diamond, the many facets have varying purposes, importance, and brilliance.

RE: Customers – How can you grow your customer base? What do your customer like about you? What do they dislike? How do customers find you? How do you find them?

RE: Product/Service – What is your product or service? Is demand growing or shrinking? Which is your link in the value chain (IE. do you manufacture the raw product or do you retail to the final user, or somewhere in between?)

RE: Finance/Cash Flow – Are you financially strong enough to support and sustain the growth you desire? Will the growth you desire help or hinder your cash flow? Can you access the financing you need?

RE: Human Capital – Have you built a team of highly valuable people who drive results in your business? Will your business operate just fine in your absence? Do you people have the ability and desire for more responsibility?

RE: Information Management – Do you have systems in place to provide you with current and accurate information readily available anytime, specific to working capital, accounts receivable & payable, inventory, days to cash, etc?

RE: Management Capacity – Do you, as the manager, have the capacity to literally handle the growth you desire? What skills do you have that are better used in another part of the business? What skills are you lacking in your current role?

Seventeen questions related to six facets of growth; if you were to answer them with brutal honesty, is there room to improve on any of them? Is there opportunity “to grow”? If it is true that better is better before bigger is better (HINT: it IS true) then we’ve just provided you with six major factors in your business where growth can occur. There are more, but if you’ve looked after these first 6, the results will amaze you.

Plan for Prosperity

Growth is not a result or a destination.
It is a process.
It is a mindset.
It is a culture.
It is complex.
It is difficult.
It is worth it.

Interruption

Interruption

This shouldn’t be here.

It shouldn’t have gotten done.

But the thought of missing a Tuesday for the first time in 172 consecutive Tuesdays has me doing something I probably shouldn’t be doing. I should still be in bed. I’m very weak.

Actually, I should be in Boston to attend a conference I’ve been looking forward to for a year. But, illness can have a way a derailing all of our best laid plans.

Over the last week-and-a-half, both of my children have been affected by a different iteration of  the virus that is currently going around. My oldest took the least of it; my youngest was nearly hospitalized. I managed to dodge it, until I didn’t. It caught up to me on Sunday, the day that was all planned out: tidy up work before my trip and, of course, pack for the 5 day venture. As my condition worsened, I made the call at 5pm to cancel my travel plans. By 8pm, I was headed for emergency.

This has been the first time I haven’t gotten out of bed in 2 whole days since, well, that story is a little personal.

I have heard a disappointing number of business owners over the years express how they need to hold on to the reigns and keep control; their justification is that they need to be needed. They feel that their purpose is to control the business. How unfortunate.

What happens to the business of an owner with that mindset who suddenly took ill? Does the business stop? What should be told to customers, employees, suppliers?

If you are a business owner, ask yourself the following to gain some insight into your business continuity plan:

  1. Can your business run without you there every day?
  2. Is there someone, or several others, who know what you know so that your business can operate uninterrupted in your absence?
  3. Do you have health insurances (disability, long term care, critical illness) to cover your personal financial obligations during an illness so that you won’t be draining cash from your business during that time?
  4. Do your loved ones and/or your key people know who to contact and what to do in case of your severe illness or sudden passing?

As a solo-preneur, I am my business. If I’m not working it, my business stops. So for the last few days, things have stopped. Can your business afford to stop?

Plan for Prosperity

There are few guarantees in life, and yet it happens too often that we don’t plan for that which is guaranteed. Maybe us weak humans have difficulty facing our own mortality? Maybe it’s something more narcissistic? No matter what it is, we’re all going to get sick now and again (whether it’s a minor illness from which we recover or something more serious) and we are all going to die…someday. If we aren’t prepared for the inevitable, the people left behind are the ones who will be hurt the most.

Take some of that (perceived) unpleasantness onto yourself and do this hard work so that you can save your loved ones, your employees, and your legacy the pain of trying to keep things afloat while you’re out of the picture.

Growth Avenue

Avenues to Growth – an Introduction

There are many tactics that can be implemented to achieve growth in your business. Listing them right off the hop would be meaningless, because first we must understand your goals.

What is it you are trying to achieve in business? Why are you in business? As Michael Gerber wrote in The E-Myth Revisited, “the problem is not that the owners of small businesses don’t work; the problem is that they’re doing the wrong work.” Gerber has built a career and a successful enterprise on breaking down why most small businesses fail. In my opinion, it is summed up nicely in what Gerber calls the Fatal Assumption.

The Fatal Assumption is: if you understand the technical work of a business, you understand the business that does the technical work. And the reason it’s fatal is it just isn’t true.  The technical work of a business and a business that does that technical work are two totally different things!

Michael Gerber – The E-Myth Revisited, page 13

So, if the reason you’re in business is because you are an expert at the technical work being done in your business, you may be wondering why your dreams and aspirations of growth, wealth, and freedom haven’t transpired as imagined when you took the leap.

Business is complex. There are many facets to successful business, far more than simply “doing the work.”
Understanding that is the first step.
Asking for help is the second step.

Because if you are an expert at the technical work of your business, then is it likely you’ve struggled managing the business which does that technical work.

And growth has possibly eluded you…
Or, at least the potential for growth that your industry may present?

As a former bank lender, and having had several conversations with current bankers over the last half-dozen years since I left banking, the sentiments are the same. One banker was recently describing a client, who was a good client but could be so much better, by saying, “He builds a helluva road, but can’t manage his cash to save his life.”

Change the character to either he or she, and change the activity to almost any technical work. She/He:

  • Builds a helluva road,
  • Installs a helluva wiring system,
  • Designs a helluva house,
  • Welds a helluva bead,
  • Grows a helluva crop,

…the list can go on and on.

Just doing the work will grow your business to a point, but that point is reached when you, as the owner/manager, run out of capacity.

Dr. David Kohl spoke recently in southern Saskatchewan. He described how success requires alignment of your expertise, your capacity, and your market.
Clearly, you have expertise or you would likely not be in business.
If you operate in a market that is hungry for your product or service, then growth is ready for the taking.
Is your capacity is sufficient in ALL areas that need to be covered in order to sustain growth: management, finance, reporting, staffing, logistics, facilities & equipment, etc?
(**Did you notice that facilities & equipment was found at the END of that list?  That is symbolic.)

All too often, the “technician” owners put emphasis on the facilities & equipment because that’s where their expertise is found. It’s why the “technician” owners are more apt to fail. Getting additional equipment is the easy part; managing the cash flow, bankers, and staff is the hard part.

So in this Introduction to the “Avenues to Growth”, we have described that:

  1. You need alignment of your expertise, your capacity, and your marketplace;
  2. You need clarification of your reason for being in business; and
  3. You must define your business goals.

Plan for Prosperity

Over the coming weeks, we will be exploring the Avenues to Growth in greater detail. The explicit certainty in any growth plan is that growth must be intentional. Accidental growth or fortuitous growth is not sustainable unless the owners & management team conduct a postmortem on how and why the growth occured so that lessons can be learned, mistakes not repeated, and good decisions leveraged further in the future.

The other explicit certainty to growth: there are many avenues to get there, none are a straight line, and there is no “Easy Street.”

 

**The featured image is a screen shot from a Google street-view of Fort Wayne, Indiana. In a weird twist of irony, Growth Avenue in Fort Wayne is a dead end street.

Coach

Who Needs a Coach?

Muhammad Ali.

Wayne Gretzky.

Tom Brady.

Professional athletes…emphasis on “professional,” the best at what they did (do). Evoking cries of “The G.O.A.T.” which stands for “Greatest Of All Time,” these legends all used a coach.

Football teams have more coaches than they are allowed players on the field at any one time. Baseball, hockey, soccer, olympic squads, the list goes on…all have coaches.

Individual success, such as Tiger Woods, Venus Williams, Michael Phelps, even many CEOs of Fortune 500 companies, all use a coach. One of the best, if not the best coach of corporate executives, Marshall Goldsmith, uses a coach himself.

Right now, I have three. Each has a specific purpose, yet they compliment each other in how I benefit from having them. This does not include the advisers I use for accounting, legal, investments, or insurance where the number then increases to more than ten.

Back to the professional athlete, who is so skilled at what he or she does that they make a living doing it (and a exceptionally good living at that.) If you’re already top of your game, what good is a coach? If that were true, then everyone at the top of their game (see a small sample list above) would have fired their coach. Just because we might be at the top of our game doesn’t mean there is no longer room for improvement. None of us is perfect.

Can you and your business benefit from a coach? What aspects of your business could use some coaching?

Efficiency: is your efficiency all it could be? The old adage that I lean on is “You don’t know what you don’t know”, so is the perspective from an expert a worthy pursuit?
Finance: this relates to banking, borrowing, and investing. Is your approach more reactive to these important facets of your business, or do you regularly analyze your situation to proactively position you and your business? I couldn’t tell you how often I’ve seen something as simple as monthly account fees going totally unmonitored and therefore costing 2-3x what would be charged if a regular review was done.
Growth: this can take so many forms; I could write a book! Growth is not just about size and scale, there are many ways to grow (both personally and business.) If growth is your desire, considering how varied and complex growth can be, having a growth coach can save hours of stress, create multiples of efficiency, and help avoid pitfalls along the way.

The list is almost endless: from technology and social media to HR and governance/policy development, there is an expert available who is willing to help you take your business to new heights.

Plan for Prosperity

It is not reasonable to expect that you, as an entrepreneur and business owner, can know everything related to the successful operation, sustainability, and life-cycle of your business. And yet, considering that your business is the driver of your family’s lifestyle and a big part of your legacy, it is tragic to leave to chance so much of what is critical to business success.

Do what you do best, and get help for the rest.™

-Kim Gerencser

The quote above is a major cornerstone of my advisory work with clients, that’s why I’ve trademarked it. It’s been said that we can spend our entire lives trying to improve on our weaknesses and all we’ll end up with are a bunch of strong weaknesses. Whereas if we leveraged our strengths, the potential they create can grossly overshadow the drawbacks of any weaknesses…especially if we leverage others whose strengths are in the areas of our weaknesses.

 

 

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.

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.