Business Planning – Growing Farm Profits | Improving Farm Business Performance™ https://www.growingfarmprofits.com Kim Gerencser - Improving Farm Business Performance in Saskatchewan and Western Canada. Wed, 21 Nov 2018 20:52:21 +0000 en-US hourly 1 https://wordpress.org/?v=4.4.30 Direction https://www.growingfarmprofits.com/direction/ https://www.growingfarmprofits.com/direction/#respond Tue, 21 Aug 2018 07:30:50 +0000 http://www.growingfarmprofits.com/?p=1506 Without direction, how do you know where you’re going? And we’ve acknowledged many times in this weekly commentary, if you don’t know where you’re going how would you know if you’ve gotten there?

Who sets the direction for your business? Without direction and a charted course, your business is akin to a rudderless boat, just floating along aimlessly. While “floating along aimlessly” sounds like a great vacation, it is most definitely not a strategy for your business.

Direction is set by the leadership team within the business. Big or small, any business without solid leadership, visionary decisive leadership, will find it very difficult to achieve its full potential.

This is why great leaders are well known, highly regarded, and abundantly compensated.

This reality crosses into all aspects of life, not just business. Sports, politics, religion, even in households, the same can be said. Every organization, even volunteer advocacy and/or charity groups have a designated leader…someone who sets the direction for the organization, or in the case where there is a board of directors (or something similar) the leader is accountable for the execution of the strategy and direction for the organization.

Nowhere is the accountability of the leader more public than in professional team sports. Anyone who is fan of any team sport can think of a time where their favorite team, or another team in the league, has went through the turmoil of having a talent laden roster of athletes that habitually fails to succeed. Often, all it takes is a change in leadership, the head coach or general manager for example, and the team begins to win. The leadership can also be identified in the locker room among the players; adding a player with tremendous leadership attributes can be as beneficial as cutting a player who brings a toxicity to the locker room. As fans, we all witness these personnel transactions and then complain or celebrate accordingly (depending on our own view of the matter) but it is a test of the team’s leadership to make the decisions to essentially “fire” a coach or player who may be popular from the outside looking in, but is a detriment from the inside looking out.

This example applies to your business as well. While it may be hard to justify letting go of a star member of your team, if that individual is not conducive to team harmony and progress it falls on the leader to make, or not make, the hard decision. Either way, the leader has provided a clear message to the entire team through their (in)action.

What is even harder is when the person that needs to be let go it the leader himself! Are you holding your team back from achieving their full potential? How would you even know if you are? Could you handle hearing that the problem is you, or would pride get in the way? It is a wise and humble leader who recognizes that the best move for the organization might be to fire herself.

Plan for Prosperity

Whether you believe that leaders are born or leaders are made, an organization without a leader is an organization without direction. Without direction, a business lacks purpose. Without purpose, a business lacks the ability to make progress. Without progress, a business becomes redundant. Look no further than Kodak or Blockbuster Video for real life examples.

As the leader of my own business, I hold the accountability for decisions (good or bad,) results (good or bad,) and overall direction & strategy. As the leader, it is up to me to adapt when things change because, as they say, “The only constant is business is ‘change’.”

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Recession Readiness https://www.growingfarmprofits.com/recession-readiness/ https://www.growingfarmprofits.com/recession-readiness/#respond Tue, 07 Aug 2018 18:57:51 +0000 http://www.growingfarmprofits.com/?p=1494 Recessions happen. In cyclical industries, the effect of a recession on a business’ results is magnified similar to how the benefits of a market boom are magnified. Industries that are less cyclical do not experience such swings in results and therefore appear to be more stable. These industries are less elastic (think about grocery stores, gas stations, natural gas companies) and are even considered “recession proof.”

If your business isn’t recession proof, here are a few tips to help you mitigate the effects of a recession and survive the downturn…maybe even thrive during it.

Bullet Proof Your Balance Sheet 

A strong balance sheet is your best weapon in fighting the effects of a recession. This also means keeping balance in the balance sheet, specifically top vs bottom, not just (left side and right side) assets vs liabilities. Top vs bottom means focusing on current assets and current liabilities (I.E. your working capital -the top half of the balance sheet), and not just accumulating assets and equity (the bottom half of the balance sheet.) Too often, I’ve seen businesses punish their working capital in a race to retire long term debt. While creating that equity by reducing debt is great, if it costs you your strength in working capital, it isn’t making your balance sheet bullet proof. Bullet proof is strong equity AND abundant working capital.

“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

Trim the Fat

Where in your business have things gotten a little complacent? Where is your business over-equipped? What can be identified in your business as “nice to have” instead of “need to have”?
When business is good it becomes easy to let things slide, to acquire equipment that helps things along but isn’t necessary overall, to treat oneself in ways that weren’t affordable before. It’s human nature, it happens, but it’s not sustainable in business that faces recession.

It is the business owner’s/manager’s obligation to scrutinize assets and processes for opportunities to get lean. And getting lean BEFORE the recession, before the business is forced to make reductions, is far easier than when the situation has become dire.

Is making a change to diet and exercise easier and more beneficial before a heart attack (I.E. prevention) or after (I.E. recovery)?

Be Responsive

We’ve all heard it before, and have probably said it a time or two ourselves: things will get better, they’ll turn around, just give it time.

Famous last words?

No one can accurately and consistently predict how long the market cycles will last. Many think they can, but they can’t. So if your business generates results that do not meet expectations, doing nothing about it is sure to repeat the same results. How long can your business not meet expectations during a recession? If we knew how long the recession would last, we could answer that question confidently, but we already acknowledged our inability to prognosticate market cycle duration. The solution then becomes, “do something about it.”

If revenue was below target, find out why.
If profit missed expectations, find out why.
If your best employees have resigned unexpectedly, find out why.
Waiting for divine intervention to “turn things around” is rarely a successful plan.

Plan for Prosperity

The advice above does not only apply to preparing for an economic or market recession; it applies to big picture planning in your business as well. Because it doesn’t take macroeconomic factors to have an impact on your business, putting these actions in play anytime will prepare you and your business for the unforeseen hazards that can throw your best laid plans into the ditch.

If you want to “Be Better™” is starts with “being ready.”

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Growth Kills https://www.growingfarmprofits.com/growth-kills/ https://www.growingfarmprofits.com/growth-kills/#respond Tue, 24 Jul 2018 07:30:29 +0000 http://www.growingfarmprofits.com/?p=1476 We’ve all heard the anecdote “Speed Kills” as it was used to advise drivers to slow down. Former Canadian Football League (CFL) player Jason Armstead had “speed” and “kills” tattooed on the back of his left and right calf; as one of the fastest players in the league during his playing days, Armstead’s speed as a wide receiver and returner could kill the opposing team’s chances of winning.

But who has ever heard of “Growth Kills”?

I have written about it in this commentary and spoken about it at industry events: business can grow itself to death.

When a business pursues expansion at a pace that exceeds:

  1. Management’s ability to manage the growth,
  2. The business’ ability to finance the growth, or
  3. The market’s ability to consume the growth…

…we have an entity that has likely grown itself to bankruptcy, or the very brink of bankruptcy.

We’ve all seen it. A couple years of back to back successes, and owners feel invincible! The next thing you know, there is new equipment and buildings being added to the operation, fancy vacations being planned, and new personal expenditures (like houses, RV’s, and vehicles) being made like the lotto has just been won. Everyone who sees this opulence must surely believe that this business is very successful.

If owners (managers) are ill-equipped for the rapid success they’ve enjoyed, there is a likelihood that less-than-ideal decisions will be made in the future. As Marshall Goldsmith titled his bestselling bookWhat Got Your Here Won’t Get You There. Management has to keep up with the change that sustainable growth requires. This could include new knowledge/strategy/execution in areas like cash management, human resources, marketing, etc. Growth kills when management’s ability is stagnant in the face of growing complexity in business.

As sales grow, there is a need for more investment in the business (Eg. property/plant/equipment; labor; technology, etc.) to support the demand. That investment requires capital. Whether the capital is borrowed or sourced from within the business (usually taken out of working capital) has a major effect on the sustainability of the investment. Growth kills when, without a “home-run” or two, investment is pursued to the point that financing is maxed out and working capital is depleted.

What happens when more product is produced than the market can consume? A shift is made, and what once may have been a specialty item is now offered at a lower and lower price until supply has been consumed (see the “model year blowout” and virtually every car dealership every year.) A business that has enjoyed significant growth may decide to increase production based on past sales growth. Such a decision usually requires investment in the business (see the previous paragraph) and investment in inventory. Whether that inventory is raw material, or finished product remaining unsold, it is tying up working capital. How long can a business hold inventory before it converts that inventory to cash? If working capital is been reduced (see paragraph above) the answer is: not long.
Maybe the business is in a service industry. While there likely isn’t any inventory to have to manage, ramping up capacity (hiring & training staff, acquiring tools & equipment for staff, etc.) requires investment. These investments also carry an overhead expense (salaries & wages, utilities, depreciation, etc.) which becomes harder to pay for when market uptake is satiated. Growth kills when we assume the market will sustain our rapid growth for us.

Plan for Prosperity

What led to the recent success in business? Was it deliberate, planned, and executed…was it intentional growth? We recently discussed the ramifications of unintentional growth. Maybe this article should be titled (Unintentional) Growth Kills, but that probably would not have captured enough attention for you to even read it.

Growth Kills when the growth was unintentional and leads the ownership/management group to ignore the reality that (almost) all industries are cyclical. To say timing is everything does not give credit to important factors like strategy and execution, however an adequate strategy will give consideration to timing (to implement the growth strategy.)

It’s all connected. There is no magic bullet; one thing alone does not make success, and if it does, it’s “luck” and it’s short term because luck isn’t sustainable.

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KYN: Debt Structure https://www.growingfarmprofits.com/kyn-debt-structure/ https://www.growingfarmprofits.com/kyn-debt-structure/#respond Tue, 17 Jul 2018 07:30:13 +0000 http://www.growingfarmprofits.com/?p=1467 In this edition of KYN: Know Your Numbers™, we build on the previous topic of Debt Ratio by looking deeper at Debt Structure.

Debt Structure refers to the ratio of current/short term debt to long term debt in your business. This metric provides insight into how you are financing your business’ needs.

Those who know me know that I am consistent in my belief that short term assets should secure short term debt and long term assets should secure long term debt. This is because short term debt (think about your current liabilities) is expected to be paid off with current assets (like cash) whereas long term debt would be paid out with fixed assets (if a lump sum is required versus retiring the debt over time with regular payments.) That premise is Financial Management 101, and while not a hard and fast rule, it is sound guidance.

More to the Debt Structure conversation, we calculate this ratio by dividing Current Liabilities (all payments and payables due in the next 12 months) by Total Liabilities; same for Long Term Liabilities (total debt not yet due within the next 12 months.)  Here is an example:

Current Liabilities Long Term Liabilities

Accounts Payable

$1,350,000 Long Term Debt (LTD) $3,100,000

Overdraft

$687,000

Shareholder Loan

$300,000

Taxes Payable

$27,350

Current Portion LTD

$487,000

TOTAL $2,551,350   TOTAL

$3,400,000

In this example, there are total liabilities of $5,951,350 (calculated as $2,551,350 in Current Liabilities + $3,400,000 in Long Term Liabilities.) The debt structure is 42.8% short term and 57.2% long term. While this is good to know, the next question is “So what?”

On its own, the debt structure ratio does not carry much weight. The value is found in trending the debt structure ratio. For example, if your short term debt trend is increasing it may be an indication of liquidity challenges in your business.

Ideally, calculating your Debt Structure Ratio will cause you to ask more questions and seek more clarity, such as:

  • What types of debt make up my short term liabilities? What are these debts for?
  • Are my short term liabilities trending up, down, or remaining fairly steady? Why?
  • What is the right ratio of Debt Structure for my business/industry?

With economic indicators preparing us for more volatility than years past, and with interest rate increases on the horizon, it is a good idea to have abundant clarity on your overall debt situation. Understanding your Debt Structure, including how your Debt Structure will affect your business under different economic situations, creates an opportunity to “get your house in order,” so to speak, before things start happening.

Plan for Prosperity

The winds of change are blowing. Are you simply going to lower your sail and wait it out, hoping to survive whatever comes? Or are you preparing to chart new courses so that whatever winds you get you are still able to make progress and move forward?

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KYN: Debt Ratio https://www.growingfarmprofits.com/kyn-debt-ratio/ https://www.growingfarmprofits.com/kyn-debt-ratio/#respond Tue, 10 Jul 2018 07:30:03 +0000 http://www.growingfarmprofits.com/?p=1463 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.

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The Uncontrollables https://www.growingfarmprofits.com/the-uncontrollables/ https://www.growingfarmprofits.com/the-uncontrollables/#respond Tue, 03 Jul 2018 07:30:05 +0000 http://www.growingfarmprofits.com/?p=1459 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.

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Bubbles https://www.growingfarmprofits.com/bubbles/ https://www.growingfarmprofits.com/bubbles/#respond Tue, 26 Jun 2018 07:30:31 +0000 http://www.growingfarmprofits.com/?p=1451 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.

 

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Cycles https://www.growingfarmprofits.com/cycles-2/ https://www.growingfarmprofits.com/cycles-2/#respond Tue, 19 Jun 2018 07:30:38 +0000 http://www.growingfarmprofits.com/?p=1442 “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?

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Elasticity https://www.growingfarmprofits.com/elasticity/ https://www.growingfarmprofits.com/elasticity/#respond Tue, 12 Jun 2018 07:30:38 +0000 http://www.growingfarmprofits.com/?p=1437 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.

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Intention https://www.growingfarmprofits.com/intention/ https://www.growingfarmprofits.com/intention/#comments Tue, 29 May 2018 07:30:20 +0000 http://www.growingfarmprofits.com/?p=1428 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.

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