financial – 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 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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Sub-Topics of Growth (Part 2) https://www.growingfarmprofits.com/sub-topics-of-growth-part-2/ https://www.growingfarmprofits.com/sub-topics-of-growth-part-2/#respond Tue, 08 May 2018 21:13:11 +0000 http://www.growingfarmprofits.com/?p=1403 As we continue our discussion on the many facets of growth (which is about far more than just “size and scale”) we will look this week at two types of capital: monetary and human. Here is another look at the graphic which provides the basis of our conversation, which, again, is not an exhaustive list within the conversation of business growth.

Facets of Growth 1Finance and Cash Flow

One of the first questions I get asked during interviews with prospective clients is usually related to cash flow or financing. As many business experts have written, these are the symptoms not the problems. Before we can understand how cash flow and financing have become an issue, we need to clarify your desired business goals.

Too often, financing is a reaction to a need or to a problem. When financing becomes the reaction to a want is when the business is beginning to create its own problems. “Needs” should be mapped out as part of a business’ 3 Year Plan. “Problems” need to be anticipated (as best as possible at the time) so that contingencies can be considered in advance. Reckless management of financing and cash flow hinders growth.

Where does your cash inflow come from? Whether it be from the sale of a product or service, or a little of both, it is important to make this obvious distinction. While it is obvious to you as the owner/manager of your business, is that obviousness directing how you invest your other resources (time, expertise, people, etc.)? At what stage of your sales process do you collect all, or part, of the payment from your customers? Does the timing of your cash inflow match your obligations for cash outflow? Insert financing…

Seeking financing when you are short of cash is reactionary. Because of the time it takes to go through the levels of due diligence that lenders must utilize before granting credit, reactionary Finance and CashFlowborrowing is challenging for everyone, borrower and banker alike. In general, seeking financing from a position of weakness usually doesn’t achieve the desired results.

The appropriate financing strategy can reduce costs (interest, fees, etc.), increase efficiency (pre-approved credit, overdraft protection, etc.), and reduce stress. Does your business have sufficient financing available to not just get you through the next production cycle but more than one production cycle? Is your business “borrowing from Peter to pay Paul?” If so, then cash flow and financing are two exceptional opportunities to seek growth.

Human Capital

We have all heard it before: hire for skill and you will fire for attitude; hire for attitude because you can train for skill. Anecdotal, yes, but incredibly accurate. Some things cannot be taught. Have you amassed a staff of people with the right skills or the right attitude? Ideally, it is both!

More anecdotes?
Middle Manager: “What if we train all our people and they leave us?”
CEO: “What if we don’t train them and they stay?”

Investing in your people is a growth strategy that is often overlooked in small business, but is par for the course in large corporations. Many large enterprises have made it a part of the corporate culture to invest in the skills of their employees. As business owners, we are often told that the best investment we can make is in ourselves, and if that is to be true, then the second best would be in our employees. How much training do your people need? Are you paying them fairly based on their experience, skill, and attitude relative to the competitive marketplace? Remember, the soon to be largest segment of the workforce, millennials, are said to place less importance on rate of pay. How are you adjusting your overall compensation strategy?

Human Capital matrixResponsibility and accountability are hallmarks of a great staff member. Most people crave it in their work. Sadly, many small business owners are reluctant to “let go of the reigns.” If you have managed to find good people only to wonder why they eventually left, consider how you allowed them to take on more responsibility. If they felt like they were held back, it is no wonder they would seek out a different opportunity elsewhere.

 

Peter Drucker has been credited as saying “Culture eats strategy for breakfast.” This means that even the best planned and executed strategy will fail without the appropriate culture in place. What is the culture in your organization? Is it one of respect and accountability, or is it a culture of mistrust and blame? The way to tell is to observe how people in your business respond during a time of crisis. When observing the behavior and acknowledging the type of culture in your business, remember the culture is an extension of you, as the owner/manager/leader because the culture is either from what you have tolerated or what you have set as an example in your own behavior. But do not despair! A poor culture can be changed, it just takes a lot more work and an incredible amount of consistency.

Plan for Prosperity

This week we touched on the two most powerful growth opportunities in your business: monetary capital and human capital. In reflection, remember these important points:

  1. Manage things. Lead people. Your people are not to be managed, but led. Then watch them perform.
  2. If your leadership skills are lacking, then make an investment in yourself right away. Or relinquish leadership from your duties and hire someone to do it for you.
  3. Get the right people in place before adding property, plant, or equipment. It’s far cheaper to be overstaffed for a short time than to under-service clients at anytime.
  4. Acquiring financing from a position of weakness will always be more difficult than during the execution of a strategic plan. Proactive vs. Reactive.
  5. Do not underestimate the impact of the right culture in your business. Spend a little time online reading about corporate success stories from implementing a specific focus on culture. If it can work in a large entity, it can work for you because you are much more agile as a small-to-medium sized enterprise.

 

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Facets of Growth https://www.growingfarmprofits.com/facets-of-growth/ https://www.growingfarmprofits.com/facets-of-growth/#respond Tue, 24 Apr 2018 07:30:02 +0000 http://www.growingfarmprofits.com/?p=1386 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.

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Don’t Panic https://www.growingfarmprofits.com/dont-panic/ https://www.growingfarmprofits.com/dont-panic/#respond Tue, 06 Feb 2018 16:29:31 +0000 http://www.growingfarmprofits.com/?p=1324 The markets are on a wild ride over the last week. After an elongated bull market, we’ve seen huge drops in the value of the S&P500, which have created ripples in Canada as well as in foreign markets. Right on cue, we hear investment advisors insist that staying the course and not panic selling is the best thing to do. The markets always go up and go down. After every crisis, brighter days returned which left us to quickly forget how we felt during said crisis.

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

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

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

*Anyone getting tired of hearing about planning yet?

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

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

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

 

Plan for Prosperity

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

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

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

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

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Questions from Farmers https://www.growingfarmprofits.com/questions-from-farmers/ https://www.growingfarmprofits.com/questions-from-farmers/#respond Tue, 23 Jan 2018 07:30:03 +0000 http://www.growingfarmprofits.com/?p=1297 Over the winter, I do a number of speaking engagements, usually around finance and management. Here are some questions and comments from the audience, and excerpts of my response.

 

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

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

 

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

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

 

The following are a sample of comments made by participants:

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

 

Plan for Prosperity

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

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

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

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

 

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Contrast https://www.growingfarmprofits.com/contrast/ https://www.growingfarmprofits.com/contrast/#respond Tue, 02 Jan 2018 07:30:11 +0000 http://www.growingfarmprofits.com/?p=1278 Did you ever wonder how so much expansion is going on during what is supposedly challenging economic times?

In this part of the world, in fact in this part of Canada, we are experiencing economic growth that is far less than we’ve enjoyed over the last decade. Government spending has been reduced provincially, and the federal government deficit has grown exponentially; we were teased with drastic changes to our federal business income tax structure; we’re paying higher levels of consumption tax; unemployment has grown; overall confidence has declined.

And yet, we continue to see businesses growing, we see new construction in housing, commercial, and industrial levels, consumers continue to buy new cars and take vacations. On Boxing Day, my thermometer read -32 Celsius but there was a line up outside the doors of the Visions Electronics store prior to their 6am opening. How tough can these times really be?

Notwithstanding the socio-economic challenges that our society faces (none of which I am trying to discount here), behavior would indicate that the “tough times” aren’t as tough as we’re being led to believe.

Contrast the difference between 2 businesses in the same industry: both make widgets, both have sales forces, both face the same challenges of staying relevant in the sleepy industry of widget production.

Company A wants to corner the market and pursues a mission of expansion that leans hard on the idea that “bigger is better,” and expecting it to lead to greater efficiency, sales, and profits. Company A increases debt and increases cash flow spending on capital assets, technology, and marketing to fuel its expansion aspirations.

Company B recognizes the truth in the adage “Innovate or die.” While the widget production industry is sleepy, Company B knows that the status quo is not sustainable. Five years ago, Company B developed a 5 year plan to position itself to be an innovator in widget production. It carefully managed margins and cash flow so as to create a “war chest” of resources.

Which company is building a new production facility in 2018? Which company is at risk of losing not only its market share, but its best people,  to its competitor? Which company will blame the tough economic times for the decline of its business?

The best businesses, and it doesn’t matter which industry they are in, the best businesses plan. They plan for cycles, growth, innovation, and the unforeseen (like the 4 D’s: death, divorce, disability, disagreement.) Businesses that do not plan leave themselves at the mercy of the market, the fickle nature of consumerism, or “tough economic times.”

Plan for Prosperity

Planning, in and of itself, does not guarantee prosperity. Even execution of the best plan does not guarantee prosperity. But in contrast to your competitors who do not plan, who make decisions based on short term perspective and emotion, or who are happy just floating along, there is a clear and obvious line separating the grain from the chaff.

Which side of that line do you want to be on?

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It Can’t Happen to Me https://www.growingfarmprofits.com/it-cant-happen-to-me/ https://www.growingfarmprofits.com/it-cant-happen-to-me/#respond Tue, 28 Nov 2017 07:30:55 +0000 http://www.growingfarmprofits.com/?p=1244 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…

 

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Is Profit a Part of Your Strategy? https://www.growingfarmprofits.com/is-profit-a-part-of-your-strategy/ https://www.growingfarmprofits.com/is-profit-a-part-of-your-strategy/#comments Tue, 17 Oct 2017 07:30:36 +0000 http://www.growingfarmprofits.com/?p=1190 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?

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Adding Value https://www.growingfarmprofits.com/adding-value/ https://www.growingfarmprofits.com/adding-value/#respond Tue, 05 Sep 2017 07:30:32 +0000 http://www.growingfarmprofits.com/?p=1152 To actually add value to your business you must have profit from operations. Every dollar of retained earnings that is left in your business increases the value of your business. Simple concept.

In agriculture, when someone says “adding value” we typically hear “value-added” which means something like processing, milling, refining, etc, etc, etc. Basically we infer that it is anything one or two steps up the value chain that isn’t the actual farming.

At this point, many ears close and minds drift off…

What I’m referring to today is what adds value in your business. It matters not whether your business is production, processing, or any product/service that supports your business, there are aspects where value is insufficient and it is hurting your bottom line.

What Doesn’t Add Value

  • Anything that does not provide an ROI (Return on Investment) above 1:1.
  • Anything that doesn’t provide a measurable and quantifiable improvement to efficiency (which can be translated to ROI.)
  • Anything that uses more cash that it provides.

Examples would be a brand new pickup truck, renting land that (at best) will only break-even, chasing yield to the detriment of gross margin.

What Does Add Value

  • Cash flow and expense management
  • Driving down Unit Cost of Production
  • Empowering your people

Examples would be building and preserving working capital (especially cash), understanding total farm costs relative to production, building a team of competent people who can replace you.

Defining Value

Maybe this is the place to start? How do you define value in your business? What do you see as providing value? For far too many farms, value is centered around land appreciation (a passive boost to equity) and new equipment (a major draw on cash.) Interesting how these two focus points are conflicting in how they affect a business’ financial position…

Does value comes from biggest yield, biggest equipment, biggest acreage base? Or does it come from profit, efficiency, and control?  I might be swimming against the current here, but my vote is the latter…

To Plan for Prosperity

Knowledge is key. Without knowledge, determining value becomes emotional, a guess, or a hunch… To understand value in your business requires an awareness, a level of knowledge, that does not come from gut feel. Your systems for managing the operation and all the financial decisions that go along with it are what will provide the knowledge to help you determine where you are adding value, where you can create value, and where you’re letting value be eroded away…

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Better is Better… https://www.growingfarmprofits.com/better-is-better/ https://www.growingfarmprofits.com/better-is-better/#respond Tue, 11 Jul 2017 07:30:02 +0000 http://www.growingfarmprofits.com/?p=1086

Would you rather make $50/acre profit on 20,000 acres or $100/acre profit on 10,000 acres?

This is a question I ask any farmer who admits to pursuing aggressive expansion. As was aptly described in a recent edition of FCC’s AgriSuccess  in May 2017, journalist Kevin Hursh discusses cost effectiveness of farm expansion with Kristjan Hebert. Kristjan has been quoted in this commentary a number of times in the past because he is the first person I hear using the term “Better is better before bigger is better.” To his credit, he admits that it isn’t his phrase; he heard first heard it from someone else.

The question posed at the beginning of this piece is meant to evoke an admission of any business flaws that have crept in to the practices and decisions that drive aggressive expansion.

The point is acknowledge that for all the risk undertaken in the operations of any agricultural enterprise over the course of one year, the end result must recognize the effort involved and the risk taken. If you’re working harder and risking more, why would you accept less profit? True, the linear dollar profit is the same in this example, but the profit per unit (in this case, per acre) is half. Anyone who can prove that their whole farm costs, right to the paperclips, are also halved is welcome to step up and prove that bigger is in fact better. I’ll wait…

There are many advisors who have questioned why any commodity production business would want to rapidly expand before doing the best job they can on what they already have. The argument on what led to the mindset of expansion at all costs hasn’t been settled in over 20 years, and won’t be settled here today. But in the end, we can do better, we must do better, because now we know better.

And the words are true: Better IS Better…

To Plan for Prosperity

This week’s piece is purposefully pithy. It is meant to drive awareness of the “Costs and Effects™” of the decisions made in our businesses. Every choice we make has a consequence, and to truly “be better,” we must evaluate each business decision on its merit, not how it makes us feel.

While bigger can sometimes be better, it’s guaranteed that better is always better.

 

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