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inadequate working capital

Eat to Live, or Live to Eat

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This week’s title is common phrasing when dealing with people who struggle with weight loss. While there are many factors that come into play for those who struggle with weight, a person’s caloric intake is often a major contributor. Making smart decisions about what to eat, when to eat, and how much to eat can be challenging for many people who are trying to do a better job of managing their health, not just those with weight issues. The question of “why” they eat gets into the psychology of the issue, which, coincidentally, leads into the real topic behind this week’s commentary.

Spending time at Canada’s Farm Progress Show in Regina each June has been something I’ve looked forward to for as long as I can recall. Remember, I knew I wanted to farm since I was less than 10 years old, so the Farm Progress Show was a more tantalizing buffet to the teenage me than even an actual buffet! (BTW, I still have an appetite like an 18 year old farm boy.)

The desire for more and new farm equipment seems almost insatiable, and begs the question:

Do we have all this equipment so we can farm, or do we farm so we can have all this equipment?

  • I recently met a young farmer who, while struggling to establish adequate cash flow, explained why another 4WD tractor on his 2,000ac farm will make him more efficient (he’s a sole operator with no hired help…how one man can drive more than one tractor at one time is something I can’t quite wrap my ahead around.)
  • You may recall from a few months ago the fictional story about “Fred” and how he NEEDED another combine. Despite his banker’s advice, he forged ahead.
  • Conversely, another farmer I speak with frequently is feverishly trying to rid himself of the over-abundance of iron on his farm.
  • Another is protecting his farm’s financial position by keeping the absolute bare minimum amount of equipment on his farm. Nowhere is there a “nice to have” piece of equipment on that farm; everything is “fully utilized.”

During the week of the June show in Regina, I read a tweet from an urban, non-farming young lady who was seeing the Farm Progress Show for the first time; it said (something along the lines of) “all this big beautiful equipment makes me want to go farming!”

Direct Questions

What circumstances must be present for you to consider additional equipment?

Does any equipment deal have to make for a sound business decision, or simply fill a desire?

Is your equipment a tool to operate your farm, or is it the reason you farm?

From the Home Quarter

In these weekly editorials, you have read about Mindset, about Strategy, and about Focus; these topics (and many of the others) challenge the conventional thinking in the industry today.

Those who bow to the mistress that is their farm equipment are only enjoying short term excitement. The mistress entices her suitor, subservient to the raucous cycle, and she soon becomes the one in charge.

Just ask anyone trying to get out of multiple leases…

toe the line of critical state

Critical State

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Critical State…it’s a subjective term, but is often defined in science literature as “the point at which something triggers a change in the basic nature or character of the object or group.” To paraphrase: something can be referred to as being in a critical state when at the point of significant change.

How many triggers of change do you, your family, and your business face each day, each month, and each year that could cause significant change? How many ways are you riding on or near the line of a “critical state?”

While there is little doubt that the list could be far longer, here are ten of the most important circumstances (many of which are ignored) that could put you at, or beyond, a critical state:

  1. Disability or Loss of Life: whether it be one of the major stakeholders in your business, a member of your family, or one of your employees, this is often the most catastrophic change.
  2. Lack of a Succession Plan: see point #1 above.
  3. Inability to Communicate: with family, partners, employees, vendors, etc.
    Does any more need to be said on this one?
  4. Debts Get Called: sometimes lenders make adjustments to their portfolio to manage their risk. If your debts get called, how do things change for your business?
  5. Overspending: cash in the bank is a good thing. Spending it because it is there is the scourge to many farms’ financial strength. Do you believe cash is king?
  6. Crop Failure: do you have the financial strength to survive a crop failure?
  7. Timing: trying to time the commodity markets is almost like trying to pick winning lottery numbers; both are nearly impossible. Regarding major purchases, there clearly is a right time and a wrong time to be taking on more debt, investing in more or upgraded assets, expanding, etc.
  8. Inaction: not monitoring bins, too cold to haul grain, we’re at the lake (can’t scout for bugs/disease,) etc. Poor excuses that can quickly create a critical state.
  9. Maintaining Inadequate Working Capital: believe it or not, but the chronic dependence on operating credit from lenders and vendors leaves a farm at the precipice of a critical state. Operating credit should not be counted on year over year. What if it isn’t there when you needed it most?
  10. Unwilling to change and adapt: “We’ve always done it this way,” are the 6 most deadly words in business.

Direct Questions

How many of the 10 points above might apply to your farm?

How would you gauge your ability to critically analyze your own business relative to the 10 points above?

What is your strategy to remain “well back” of the line that crosses over into critical state?

From the Home Quarter

In the battle against weather, insects, disease, market prices, etc, it is easy to get caught in a routine. When we succeed at managing through the day to day, the “extra” stuff, the “other” issues seem like they can wait. “It’ll never happen to me” are some of the most famous last words.

Too often, we operate at the very brink of critical state. Too often, we get away with it, which allows to be become “something we’ve always done.” So I’m left to ask,”Isn’t it better to avoid a crisis than deal with one?”

 

dichotomy

Dichotomy

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Here is a throwback to an article I wrote in August 2015 titled Is Data Management Really Important? where I highlighted a conversation between a friend and I that included his opinion that even large corporations let their “focus (be) primarily growth & profits and how to accomplish it, with information management being thrown together afterwards.”

While I believe that statement to still be true both for large corporations and farms alike, there is something in that statement that opens up what seems to have become the dichotomy of prairie grain farming: growth or status quo.

Let’s not get hung up on “growth’ as a single definition. In March 2015, my article Always Growing…Growing All Ways clearly described a few of the many ways we can achieve growth in our businesses that does not have to be pigeon-holed into the category of “expansion.”

So let’s clarify the dichotomy as “expansion or status quo.”

Now let’s compare a couple different scenarios.

  1. In the spring of 2016, I met with a young farmer who started out in 2000 with nothing but an ag degree and desire. As he prepared to sow his seventeenth crop this spring, he showed me his numbers while admitting that he felt good about his financial position, but didn’t really know if he was good or not. He lost almost 20% of his acres from the previous year, and was happy about it because the cost to farm that land was too high and he knew it.
    When I told him that I’d peg his operation in the top 10%, maybe even the top 5% of all grain farms on the prairies, he paused and said,”OK, so what are the top 5% doing that I’m not?”
  2. There is a farmer who has been calling me off and on for a couple years now. By all accounts, it is quite a feat that he is still operating. Although he’s been farming for well over 20 years his debts are maxed out, leases are burning up cash flow faster than the Fort McMurray wildfire is burning up bush land. He spends more time running equipment that his hired men; he has no clue what his costs are; he has aggressively built his way up to 10,000ac and wants to get to 20,000ac; one of his advisors told me that his management capability was maxed out at 4,000ac.

The first scenario has the farmer focused on growth of profitability, control, and efficiency.

The second scenario has the farmer focused on growth of the number of acres on which he produces.

One would be the envy of 95% of farmers.

The other will never in his entire career get to the point of financial success that the first farmer has already achieved.

Direct Questions

Which are you more like, the first farmer above, or the second farmer?

Which farmer do you want to be like?

What are you prepared to do to get there?

From the Home Quarter

What has been described above is actually a false dichotomy. We’ve been led to believe that farms must get larger in order to survive and that small farms were doomed. What that message failed to deliver was “At what point is a farm large enough?” I am not decrying large farms or the continued expansion of farms…as long as it makes financial sense! The false dichotomy of expansion or status quo need not be black or white, left or right, mutually exclusive. Farms that are not expanding today could be expanding next year, just like farms that are expanding today may not be next year. Some farms that have expanded over the last few years might even be looking at reducing acres in the future.

Growth (expansion) at all costs can often come with the heaviest of all costs.

Spending Less

Spending less is more valuable than earning more….

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Let’s start with a handful of truths:

  1. You need to spend more to earn more, but it is incremental such as…
    • When you go beyond the exponential benefit (spending $1 extra to earn $2 more,)
    • When you move into the realm of linear benefit (Earning $1 for each $1 you spend,)
    • When you push on and find yourself in a negative benefit (each $1 spent earns less than $1 return)……we may have reached the beginning of the end.
  1. Earning more leads to spending more.
  2. In what is our “consumer society,” we are driven to spend more.

 

Ok, so let’s expand a bit for some clarity.

Spending more to earn more applies to your crop inputs.
Does investing in a $200/ac fertility plan earn you more than $200/ac above what you’d earn without any fertilizer? Of course it does. How much more…have you figured it out?
If spending $20/ac on fungicide can earn an extra $60/ac in revenue, it’s a no brainer. Can it? If you expect to yield 40bu/ac on a wheat crop, will that $20 fungicide earn you a $1.50/bu premium? What’s the spread between #2 and Feed? If it is $1.50/bu or less, why invest in the fungicide?

When we earn more, we spend more. It’s just the way it is. Does it have to be this way? No, of course not, but in our consumer society where we need instant gratification, usually achieved with retail therapy, our consumerism appetite is nearly insatiable. We’re all guilty of this to some extent…even me.

The title, “Spending less is more valuable that earning more” is a line I read in an Op/Ed piece and that line is attributed to Andrew Tobias from his book The Only Investment Guide You’ll Ever Need. I have not read Tobias’ book, so I cannot offer anything on his intention or his message. What I can do is share some of my perspectives on the realities of how we spend.

  • “I just got a raise, so let’s go out for supper. I’ve never had escargot before, but hey, I’m earning more now, so why not?”
  • “We just closed that deal and it will put me over the top for the bonus I’ve been waiting on. I’ve had my eye on that Ferrari for so long…paying off my line of credit can wait until next bonus!”
  • “Wow, we’ve had a banner year! We’ve never seen this kind of cash flow before! Interest rates are so low. I bet I could get a deal on a new <shop/tractor/combine/etc.>

From my days at the bank, I saw a client pay approximately 10-15% more than market price for land, and then 1 year later, pledge to buy a brand new combine with cash. At the time, their working capital was adequate, not especially strong, but it was adequate. They were prepared to use up all of their working capital to buy this new combine because they had a strong year (and felt that many strong years were to come.) I gave them good advice: do not use up your cash to acquire a depreciating capital asset. As a thankyou, they didn’t even give me the loan (they went to another lender.) The very next year, they got hammered with excess moisture and were a breath away from getting all their loans called. Imagine if they hadn’t taken good advice!

Early in my banking career, I heard a grizzled old banker say “Farmers hate having money in the bank; as soon as it’s there, they spend it!” Recently, I listened to a very progressive farmer admit to keeping a set balance in his operating account by shifting excess cash out to a savings account. His rationale: if I don’t see it I won’t spend it; I know it’s in another account, but I don’t track it like my operating account so it’s not available to spend on something I really didn’t need!”

Beautiful!

In our chase to “earn more” we can easily get caught in a cycle of working harder & longer, and investing (spending) more in our business in an effort to boost revenues. Yet the tradeoff of return versus investment must be considered. Investment isn’t just monetary.

Just the other day, I was talking with a client who is considering adding an enterprise to his farm. (For the sake of confidentiality, I won’t give more detail than that.) This new enterprise would very likely bring significant positive cash flow to his farm and family, with very manageable new debt required for equipment to perform the work. He is a strong relationship marketer from previous work outside of farming, so “business development” isn’t a risk for him. The question I asked, the question he couldn’t yet answer, was, “How much time are you prepared to take from your farm and your family for this venture?” His investment wildcard is “time.”

Direct Questions

We’ve discussed ROA and ROI in the past. How are you implementing a reasonable “return” for your investment in inputs, assets, and time?

How would you feel to have 1/10th of your net worth sitting in the bank as cash? That’s $1million in cash on a $10million net worth. Would that burn a hole in your pocket, or give you a calm and serene sense of security?

Where is your mindset when it comes to generating profit: is it from increasing revenue or decreasing expenses…or both?

From the Home Quarter

Andrew Tobias has received many accolades for his writing, and he was the one who wrote “Spending less is more valuable than earning more.” If that applies in a practical sense or not, we could argue all day by bringing up economies of scale, leverage, and tax rates. I am contending that it applies to a mindset of earning a profit and hanging on to it, building those retained earnings, establishing that “war chest,” and setting yourself and your business up for riding out the rough spots in the economic cycles.

Taking all your profit from the last go-round and reinvesting it all on the next one has a place.

It’s called a casino.

 

 

farming should be like baseball

Farm Management Could Take a Lesson From Baseball

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If you love statistics, then you probably love baseball. Where else can you know with certainty that your starting pitcher has a propensity to throw more fast-balls than breaking pitches to left-handed batters at home during afternoon games in June under sunny skies with a slight north-west wind? While this is a bit of a tongue-in-cheek poke at the nauseating volume of stats that originate from the game of baseball, such statistics and the subsequent use of those statistics have real world applications.

I’m sure many of you have seen the movie Moneyball. (I’m sure most of you have because I watch VERY few movies, and even I’VE seen it.) As the story unfolded, there many beautiful examples of how the management team of the Oakland Athletics baseball club used statistics to improve their team. In this specific scene (I can’t recall who the player was) Assistant GM Peter Brand (played by Jonah Hill) explicitly instructs the player to “take the first pitch” during every at bat.  The reason was because through the use of statistics, and tracking the data, management knew that this player got on base more often when he took the first pitch. In the movie, it worked, and this player’s on-base-percentage increased almost immediately.

What would have happened had this team’s management not had, or used, such important information? The player may have been released, sent down to the minors, or traded to another team, the manager (bench boss) may have been fired.  Spread those “uninformed decisions” across the entire roster, and failure is sure to proliferate.

Livestock and dairy farms have been heading down the road to improved data management for years already. Average daily gain is not a new concept in beef operations. Robotics in dairy parlors bring a whole new level of data management. In conversation with a farm family that is investigating the benefits of robotics in a dairy parlor, I’ve learned that through RFID technology and a robot milker, they will be able to record and monitor milk volumes and milking frequency (a cow can come to the robot for milking whenever she chooses.) The management team can then compare results across the herd to determine which cow(s) is producing more or less than others cows under similar conditions. Informed decisions can then be made.

Grain farms having been catching up in recent years. With field mapping technology we can create yield maps; overlay that with crop inputs applied and we can tell which areas of each field are more profitable than others.

But that is way ahead of where most of the industry is generally at. By and large, many farm operations still don’t know the true profitability of a specific crop on their whole farm, let alone any given field.

The progression of profitability management, which requires stringent data management, begins at the crop level, advances to the field level, and reaches the pinnacle at the acre level.

Imagine:

  • determining which crops to exclude or include in your rotation by clearly understanding which crop makes you money and which one doesn’t;
  • deciding which fields to seed to which crop, or even which fields to renew with the landlord or which to relinquish based on profitability by field;
  • controlling your investment in crop inputs by acre to maximize your profit potential of the field, the crop, and your whole farm.

None of this is new. All the farm shows and farm publications dedicate significant space to all the tools and techniques available in the marketplace to facilitate such gathering of useful information. Equipment manufacturers and data management companies have invested enormous volumes of time and capital into creating tools and platforms to collect and manage your data. But like any tool, its value is only apparent when it is used to its full potential.

Almost all of the farms I speak with achieve greater clarity in the profitability of each crop in their rotation. I have a 13,000ac client that has taken several major steps toward measuring profitability by field. They have found that the extra work required to COLLECT this information is minimal. The extra work required to MANAGE this information is greatly offset by the benefit of clearly understanding that some of their rented land is just not profitable under any crop. Do you suppose they are looking forward to relinquishing some $90/ac rented land that just isn’t profitable enough to pay that high rent?

Direct Questions

Which of the crops in your rotation are profitable? Which are not? How profitable are they? Do they meet your expectations for return on investment?

Collecting the data is easy; managing the data takes some effort. What effort are you prepared to invest to make the most informed decisions possible?

How are you fully utilizing the tools available to you? If you’re not, why would you have them?

From the Home Quarter

Baseball collects gargantuan volumes of data on players, plays, games, and seasons. Much of it seems useless to laypeople like us, but to those who make their living in “the grand old game,” the data is what they live and breathe by. Agriculture should be no different. We should be creating consecutive series’ of data on our fertility, seed, chemicals, equipment, human resources, etc, for each year we operate, for each field we sow, for each person in our employ. Management cannot make informed decisions without adequate and accurate information. Now, with all the tools, techniques, and support readily available to help farmers collect adequate and accurate information, the last piece that may be missing is, “What to do with all that data?” While it can be boring to analyze data and create projections, I can assure everyone that the most profitable farmers I know all share one common habit: they spend time on their numbers, they know their numbers, and they make informed decisions based on those numbers.

You collect the information. I can help you use it. I’ll make tractor calls (as opposed to house calls) during seeding…as long as you have a buddy seat. Call or email to set up a time.

ic_leap

Experience: LEAP – – Leadership, Engagement, Authenticity, Passion

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Leap year only comes around every 4 years, so to some people, it’s kind of a big deal; to others, not so much. I will have spent the 2016 leap day by taking part in a unique event, Experience: LEAP.

Experience: LEAP is an initiative of the wonderful people behind Project: SHINE Inc. Their passion is for everyone to live the fullest life possible, to be their true self, and to experience life with passion and purpose. The key message is for everyone to learn that where you are is not where you have to stay. The message applies to us personally, but also has business implications.

In the case of this event, LEAP is an acronym as follows:

Leadership

Leaders are made, they are not born. While some people are born with the characteristics that are often found in great leaders, the fact is leadership skills are learned, and therefore, leaders are made. This has 2 different aspects that apply to your farm:

  1. You are the current leader of your operation.
  2. You need to identify and develop a leader to take your place for when you’re no longer leading the business.

We often learn from experience, or learn from others’ examples, but rarely do farm business owners ever get sat down and taught how to be an effective leader. Everyone in your business will perform in direct correlation to their response to the leadership of the organization. It is like the old saying, “Would you rather be in an army of lions led into battle by a sheep, or be in an army of sheep led into battle by a lion?” If you find yourself questioning the effectiveness of your employee(s), first gauge your effectiveness as a leader.

As a leader, you need clarity in the results you expect in your business, the strategy for achieving those results, and the tactics in execution of the plan. Naturally, sharing this information with your team is critically important in effective leadership.

Engagement

One cannot expect to build a profitable business or an effective team without being engaged. A person who is disconnected and unattached will achieve sub-par results, and find the same in their team. How does one become more engaged? What can be done to increase the engagement of a team? By and large, it begins with purpose. Clarifying the “why,” which means “why are we here; why do we do what we do; why are we the best people for the job?” Clarifying purpose by answering the “why” helps teams, and individuals, recognize that they are a part of something bigger and that they have a key role to play in the organization. By turning a basic employee, a laborer per se, into an engaged and contributing member of a highly functioning team will pay dividends to your business that may astound you.

Authenticity

To be authentic is to be real or genuine. This involves interactions with your staff, your business partners, your family, your vendors, but most importantly with yourself.
I find it curious that authenticity is required for true engagement, which is required for effective leadership. Passion affects everything.

Passion

Passion can be difficult to describe because it is a feeling like few others. Passion can consume you, drive you to heights never imagined, and lead to immeasurable levels of joy or even anxiety. Passion can often create infallible commitment, which, if not balanced with sound rationale in decision making has potential to lead to undesirable outcomes. Unbridled passion sounds poetic and profound, but it can be dangerous if not balanced with reason and objectivity.
Yet, life (or business) with no passion becomes an insufferable task to endure. Most farmers I meet are passionate about their farm, about the land, about growing things, about the family legacy they are living and plan to leave behind. “Life becomes work” if there is no passion. But don’t forget balance, because “work can become life” on the opposite end of that spectrum; neither is desirable.

Direct Questions

How are you gauging the effectiveness of your leadership? (HINT: this isn’t a “self-assessment.”)

What are you doing to match your engagement to that of which you expect from your team?

How would you describe your passion?

From the Home Quarter

Recently, I listened to a presentation where the crowd was polled: If you could sell all your land for 25% above market value today, and rent it back for life at half of current rental rates, how many would take that deal? No one raised their hand. The presenter then acknowledged that no one in the crowd was a farmer, but actually a land owner. Everyone laughed in subtle agreement.
The point is to define your passion, your “Why.” Clarity in what you do, why you do it, and how you do it is no longer something that only applies to large corporations who need that “feel-good mumbo-jumbo” as part of their strategy. Make no mistake, farms of the future will require processes that were once foreign, or only found in corporate cultures. The need for social license becomes greater each day. The need for strong and committed teams becomes greater each year. The need for passionate, authentic, engaged leadership becomes greater with each new generation in the family business.

Daddy Selfie

Additional Family Members

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It is amazing how a family is changed when you add another member to the fold. Whether it be the addition of my new daughter last week (Feb 16 if you want to keep track) and the changes she brings to this household, or the addition of another generation into the family’s farm business, the change is not only imminent, but it can also be drastic, unpredictable, and challenging.

Both situations above involve adding a child, or another child, to what used to be “normal” and “routine.” The similarities don’t end there.

Where Does Everyone Fit?

Bringing another person into the mix creates upheaval. What used to be a shared role could now fall to one person solely. New roles that didn’t exist before now have to be addressed to determine who should fill these roles. This can be stressful, cause tension, and can lead to feelings of inadequacy or inequity.

Can I Understand How This Affects Others, Not Just Me?

We humans, despite being the most intellectually and emotionally intelligent animals on the planet, often struggle with empathy and being able to put ourselves in “someone else’s shoes.” We see ourselves as “up earlier, up later, working harder, taking fewer breaks, taking less personal time, doing more than just the fun jobs, etc.” than our cohorts do. We feel our own plight, get grumpy at our circumstance, and then usually either withdraw or lash out (depending on the individual.) If we were to acknowledge that everyone else in the unit probably felt the same way, we would likely find more patience and understanding for each other and for each other’s quandary.

What Do I Have To Do To Do My Part?

Communicate. Of course, it is much more than just that, but it is critical to communicate with your partners about what you want and what you feel. Most issues in business and personal relationships stem from one or more parties feeling like they haven’t been heard. Being reciprocal is key: if we want to be heard, we must also hear our partners.
Clarifying everyone’s “part” is also important. Assuming that Dad should just keeping doing <insert task here> because he’s just always done it is a recipe for conflict. Does Dad even enjoy that task? Is he actually the best person for that task? Same rationale applies to everyone in the family unit.

Direct Questions

To use an analogy, every person is “rowing their own boat.” What are you doing to ensure that everyone in your family (business or household) is rowing in the same direction?

Change is inevitable, even without adding a new person to your business or family unit. How are you ensuring that you aren’t blaming the arrival of a new person for your stress in the face of change?

There is always positive and negative in every situation. The upheaval and change from adding a new person also brings about great opportunity. What are you doing to identify and leverage all of the opportunities that a new person brings to the fold?

From the Home Quarter

The degree of change that comes with the addition of a new person into your realm is monumental, especially if that person is a little baby who is dependent on you for everything. But as we adjust to our “new normal” and a child becomes less dependent, we are no longer suffering under the weight of anxiety of “how to adjust” and actually have to stop and look back once in a while to truly see how far we’ve all come. By working together with a strategy on how to adjust to the new normal, we can accomplish so much more with far less stress and anxiety.
The same holds true in your family farm business. Whether it be a new employee, or a family member who is joining the farm with ownership aspirations, the same tactic applies. Work together with a strategy in mind on how to adjust to this new normal. You’ll find that this new person is more independent than a new baby. Plus, you’ll actually get some sleep from not having to be up every 3 hours.

On a side note, can anyone tell me how adding one tiny person to a household can more than double the volume of garbage produced by 2 adults and a toddler a week earlier? I can’t rationalize this at all.

growing lentils to increase gross margin

Gross Margin or Operating & Fixed Costs – What Comes First?

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The question may seem redundant or nonsensical, 6 of one and a half-dozen of the other…

Do you build your crop plan in an effort to generate sufficient gross margin to cover operating and fixed expenses, or do you budget your operating and fixed expenses to fit within your typical gross margin?

For most high cost operations I speak with, they know their costs are high and then find themselves working hard to generate adequate gross margin to cover their costs and , hopefully, leave a profit at the end.

The challenge that many high cost operators are facing is the run up of their expenses during the recent string of bullish years (land, buildings, equipment, pickups, etc.) and are now trying to manage those residual expenses during a period of tighter margins. They are focusing heavily on one of two areas:

  1. Seek out every opportunity possible to increase yields and to expose marketing opportunities, or
  2. Cut expenses to a level more in line with their farm’s historical gross margins.

It seems that the most common strategy that would fall under Point 1 above is to bring lentils into the crop rotation for 2016. The high prices are just too tantalizing to bear for most high cost producers. We will see lentils being grown in non-lentil growing areas in an effort to boost gross margin. I spoke with a young seed grower this month who told me he received a call this winter from north-east of Prince Albert looking for lentil seed. Good luck with that.

I learned of another operation, in an area that is typical for lentil failures, that dabbled in lentils in 2015. While this region can typically produce 30-50 bushel pea yields, this farm enjoyed a solid 5 bu/ac lentil yield. What is the opportunity cost of using land for a 5 bu lentil crop that could have produced a 30 bu, or even 50 bu, pea crop? Chasing rainbows? I’d say so.

A number of my clients are focusing on Point 2 above, and have been quite successful in reducing the one cost that is most controllable, yet has gotten quite high over the last few years: they are selling equipment to reduce their overall equipment cost. Whether it be liquidating the extravagant tillage tool that is only needed once in a while, moving out that sprayer that is too big for the farm size, or not acquiring that “nice to have” tractor, these farms are working to bring, and keep, their costs more in line with their expected gross margin.

Moe Russell has been quoted in these articles before, and he is on record saying, “Over the long term, the price of agricultural commodities will level out at the cost of production of the highest cost producer.” Essentially, if you’re a “highest cost producer,” over the long term you’re looking at a break even.

Direct Questions

What strategies have you employed to manage costs in the wake of tightening gross margins?

Do you budget your expenses to a level your gross margin will cover, or do you try to achieve gross margin to cover existing expenses?

From the Home Quarter

One of these approaches is top-down, the other is bottom-up. If you caught my presentation at Sask Young Ag Entrepreneur’s Annual Conference earlier in January, then you’ll have already heard my explanation of why top-down is better.

Top-down is managing your farm by budgeting your operating and fixed expenses to fall in line with your typical and expected gross margin. You have likely enjoyed a regular profit.

Bottom-up is reacting to a long line of expenses that were incurred during a short period of high profitability by trying to create a gross margin that is not very likely.

The view from the top is better.

Financial data

Compiling Your Financial Information

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The proverbial shoe-box, or an organized file package.
Maybe a shoe-box that supports accounting software.
Maybe it’s a fully completed accounting software package that includes all depreciation expensed and dividends paid.

For those of us on a December 31 year-end, the calendar has turned and the clock is ticking. If you haven’t had a planning meeting with your accountant prior to now, it’s likely too late to act on some of the options you had.

When are you able to get your information in to your accountant? My mentor threw down the gauntlet last year when he showed me that his accountant had his financial statements prepared a mere 28 days after his fiscal year end. That’s some WOW factor there! For my file, I’m shooting for thirty-five days or less; target: early/mid-February.

For me to help my accountant meet my goal of a 35 day turnaround, I need to provide him with accurate information as fast as possible. I need to provide clear information on income and expenses (not a shoebox full of invoices and receipts.) I need to provide a detailed report on changes in my fixed assets over the year, my accounts receivable at year end, etc. The better the quality of info I provide to him, the faster he can get my file off his “To Do” pile and onto the “Done” pile.

It is a typical comment made every year: we have to wait for the bank, and other creditors, statements before the final month report can be ready to send to the accountant. I’m not waiting. I’m logging into my online banking and retrieving transaction info right away. The details are there, so why let this time go to waste?

When getting your taxes and reporting completed as quick as possible, the benefits are many:

  1. You will get ahead of your accountant’s busiest time, which  makes him/her happy!
  2. You will get your bank annual review done earlier and on time, which makes them happy!
  3. You will receive your financial reporting earlier allowing you to fully analyze last year’s results and make improved decisions for this year accordingly.
  4. You will be equipped to seek new credit before seeding, if required.

The government has filing deadlines for taxes, the bank has reporting deadlines for your annual review. To receive your December 31 financial statements in August because it took you so long to get your info in to your accountant provides you, and your financial partners, little use. The information in those reports is too old because so much has changed on your farm since the date on the statements. Would you write a cheque in August based on the balance you see in your December bank statement?

Direct Questions

What systems and processes do you have in place to compile your business and financial information as quickly and accurately as possible?

How are you using your financial information to make business decisions?

Have you discussed with your accountant as to how he/she prefers to receive information from you? Making their jobs easier will get you higher quality reports much faster.

From the Home Quarter

Getting your year-end completed quickly will help you be more profitable. When your statements are early (or at least on time,) you create opportunity with your creditors. Opportunity with your creditors creates strategies for growth (and possible lower borrowing costs.) Strategies for growth create opportunities to expand, increase efficiency, control expenses, etc…all which lead to greater profitability.

And it is all starts with getting your information compiled and delivered to your accountant fast and on time.

 

new years resolutions

New Year’s Resolutions

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It’s that time again, already. Another new year is about to begin and with it, the customary practice of declaring resolutions for the new year, promises we make to improve ourselves for our own betterment. I’ll preempt just about every newscast you’ll see between January 1st and 4th by stating it now: New Year’s Resolutions seldom last. There. You can still tune in to the TV or radio for more on that headline: the same old rhetoric from the same old stories that get recycled every year.

When it comes to our businesses, we shouldn’t be so laissez-faire with our intentions to improve our station. (Yes, we should be more dedicated to our personal “resolutions” too.) Two weeks ago, you read about some of the goals that my clients are working on in 2016. I can assure you (and them) that their goals will see through, because I will see to it. As their trusted advisor, I will be there all along the way to help them stay on track and focused. Similar to how a personal trainer will hold their clients to account on their “fitness resolutions” in the gym.

Interesting how gym memberships sky-rocket in January.

“Resolution” is the act of resolving; the act of finding an answer or solution to a conflict, problem, etc. (http://www.merriam-webster.com/dictionary/resolution)

For a resolution to be realistic, the “problem” needs first to be identified. Is the “problem” real or perceived? Is the solution to the “problem” achievable? Is the “problem” even a “problem?”

At the beginning of 2015, my New Year’s resolution was to be more physically active. I had committed to a 28km back-country mountain hike to take place in July, and I knew that my stagnant carcass, being that I am always sitting (either at my desk, in my truck, or with my clients,) would struggle with the inclines but mostly with the endurance. Great intentions fell flat during the winter, which is my busiest time of year in business. I even tweeted on March 30 that I was “starting on my New Year’s Resolution today” since I was finally starting to take action on my goal. High hopes and grand plans were all for not as I embarked on the 3 day hike (28km in, and 25km out) with little in the form of physical preparation. The hike was more difficult that I imagined, but I got through it better than I expected. I guarantee that I won’t be unprepared for this summer’s edition!

My Goals for 2016 (not New Year’s resolutions!)

  1. Improved physical activity (double current levels)
  2. Increase efficiency in my business by 50%
  3. Multiply my 2015 family vacation time by 3 (I took 1 week this past summer.)

Direct Questions

Do you get caught up in New Year’s Resolutions but let real goal planning go undone?
How are you documenting and measuring your progress on your goals?
How do you stay motivated to keep working on goals and not let them slip into nonexistence?

From the Home Quarter

Growing Farm Profits Weekly™ will begin the New Year with a series of concepts to help you find greater efficiency, make more informed decisions, and realize improved opportunities to enhance your profits and your wealth.
This edition marks fifty-two issues now in the books and I thank you for following along in this first year. The next year, and years to come, will continue to deliver more thought provoking topics, mind-set challenging discussions, and pragmatic tips and tools to assist your ongoing and ever essential need to be Growing Farm Profits™.