The Logic Behind a Resilient Business
March 3, 2017
The current economic reset is three years into its cycle for most commodities. The grain industry was the first to experience the downturn, followed by the livestock industry. Today, the impact of the economic reset continues to spread beyond the farm gate and into related agribusinesses and rural main street businesses. In this economic environment, many ask for some management and financial steps to make their businesses more resilient. Farmers must examine the practices that allow businesses to bend and bounce back, but not break. Despite challenging cycles, there are several real-world examples of businesses displaying such agility and resiliency.
Many of today’s hardy businesses have a written marketing plan to which they have committed. When the window of $4.00 per bushel corn arrives, management takes the opportunity. Marketers committed to the execution of their plan do not wait for the hope of $5.00 per bushel corn because they know waiting may result in a $3.00 per bushel price. In fact, many grain bins across the country are full this winter because of the hopes for a $5.00 per bushel mark – proving to be costly emotional decision-making. The University of Minnesota’s Center for Farm Financial Management recently highlighted a situation in which an operation sold corn at a price that was only $0.15 per bushel higher than previously marketed. This operation gained approximately $50,000 in profit. Another example showed an increase of $0.77 per bushel in soybean marketing, adding approximately $40,000 to this operation’s bottom line. How did they do it? The key was following the logical strategy of a marketing and risk management plan and not allowing emotions to overcome reasonable expectations.
The foundation of any farm resiliency plan is the cost of production, for each enterprise of the operation. This creates essential flexibility. For example, if you examine the cost of production for each business entity and identify one as clearly more profitable, then resources can be re-allocated to help support that enterprise. Farms generating more profit per unit manage expenditures in line with prices, which equates to higher return on assets. This winter presents the perfect opportunity to examine rents and leases, production, and input costs. Be careful not to cut costs in the wrong places. I know one upper Midwest producer who decided to cut crop insurance and is now financially debilitated after many of his farms suffered devastating losses from a severe hailstorm for which he was no longer protected.
Resiliency also requires some personal sacrifice. Family living budgets that expanded during more profitable times must now be carefully scrutinized. The top percentage of profitable farms proactively cut living costs by $25-$30 per crop acre and the equivalent measurement in livestock enterprises. Whether it is credit cards or the next big toy, family expenses involve each member of the family. Therefore, give each member an actionable task in reducing costs. This may prove the goal much more achievable as active involvement is often easier than sitting idle. In fact, having a crucial family conversation regarding expenses before the budget presents an issue is the best sign of a resilient business.
Whether you are just starting out or have farmed for many years, a business transition is probably inevitable at some point. Regardless of where you are in your business timeline, a succession plan for assets and management is imperative. Often, this process includes a team of advisors and involves multiple meetings, sometimes over a two to three-year period. As the economic reset continues, expect business transitions to accelerate as the older generation becomes motivated to part with assets and move on. These actions will create more opportunities for the younger generation, but these openings alone are not sufficient for success. Transition management planning requires one to think through the past, current, and future status of the business while including possible challenges and opportunities. In short, transition planning brings logic and structure to what can often be an emotional and fluid process.
Another strategy employed by resilient businesses and management teams starts with a simple cash flow of their operating budget. They apply a broad set of assumptions on price, cost, interest rates, and marketing opportunities and think through – on paper – possible scenarios before committing resources. A new opportunity is often exciting and emotions can be contagious and sweeping. Written scenarios show both the good and bad possibilities. This type of objective thinking interjects reason and can highlight potential risks that an excited manager may miss.
A strong business is made by its people; managers and employees that value and prioritize education exhibit resiliency. Today’s competitive edge is information and knowledge. I recently heard an applicable saying, “If you are not learning, your neighbor is.”
Lastly, challenging times often dictate some self-assessment. A healthy body includes more than just the mind. Commit to an active routine of exercise and sensible eating. Similarly, those around you can impact your healthy perspective. Maintain a positive network of people with whom you can share ideas and process solutions. Take time to shut off the technology. In the quiet, think about where you have been and where you want to go. Remember that the strength of mind, body, and spirit are each essential life components.
By design, emotions such as fear, excitement, and others are meant to spur responsive action for our protection and survival. However, business is a different creature; as such, business action must stem from planning and preparation. As the economic reset continues, proactive planning and objective assessment are the most critical tools for a resilient business. I have heard it called by many names including instinct, the gut, or even just a feeling. Whatever you call it, do not allow emotional decisions to stand between you and your goal of a sustainable and profitable business. Remember, the key to a resilient business is logic.