In part one and two of this series we shared ideas from some of the leading farm and business gurus. It’s part of our ongoing effort to help you sort through your toughest business challenges. Watch for more secrets coming up in this series.
1. Become the best on the block.
Every business has four constituencies: buyers, suppliers, employees and lending sources. Do some research or hire outside help to learn the five biggest frustrations in dealing with grain elevators, banks, suppliers or employees. Eliminate those frustrations and you are on the way to becoming the employer of choice, supplier of choice – you get the idea. Work toward becoming the go-to business in the community.
2. Analyze what to stop doing.
The very best companies spend as much time doing this as they do analyzing new opportunities. To paraphrase from the best-seller First, Break all The Rules: Get the right people on the bus in the right seats, and the wrong people off the bus.
3. Ramp up cost (margin) management.
Most people don't have a clue what their true costs are, or even whole farm costs. Software tools can help give farmers that kind of information and turn your data into something valuable. In today’s tight margin environment, you need better cost management and cost accounting for individual farms making up your operation, as well as by enterprise and by field. “That way you know the trigger point for marketing, or when you’re paying too much for rent,” says Klinefelter.
4. Do what-if scenarios.
‘What-if’ planning means looking at what could happen and if so, what would you do if it did? Farm Credit and banks do these shock tests all the time, but you have to have a written strategy ready in case something does happen. It's not looking at extremes - just a wider range, such as price and yield variations. From a full-on family business perspective, look at the four Ds: divorce, departures, death, or disability. What if you lost a lease, what if your lender shuts you off, what if you lost a key employee, what if a key supplier goes bankrupt? What if you're hit by a major disease or drought? In each case determine what to do and write down an agreed backup plan. If you don’t like these exercises, work with a lender, peer group, management team, accountant or outside consultant.
5. Better margins start with cost control.
The first and most important marketing decision you make is not what you sell your product for, it's what you pay for inputs. Why? If you paid too much for cash rent, land or inputs, your business won’t be competitive. Most people spend all their energy trying to outguess the market, but if you buy your inputs right, then set your cost of production, you’ll likely find price targets that offer profit – even in 2016.
6. Adopt accrual accounting to get a current profit picture.
Most farmers work on a cash accounting basis for tax purposes. Accrual accounting helps you find out where your business is financially, in part because it measures the position of a company by recognizing economic events regardless of when cash transactions occur. With tight margins today, you don’t want to find out two or three years too late if you have a financial problem. Sometimes farmers try to solve a problem by cutting back, or selling a few things to keep cash flowing. But you don't want to be late in figuring out a problem.
7. Protect working capital.
If you made some bad moves in the market or left some money on the table, think about how to rebuild your financial position. That wasn’t easy in 2015 and won’t be this year either, but you can preserve capital by rethinking every buying decision. There are good deals on new and used equipment right now, but make sure you don't destroy your working capital trying to get that deal. Holding on to cash is the first line of defense against financial stress; the value is its risk mitigation, not the return you get for it. If an opportunity comes along, it gives you the capacity to capture that opportunity. Says Purdue economist Mike Boehlje: The first thing you negotiate on land debt is term of repayment and the last thing you negotiate is interest rates. You want long terms with low interest rates, and you don't wait until you have financial pressure to do that; you do it now. If you haven’t already done so, refinance that 10-year term loan for 30 years.
Coming next: 5 tips for better marketing success