The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
The speaking trail is often a laboratory of life laden with diverse sets of questions and challenges with individuals and their businesses. For this quarterly essay, I selected a series of pertinent questions which require considerable thought and crucial conversations. The most successful, progressive producers strive to manage for profit and growth while incrementally, improving the operation. Inevitably, most producers will cross several, if not all, of these important questions. Be prepared!
Before asking or answering any questions, you must first be clear on the current status of your business and where it is you want to go. Most importantly, understand there is no silver bullet in business or life. Assess the goals and values of the business, family and personal lives. Both short-term and long-term goals should be evaluated. Next, examine the current resource base including land, machinery, equipment and human resources. Time is an especially precious resource and is a crucial part of any business decision. With this type of analysis complete, one is better prepared to ask more detailed questions and hopefully, conclude more accurate answers.
The first set of questions concerns employment. Questions to ask may include: What level of business must be achieved to necessitate another employee? What are the best methods of hiring and retaining an employee? What needs to be in place and what should be examined financially before hiring?
In response to these questions, the first factor to examine is the area of the business where additional help is needed. Will this individual be needed for field work with crops or livestock, or in the office for record-keeping or management? A good, old-fashioned job description is vital for guidance and focus in this situation. Detail the expected responsibilities, methods of performance measurement, probation periods, and the timetable of performance review by the owners or managers. Recently, I observed a situation where a family member was hired into a business without an outline of the aforementioned items. This created considerable discomfort for other employees as well as the other owners. An employee must be aware of your expectations in order to fulfill them.
Generally speaking, a newly hired individual should be required to generate $40,000 to $70,000 of incremental net income above salary and benefits paid to that individual. This allows one to calculate the number of additional head of livestock, acreage, or cost savings necessary to successfully add a new hire. Remember to account for economic challenges, volatility and cycles that inevitably occur in agriculture.
Hiring a new person is a significant commitment both individually and for the business. If an individual is young and newly out of school, an internship may be appropriate. This allows you to “test drive” the situation and determines whether work habits and talents are suitably aligned with the business. This also allows the potential hire to get a feel for his or her responsibilities and ascertain whether the desire and abilities exist to meet job responsibilities. If possible, meet the individual’s spouse or partner as they may be critical in the decision-making process. Peter Drucker, the famous management guru, was adamant that whenever you hire an individual, you indirectly hire the spouse or significant other as well. On a side note, farms and ranches that are isolated or without close proximity to a vibrant population center may face more issues going into the future.
In dealing with employees, consider things such as compensation, vacations, etc. As with job responsibilities, compensation packages need to be spelled out in detail. List each benefit offered and assign a value. This is important because individuals tend to benchmark themselves against their peers and friends. Have a written policy concerning what constitutes unacceptable behavior, such as, drug use or personal time on the business computer. This seems overwhelming, but may save considerable problems in the long-term.
The next set of questions relates to employment and deals specifically with record keeping; referred to on the farm as “office work.” In a small business, it is often difficult to manage all the menial, but important tasks that must be done. For example, what are the best practices for a small business operation concerning accounting and financial record keeping? What is the appropriate balance between office paper work and on-farm, production work?
The most important aspect of record-keeping is maintenance. Retain and maintain complete financial, production, and marketing records. Keep them in a secure place with other important documents such as wills, deeds, and insurance papers. I strongly recommend that you separate personal family living finances and business finances to better determine costs on both sides. There are several systems available for record keeping such as Quicken software for personal use. The Nebraska Farm Record Association is a good resource for models of what is contained in family living cost. Concerning record systems, FINPACK, Redwing and other agriculture software have very good systems along with some state extension services. If you hire an accountant, make sure they understand agricultural businesses’ unique components. Normally, it requires 48 hours per month to maintain good records. Develop a set of dashboards or metrics for financial, production, and marketing systems that you can use during the year to monitor progress. The lender and of course, the Internal Revenue Service (IRS) can both be motivating factors to meet record-keeping and financial reporting obligations. Lenders often tell me that a good set of records improves confidence as well as the lender-client relationship.
Turning to production, I am frequently asked how best to determine the next enterprise to add to the future of the business. After careful analysis of goals, current assets and resources, I suggest development of a series of budgets with different price, cost, and production scenarios, including cash flow. This requires one to think through on paper, production, marketing and a human resource plan within the various scenarios. From years of observation, I have noticed that if you dedicate the time to develop a budget on paper, 75 percent of your written business plan will be accomplished. This is simply the benefit of thinking through your business systems well enough to write them out.
Lenders believe intellectual capital will be the differentiator between successful and struggling farm and ranch businesses. From my years of participation and observation of the agricultural industry, I agree completely with the role of intellectual capital. This variable will only increase in value and necessity as agriculture continues to be more entrepreneurial and globally interconnected. In general, as agricultural businesses become much more complex, intellectual capital will be in high demand. Historically, agricultural lenders examine the “5C’s of credit;” cash flow, capital, collateral, character and capacity. Today, the “sixth C,” or intellectual capital must be added to the examination list.
What are some of the elements of intellectual capital or the sixth C? Examine production operations and how they align with the markets and distribution, but also with cash flow, the profit plan and the ability to build earned net worth or retained earnings. Does your business attract and retain the necessary intellectual capital to ably execute your plan? Seeking better production efficiencies or competing for a specific customer base or market requires one to enlist new technologies and use creative strategies. However, this type of planning requires intellectual capital in addition to a certain skill set and knowledge base. Knowledge must be paired with the hands-on ability to produce the product or service in a manner that is complementary to your market. In other words, the planning and the implementation of the operation are both necessary. Too often businesses can only master one component. They can produce but fail to market or have the ability to market but are unable to produce the product or deliver the service in a profitable manner. Intellectual capital well matched with your business needs can help you realize each step of the operation from concept to product and finally, profit.
As you strive to incrementally improve your business, continuing education is crucial. Northwest Farm Credit’s Business Management Center (BMC) is a premier life-long learning venue that will enhance your intellectual capital. BMC highlights include Ag Outlooks, the Young and Beginning Producers’ Conference, Executive Producers Summit, succession seminars, and financial workshops. In fact, there are several agriculture education programs world-wide. For example, TEPAP at Texas A&M may be expensive, but this course is a very good investment regardless of size of business. It is an information-packed venue with time for networking with people from around the U.S., Canada and globally. Farm Futures, Top Producer, DTN, and agribusiness sponsored events are all good options. I recommend attending three to five educational events annually. Time and money spent at these events are not merely costs; they are investments in you, your business and your livelihood.
Remember there is no magical profit maker. Good change often comes incrementally with deliberate and thorough planning. From employment to production, good managers face tough challenges and opportunities almost daily. The agriculture industry and its businesses continue to grow in complexity. Coupled with increased volatility, agriculture businesses must equip themselves for success. Utilize the resources around you such as your lender, crop consultant, accountant, peers and educational venues like the BMC. Examine the intellectual capital of your business. Most importantly, maintain a good balance between business and personal life. Learn from your mistakes and always keep moving forward!