What Got You Here Will Not Get You There!
What Got You Here Will Not Get You There!
By Dr. David Kohl
At a recent creamery board meeting our entrepreneurial partner, who founded the business, had an interesting quote to kick off our 23rd year of business. “What got you here will not get you there!” This quote prompted us to think of the past and also develop a vision for the future.
What got us here?
When applied to the agriculture industry or your business, this quote can provide some introspection. When considering the agriculture industry in the post-farm crisis era of the 1980s, there were many factors that got us “here.” In some years, government payments amounted to over 50 percent of net income for some commodities and enterprises. Next, paper wealth gains or the appreciation of assets, specifically land, have boosted the net worth on many balance sheets. In the broader economy, stocks and residential real estate have increased personal and household net worth in a similar fashion. The advent of technology, seed, genetics, and equipment have boosted productivity of many farms and ranches. In many cases, increased production was the variable for profits. At the macro-economic level, the expansion of global markets that created the commodity super cycle from 2007 to 2012 accelerated profits and net worth after the turn-of-the-century, along with a combination of other events.
What will get us there?
Now, let's ponder the future of the agriculture industry and the players that will carry out the strategies and actions. First, an emphasis on a management mindset for profits and overall success will be front and center as we approach the quarter-century mark. A management mindset needs to be incorporated into the business vision, mission, and core values. The opportunity for business and personal prosperity will not be dependent on size, enterprise, or the “next big thing.” Success will be about the “five percenters,” that is being a little bit better in many components of production, marketing, risk management, finance, operational efficiency, and human resources as you focus on your values and goals.
Success will be about leveraging the institutional memory and talents of the vintage generation while also harnessing the talents and energy of youth and the next generation. Innovation, technology, and leveraging talents, resources, and aligning with the rapidly changing marketplace will be a focus of the future. The future will be about soil and water health and regenerative agriculture that aligns with the demands of consumers and society. Consumers will demand transparency from production, processing, and distribution to the marketplace.
Expect a new generation of producers with a one-size will not fit all mentality. Some will mesh into family businesses while others will startup new businesses. Some producers will be boomerangers seeking to return to the agriculture industry to mesh their talents into business while seeking an agricultural lifestyle. Intensive management with an executive mindset, regardless of size or enterprise, will be critical. Key performance indicators (KPIs), benchmarking, collaboration with others, and human relations skill sets will bode well in “getting us there.”
Nuts and bolts
Will the 2023 to 2026 era be similar to the recent past? Many strategies learned during the “grinder years” from 2013 to 2019 following the super cycle from 2007 to 2012 will be applicable in the era ahead of us. This new era will require juggling the triple play, that is extreme price volatility, sticky inflated costs, and elevated interest rates.
One must focus on fine-tuning risk management plans. Cost of production and breakeven points need to be in the management mindset mentality. For those that operate multiple enterprises, the cost of production for specific commodities needs to be refined. Some managers are drilling down to the field level as a tool for land and lease negotiations.
Developing input and output marketing plans will move up in importance. Moving from “just in time” to “just enough” inventory management will be critical in the era ahead. Crop insurance levels and other earned enterprise insurances will need more intensive evaluation.
The cash flow plan with cash budgets that are developed and monitored throughout the year with the lender and advisory team will enhance the needed communications with partners and spouses. Financial sensitivity testing of revenue, costs, and interest rates will provide the guardrails of business possibilities in an era of rapidly changing events.
Family living budgets separate from business budgets will be imperative for calculating true living costs. Consider the number of families living out of the business and budget busters such as unusual expenses. Do not forget inflation in your analysis when assessing living expenses. Remember, living costs are often paid out of operating lines of credit so full transparency of the flow of money needs to be considered.
Finally, while equity gains were substantial in the past due to inflated assets, current equity or working capital will be a metric of the future. Aspire to maintain working capital at a level of 25 percent of total annual expenses or three times annual debt service payments. The quickness to cash of current assets and matching them with current obligations will be a part of the triple play juggling act.
Whether it is our creamery, your agribusiness, or the bank, take time to do this exercise on paper. It will be an invaluable reflection of the past that can launch your business journey going toward the quarter-century mark.