by Bill and Mary Weaver
In a rollicking, fast-paced presentation hosted by Ag Biz Masters, popular Ag Economist Dr. David Kohl revealed 10 important steps for survival in the face of an unexpected crop disaster or an economic downturn.
Kohl’s first priority? Make a written list of your goals. “The first thing I want to know when I consult any business is the owner’s goals. Eighty percent of people drift through life with no clearly defined goals. Only about 4 percent actually write them down.” They’ll be the successful ones. These goals should include not only the goals for your farm business, but also family goals and your own personal mental, physical, and spiritual goals. Write these goals for next year, and also for 3-5 years from now. “Setting longer term goals is particularly important for the young farmer.”
Your goals, to be helpful to you, should be Specific, Measurable, Attainable, Realistic, and Timely. (Put together, the first letters of each of these words spell SMART.) “For example, one of my own personal goals, since I travel so much, [Kohl spoke in 40 states and 6 provinces last year], is to work out at least 300 days a year. Writing down your goals is the most important takeaway advice I can give you.”
Step 2 – Attract and retain good people to help you. “I’d estimate that 40 percent of people you might think of hiring, you don’t want, and some of them might be family! Another 20 percent are marginal. The 40 percent that you want typically will come to work on time, follow directions, and get along with people.”
For more about choosing the right people, Kohl recommends the book “Good to Great,” by Jim Collins. Collins compares your business to a bus. “The premise of the book is that you need to get the right people on the bus, kick the wrong ones off, get the right people in the right seats, find the right bus driver, and make sure he has the right directions (business plan). Always have a detour plan. Remember Murphy’s Law!
Step 3 – Know your costs of production. “Unfortunately, we make our decisions for emotional reasons 80 percent of the time. Having a clear picture of your production costs will help you to make rational decisions to questions such as, ‘What does my price need to be for this product?’ or ‘Should I sell now or put the crop in storage and hold out in case prices go up?’”
“For example, for a group of young farmers, the cost of production on a given item ranged from a low of $4.24 to a high of $12. The lowest-cost producer was a diversified farmer. He said his most valuable product was manure. ‘It kept my production costs down.’”
Step 4 – If profit is your kingdom, consider cash your king! Keep three to four months of living costs in the bank in cash at all times. Keep a year’s worth of farm payments in the bank. If you don’t have that much, build it up over three or four years. “A farmer in New York did this. Another farmer told him, ‘That’s a dumb use of your money. You’re not making anything on it.’” Dumb like a fox!
The first farmer uses his cash to get the cash discount — often from 12-15 percent — on farm purchases. “I’d say that’s a pretty good return on his cash! Remember, a lot of businesses go broke trying to minimize income taxes,” leaving them short on available cash for unexpected needs.
Step 5 – Invest wisely. “A North Carolina farmer, retiring after 40 years, was asked for his best advice for young farmers. He essentially said, ‘Invest in productive assets.’ That includes yourself, and can include education like Ag Biz Masters that can save you both time and money.”
Step 6 – Check your credit score. “About 29 percent of the time, you’ll find wrong information. If you’re thinking about getting married, do ‘due diligence.’ Check him or her out. Seriously! I heard of a farmer in western Tennessee who had 97 credits cards. He had $97,000 charged!”
Try to keep your credit score above 700. To a lender, this means that if times get tough, there’s only about a 5 percent chance that you’ll default. “If you have a 600 credit score, your banker will figure that statistically, you have a 51 percent chance of becoming delinquent.” The best way to raise your credit score is to pay off your bills on time.
Step 7 – Keep a lid on family living costs. “What matters is not how much you make, but how much you spend. High livers spend $65,000 to $90,000 and more. The 20 percent lowest-spending families spend $40,000 to $60,000. You can have a lot of fun without using a lot of money.” The money you don’t spend can be used to grow your business with productive assets.
“Young farmers know how to live modestly. But during the ‘boom years’ of high grain, animal, and dairy prices from 2008 to 2013, family spending costs jumped dramatically. As my dad said, ‘Once a cat has eaten cream, it’s difficult to put him back on milk.’ It’s easier not to let your family’s spending expectations get out of control in the first place.” Crop disasters happen.
Step 8 – Use a professional record-keeping program. If you have an accountant who understands agriculture, treat him like gold. If your record keeping is not efficient, “you can spend too much time keeping records just for compliance and taxes, when you should use your records to help in business decision making.”
If you only keep a couple of kinds of records, “a cash flow should be emphasized, because it requires you to think through production, marketing, and finances. We follow these closely at the Homestead Creamery,” [where Kohl is part owner.] A cash flow is 80 percent of your business plan.
Step 9 – Make sure you have a transition plan. If the older generation delays this discussion, try the ‘Drop Dead!’ exercise. “Put everyone’s name on a piece of paper in the middle of the table. Pull out one slip and read the name. ‘You’re dead! Now what do we do?’ Believe me, that’s one time the dead will talk! If you have no transition plan, the winners will be accountants and lawyers!”
In your plan, the child who stays on the farm building equity, if deserving, should get a larger share of that equity. Often in Canada, a 3-1-1 rule is used. Every child who stays on the farm gets $3 for each $1 the others get.
Step 10 – Education matters! “Be a life-long learner. I tell my students, ‘Study hard! There’s a child somewhere else in the world who wants to take your job!’” This study could be in a technical or vocational school. It’s not confined to college.
“If I had a child working on the family farm, I would encourage a 50-25-25 rule. The child gets 50 percent of their income to spend any way they want to. Then 25 percent would be for long-term investment. The remaining 25 percent would be spent for education, which could include FFA or 4-H projects or 4-H camp. Experiences can be a great education. The experiences a child has between the ages of 4 and 15 influences the life skills they will develop, and can play a big role in determining the person they become. Give them life experiences in agriculture.”
Ten steps that will help your farm through financially difficult times
by Bill and Mary Weaver