By Dr. David Kohl
When reflecting on my academic years as an educator at Virginia Tech and Cornell University, the energy and stimulation inside and outside the classroom while engaging with over 10,000 students is certainly a highlight. Students sought wisdom for their chosen vocations as well as their lives. In school you get the lesson first and then you are tested. In life you often get the test first and then the lesson.
This era of agriculture is definitely testing business mindsets in a world that often appears upside down. Given these challenges, there are four primary areas of focus in the quest to be a sustainable business and have a solid business mindset. Let's dig deeper and examine the lessons learned and the tests to manage volatility, agility, resiliency, and opportunity.
VOLATILITY
Extreme financial volatility will be a key test for any producer and manager involved in agriculture. Abnormal weather, supply and marketing chain disruptions, trade issues and sanctions, and consumer trends can alter both the cost and revenue sides of the equation on the income and cash flow statements.
A lesson learned is when one develops a cash flow projection, financial sensitivity tests must be considered to define the parameters of outcomes. What happens if revenues are down 10 to 20 percent or costs increase by 10 percent? A major test on the horizon for many producers will be the possibility of a reduction in government support payments. Globally, over $2 billion a day in government support payments are made to agriculture. An examination of the farm record databases in the United States finds that in recent years these payments make up a larger share of the net farm income for many producers.
A lesson learned to manage volatility is that a strong marketing and risk management plan that is executed and monitored is not optional. One needs to manage volatility, not just cycles. Have you assessed your supply and marketing chains? Do you have plans A, B, C, and D? How have you positioned your business to capitalize on opportunities or to minimize losses created by volatility?
AGILITY
Next, how do you pass the test of agility? A lesson learned in recent years, specifically since the beginning of the COVID-19 pandemic, is that working capital and quickness to cash are high priorities. A major test for businesses is to determine whether working capital and cash were accumulated through profits and financial discipline, or were they generated from the sale of capital assets or a debt restructure?
The balance of efficiency and optimization versus diversification of revenue and net income are important when considering business agility. If you put all of your eggs in one basket, then that basket better be strong!
RESILIENCY
Resiliency requires you to examine your cost of production and analyze your information using a trend analysis, comparing your business to peers locally and globally. However, one lesson is that many costs are specific to a business and can change very quickly.
Are you preparing the next generation for potential ownership and management of the business? Transition planning is often a low priority as many producers focus on the urgency of the day-to-day challenges.
Of course, equity and capital position provide a fallback in case of adversity or if an opportunity arises. A lesson learned over the economic cycles is that when one is financially leveraged, strong production, marketing, financial, and operational efficiencies are required.
OPPORTUNITY
Finally, passing the test of opportunity requires one to be both adaptive and innovative while maintaining focus on processes and goals. Successful business managers often take time to conduct business planning and sometimes engage a team of advisors to assist. An advisory team can bring in new perspectives or can be a sounding board to test new ideas before implementing them. Having a solid business mindset means getting better before getting bigger or becoming more efficient before growing. These individuals “sweat the small stuff” in an attempt to become five percent better in many areas.
Passing these four tests and incorporating the lessons learned does not guarantee success. As I have told my students, life happens, but these tests and lessons can place the odds of success in your favor!
