Business & Policy
Make the business choice
Part II: How to find the business strategy that's right for your farm operation.
November 19, 2007 By David Kohl
Many businesses are coming to a critical crossroads that will dictate some
tough decisions. In a previous article, we examined the micro and macro factors
that determine a business potential. This time we look at incorporating what
you discovered into specific strategies.
Should you stay, go or grow?
Some producers can employ a 'stay' strategy where they are content to rely on
a 'get by for this year' approach. This mode, however, will not be sustainable
for much longer than a decade. If they attempt to bring the next generation
back into the business with a 'stay' strategy, it usually ends in disaster.
Businesses operating under a 'stay' strategy usually have low financial leverage,
i.e. 75 percent equity or greater. They are usually in stable rural areas that
have some drawbacks in their natural resource base or are less accessible to
their markets, suppliers or infrastructure. These businesses survive because
they are low maintenance, very conservatively run and do not use all the latest
technology, machinery and equipment. They tend to be in the later stages of
their business and personal lifestyle and are content to rely on a 'get by for
the year' strategy.
Those in the 'go' or 'exit' mode are at either end of a wide spectrum concerning
management. Some will be pure production managers. If they are not the low cost
producer with large volume and a conservative debt strategy, they will be forced
to liquidate or risk losing accumulated wealth. Others will be geographically
challenged or in an industry that is no longer competitive. Some will harvest
the farm wealth by selling land for development.
Others will not have the agricultural area or rural community for competitiveness.
Others that will 'go' are those that failed because they grew too quickly and
did not plan properly for growth. This is often the result of flawed business
strategies or improper financial and control systems.
Producers who are in a planned growth strategy are usually visionary leaders.
They communicate, demonstrate by actions and constantly evaluate.
They have a people management strategy. Internally, they attempt to get the
right people on the bus, and get people in the right seats as a strategy on
the highway of success.
They also surround themselves with community and industry support to help move
the business forward in a methodical yet flexible manner.
Managers who successfully 'grow' their businesses make every attempt to increase
net income by more than five percent annually over a five to 10 year period.
This keeps the business ahead of inflation and creates funds for reinvestment.
Finally, they have a strategy that gets the optimum out of its human and capital
assets. Lazy assets are discarded. Capital and borrowing reserves are kept for
unexpected events. Finally, while observing the big picture, they are very aware
of details and surround themselves with a team that takes them to the next level.
To wrap things up, there is a three step process when developing your game
plan of choices:
- Review your internal and external environment.
- Get the right people in the right seats on the bus – in other words
hire the right people for the right jobs.
- Decide which characteristics fit your desires and goals.
Don't forget. At the end of the day, you are the one calling the shots as to
whether you decide to stay, go or grow. That's what being in business for yourself
is all about. Making the hard decisions and living with the consequences.
Dr. David Kohl is professor emeritus at Virginia Tech University
and is a renowned agro-economist and advisor in agriculture to RBC Royal