Klinefelter: By the Numbers

Boost Your Odds of Business Failure - Part 2

Don't rely on once-a-year budget projections to know if you're on course. That will only alert you to financial problems after a crisis occurs and it is too late to avert it. (Photo by Coolcaesar, CCA-SA)

Volatile returns and narrow margins don't leave farm operators the luxury to mismanage their businesses now. With prodding from Virginia Tech economist Dave Kohl, I'm sharing the 21 habits and financial practices that -- left unchecked -- become the downfall of many farm businesses. In this final installment I'm tackling the remaining ways lax practices can lead to business failure.

11. Not having detailed job descriptions or standard operating procedures. It is very hard to hold people accountable for things that aren't written down or explained to them. Lacking job descriptions and SOPs also leads to inconsistency in performance and makes it more difficult to train new employees.

12. Not recognizing that everyone "no matter how smart" (including yourself) exists in four states of knowledge. These are: (1) Knowing what you know; (2) Knowing what you don't know; (3) Not knowing what you don't know, i.e. ignorance, not stupidity; and (4) Thinking you know something and it just isn't so. Everyone needs honest and objective feedback, and to hear alternatives and different points of view. It is one of the main benefits of participating in peer advisory groups made up of successful peers. You want to soar with eagles, not scratch with turkeys. Douglas Adam quoted in the book "The Breakthrough Company" said that human beings, who are almost unique in the ability to learn from the experience of others, are also remarkable for their disinclination to do so.

13. Not continuously learning and improving. As I have said many times before, it is an economic reality that for your business to succeed and continue successfully beyond you, management must learn, adapt and continuously improve at the rate set by the leading edge of the competition and not by your comfort zone. Otherwise you'll be falling behind even if you are moving ahead. The most dangerous phrase in business is "because we've always done it that way." There is an old saying "if it's not broke don't fix it." Tom Peters, the author of "In Search of Excellence" and "Thriving on Chaos" said, "If it's not broken, you haven't looked hard enough." All he's saying is everything can be improved upon.

14. Not focusing on what you need to stop doing. In his book "Good to Great," Jim Collins said the most successful companies spent as much time analyzing what they needed to stop doing as they did evaluating new opportunities. That is one of the main reasons that I think companies with standard operating procedures need to incentivize employees to come up with ways to continuously improve them. Otherwise, your business can become like a union, a government bureaucracy or a university.

15. Being too myopic. This is a big one. Technology and the world are changing at an exponential rate. Too many farmers continue to focus on their own commodity, only agriculture, their own region of the country (often a 50-mile radius), the U.S., and looking out only as far as the next year. Consumer trends, demographic shifts, global competition, emerging technology, qualified supply chains and the likelihood of new regulations, to name just a few, mean horizons need to broaden or you'll get swept away by changes in the tide. We're drowning in information; but a strategic manager needs to look for leading indicators to help sort through the overload to help develop insights into where things are headed. It is also important to recognize most major changes occur because of a convergence of forces, not just one. More information is becoming real time. That's why the best managers are intentional networkers and members of peer groups made up of the best decision makers they can associate with.

16. Not getting better before getting bigger. A lot of the highly publicized failures have been large farms. But it's not being big that gets them in trouble. Some of the best managed, most profitable farms are very large. The problem occurs when farmers grow just to be bigger without management or the management system being improved at the same rate. A lot of the failures in the current economic downturn will be farms that grew using multiple-year fixed cash rents at rental rates above the market. That can be a recipe for growing yourself broke. The successful operations have tended to have management teams made of management specialists and growing at rates that didn't increase at rates faster than their rate of growth in earned net worth.

17. Underutilization of assets, particularly machinery. Financial consultants John McNutt, Moe Russell and many farm recordkeeping studies have found that machinery and equipment cost per acre are one of the three biggest cost differentiators (in addition to land cost and family living) that separate the most profitable from the least profitable operations. Large dairies milk three times a day around the clock, several farmers I've gotten to know through the Texas A&M TEPAP management courses either share equipment with someone in another part of the country, have entered into collaborative farming arrangements, or farm in different states to take advantage of seasonal differences and spread overhead costs. Some benefit by using equipment three times as long during the year. Others have added doing custom work to more fully utilize machinery capacity. Kristjan Hebert, who produces canola in Saskatchewan, Canada, found it was cheaper per acre to hire another man to run a second shift than to buy another tractor and drill. Pushing this concept to the max involves farming in multiple states and running multiple shifts, but that isn't an option for many producers.

18. Having a victim mentality. Complaining, blaming or becoming depressed and wallowing in self-pity rather than learning, changing and adapting is a disease that affects too many farmers. Your best bet to beat the syndrome is to associate with winners who push, encourage and teach. Affiliating with losers who agree with you only reinforces your thinking and will get you nowhere.

19. Not monitoring actual versus budgeted performance throughout the year. Spotting changes early allows you to be more proactive than reactive. Developing contingency plans as you budget helps you take action if things don't go as planned and before a crisis exist.

20. Not using managerial/cost accounting. Not knowing your true costs on individual enterprises and individual farms doesn't allow you to separate the winners from the losers and know where you need to expand, cut back or get out and redeploy dollars and assets. Know the details of your operation. The most successful operators are consistently only about 5% better than average in all the key performance areas; but, the results are additive, multiplicative and compounding because they do it over and over again. It's like the example of the .300 hitter in baseball who will someday be in the hall of fame and make 10 times as much as the average player who hits .250. He only gets one more hit every 20 times at bat, 6 versus 5, but he works to improve all the time in order to continuously get better in all areas of his game.

21. Not knowing how to evaluate or using current technology. Some people try everything new that comes along, but that can be almost as big a problem. Others are way behind the curve because they believe most new technology is too expensive or too complicated. The reality is we're living in a technology driven world and technology is expanding at an exponential rate. Waiting until its use is commonplace can put you at a significant competitive disadvantage. Much of the new technology is designed to be yield enhancing or cost reducing. However, one of the often overlooked or undervalued aspects is that some new technology is going to be required to verify regulatory compliance, provide traceability, or to verify end user requirements on contract specifications. In some cases, the new technology is going to require training that requires outside education. It can be expensive but it's often necessary. In any case, new technology needs to be evaluated in terms of marginal revenue versus marginal cost. The issue is that these will need to include the cost of non-compliance or verification audits, often on a real-time basis which may be even more expensive or impossible without the documentation capabilities technology can provide.

Continuous management improvements will be the major differentiator between those who are the winners and losers in the current economic environment. Hopefully, you'll find that most of the management practices discussed in this two-part column don't apply to you.

EDITOR'S NOTE: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Paid subscribers can access all of his DTN columns online using the News Search feature under News.

To read Part 1 of these column, go to http://goo.gl/…