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Rise to the Challenge

With the current farming economy presenting extremely tight margins (or none at all) growers need to be extremely proactive in tracking their costs and production to gain as many clues as they can to what truly contributes to their profits (or their losses).  There are many costs associated with crop production that really don’t pay off.  The important thing is that farmers are accurately tracking and trending these costs and results so that they can start building a history.  Historical data is a gold mine.  The problem is is that up to this point many operations didn’t have the means or the motivation to accurately track these aspects of their business.  Now with tight margins there is definitely the motivation and now is the time that farmers wish they had accurate historical data from their operation to work with.   There is no better time than the present to get started on investing in the future of your farming operation by collecting accurate data to help trend and understand your profitability components.

Rising to this challenge is a commitment.  Not only a commitment of time, but also a commitment of energy and focus.  For most farmers, data collection hasn’t been on their radar until just recently.  Thanks to some great software development, growers can enter data and get insightful results much quicker and with much less effort.  But the problem still lies in the implementation of these tools.  Implementation normally goes pretty well for the first few months and then starts to dwindle.  This is a normal result due to loss of focus and vision.  That is why Ag Data Partners is committed to our clients’ success by continually being there to help guide, consult, or even be the accountability partner needed.  We understand that what we have to offer has tremendous value for our clients, but only if it is implemented to its fullest.  We are committed to rising to the challenge alongside our clients to ensure success.

 

 

The Power of Systems

In the book E-myth, the author Michael Gerber makes this statement that sums up the core of this message.  “Systems enable ordinary people to achieve extraordinary results predictably.  However, without systems even extraordinary people find it difficult to predictably achieve even ordinary results.”  This is a lesson that my dad taught me at a young age.  Actually, he more like stamped it permanently in my brain by continually telling me that the core of any successful business is nothing more than a matrix of efficient, time-saving systems that enable the company to run smoothly while predictably bringing excellent results.  However, the value of this lesson comes by experiencing first-hand how much efficiency is gained my implementing systems.  Not only efficiency, but predictable and measurable efficiency.  This is gold for any business.

On the farm, I recognize the power of setting goals and implementing systems to achieve those goals.  I also recognize that sometimes a system might not work as planned and will need to be adjusted or improved.  There’s nothing wrong with that since that is the only way of perfecting any system.  The reason I bring out the important point of these systems being YOUR systems is because people function differently.  So, what works for someone else might not work for you.  This is going to be a trial and error scenario and will need continual attention and possible adjustment.

The first step to creating effective systems for your farm is to review each aspect of your operation and think about what is working and what is not.  Most likely, you’ve already created systems out of necessity that might be effective and efficient.  That’s a great place to start since now you can look back on those areas of your business and see with 20/20 vision how it is helping you be more efficient and bring predictable results.  For each area of your operation that you recognize needs help, you should set a goal of exactly what you want as an end result in this area.  Then, WRITE THESE GOALS DOWN!  It is remarkably beneficial to record your goals and then measure and benchmark progress.

Once your goals are in place, it’s time to formulate plans (or systems) on how to achieve them.  This can (and should) be time consuming as this process takes a lot of thought and documentation.  It’s important to document your thoughts as they come.  Historical scenarios might come to mind that are excellent examples of possibly a system that worked temporarily or possibly something that didn’t.  Write these thought down for later review as they might play a vital part in your system creations.  You might find it helpful to have these brainstorming sessions off site and away from the daily grind.  This can help clear your mind and think more strategically.  Once you have the systems drafted, it’s time for the most difficult part of this journey; implementation.

Before we dive into implementation, I would like to bring out one key benefit of implementing systems in your business.  Every day, we are all faced with an array of decisions.  Actually, an average adult makes around 35,000 decisions every day!  No wonder we’re all stressed and scatter brained.  The eye-opening part of this is that the vast majority of these decisions can be eliminated by implementing systems.  Once a system is in place, all you have to do is follow it.  The decisions are already made.  This clears your mind and gives you much greater mental capacity for much more important decisions and tasks for your business.

Now, on to implementation.  Oh yes, the golden word; implementation.  Why do I put so much emphasis on implementation?  Because this is the part that takes discipline and continual effort.  It’s also where the system breakdowns occur.  Many times, implementation also involves other people which brings communication into play; another golden word.  Without implementation, there is no value and goals will never be achieved.  Progress will not be made and growth will never be achieved.  As a result, the moral of the business will also plummet.  It’s just a downward spiral from there.

Most likely, implementation will also involve change.  This can be difficult for some people, especially family members who feel like the culture of the family farm is changing.  Culture is important and I completely and totally understand the value of the family farm culture.  I love it, but unfortunately it can lead to some detrimental inefficiencies that can really hurt the business and hinder progress and growth.  So, can we balance the family farm culture with a systems approach?  I whole heartedly believe that we can.

So, what can we do to ensure that our systems get implemented and maintained while keeping the family farm culture alive?  It really does start with clear and open communication with EVERYONE involved in the farming operation.  And yes, I mean EVERYONE.  It is vital that everyone is on the same page and clearly understands all of the same goals.  It’s also vital that everyone understands the systems in place and the individual steps within each system to the point of being comfortable with implementation.  This might start to sound like nails on a chalkboard for some and I can understand that.  That’s how I felt before experiencing first-hand the power of systems.

But where does the family farm culture fit into this picture?  Get everyone involved and responsible for different systems.  Now, there will probably need to be an overseeing person in charge of the big picture and a place for the buck to stop.  It’s just a necessary position most of the time in most scenarios.  But by getting everyone involved in this effort, you can keep that family comradery alive and avoid the ever-dreaded corporate hierarchy.  You can also get everyone involved in peaceably keeping each other accountable so that system breakdowns do not get missed and are repaired.  The fun part comes when measuring and bench-marking progress as a group.  Everyone will begin to see progress and recognize the value of the systems.  In many cases, you’ll also find that this will bring the family members of an operation even closer by unifying the efforts towards the same goals and by bringing efficient and progressive results to the business.  I understand that this involves a lot of hard work and discipline, but the ending results will be worth every minute of time and ounce of effort.

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The Power of Measurement

It’s a well-known fact that if something is not measured, it cannot be understood.  And if it’s not understood, it cannot be controlled.  And if you can’t control it, you can’t improve it.  This principle directly applies to farm profitability.  Without accurate measurement, there cannot be an understanding of the components that contribute to a farm’s profitability or that drain it.  Now, it’s obvious that if you don’t understand these core business components, you are without control to improve profitability.

So, it all starts with accurate measurement.  This is the foundation on which the future is built.  The first question to ask ourselves is: What are we measuring?  To answer that question, we need to go back to our goals of understanding.  What exactly do we want to understand that will give us control to improve my farm’s profitability?  I hope this is easy to answer.  The answer is that we need to understand our current business structure, profit centers, and what we are currently doing that is profitable and what is not.

Now we need to figure out how to measure our current profitability components of the farm.  This is the difficult part and the core reason why many farmers struggle in understanding and controlling profitability.  The first step in crop production farming is having a clear understanding of your input programs and historical production averages on each field.  Then as we focus into each input program, we need to get a clear understanding of the cost per acre of each product or expenditure related to this program.  Once we have our inputs nailed down, we can apply them to the actual records of activities on each field.  At the end of this exercise, we will be able to see clearly how each field performed as if each field were individual profit centers.  Since most management practices are field wide decisions, we can gain some interesting insights as to what contributes to our profitability.  This is where the understanding comes into play.

Now that we have an understanding, we are ready to take action to control and improve our farm’s bottom line.  Based on the knowledge we now have from our measuring exercises, we can create our marketing plan and management plan for the future.  Now we are finally making decisions based on true numbers and facts rather than gut feel.  This is the power of measurement.

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Meeting the Banker with Negative Numbers

 

Going to the bank asking for an operating line of credit is stressful enough in a normal economic scenario.  But what about the year when your projections are in the red?  That’s enough to make any farmer sweat.  So what can you do if in that situation?  You can impress the banker with how you came to those red numbers.

Most bankers who are in the Ag Lending world understand the cyclical nature of this industry.  They understand that there will be tough years mixed in with the good.  What they are looking for in these types of years are signs that you are on top of your game and doing the best that you can in this difficult scenario.  These signs could be some of the following:

  1. Knowing your projected costs of production and break-evens
  2. Having The Plan in place for the coming year
  3. Understanding your field level P&L’s
  4. Understanding your equipment costs and efficiency
  5. Actions taken to decrease input costs to run as lean as possible
  6. Considering the liquidation of assets with low ROI
  7. Understanding your financial and risk positions
  8. Having a well thought out marketing plan
  9. Knowing exactly what all individual inputs are needed for the coming year including quantities and prices
  10. Knowing your farm’s historical numbers

It takes a lot of work to get this information gathered, crunched, and organized in reports.  The process needs to start with a clear understanding of your projected management plans such as your herbicide programs, tillage programs, fertilization programs, seed allocation plans, etc.  Then you need to list all inputs involved in these plans and programs with the purchase price, purchase unit, and application unit included.  This includes operation costs which includes fuel, labor, and repairs specific to each operation.  After this is complete, it’s time to develop “The Plan” for the coming year for each individual field.  From here the numbers are crunched and reports are created which clearly outlines the desired information.  This is exactly what Ag Data Partners’ ProfitFarm™ Program provides.  We come alongside the farmer and guide them through this process while utilizing our developed and efficient back-end tools and templates.  We do all of the heavy lifting and make it as simple as possible for the farmer by utilizing a software program that most farmers are familiar with; Excel.  No need to figure out a whole new program and the inner workings of it.  We make data entry extremely simple.

Every farmer in today’s Ag economy needs to get to this level in order to obtain financing and stay competitive in the industry.  We are here to help.  Just contact us today and we’ll get started right away.  Wishing all farmers a safe and efficient harvest season.

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The Building Blocks of a Profitable Farm

When playing with building blocks as a child, many of us recognized the importance of building a structure in the right way and order. If we tried to build our creation on our bed, the structure would soon topple over due to a lack of a stable foundation. With only a slight movement, the mattress would shift and bring the walls tumbling down. It was obvious that we couldn’t build the second level until the first was complete or the roof before the walls. These were just rules of building that we couldn’t usurp or shortcut.

A simple concept that seems to escape some people is the fact that successful businesses do not just happen; they are built just like our toy building block creations. Just like our childhood building projects, the inherent rules still apply. Business building takes time and needs to be done in the correct order. The first level cannot be built until the foundation is complete and strong enough to withstand the weight and stress of the structure and environment.

In production agriculture, the need for a strong foundation is the same, and at times, even more important than some other industries. Farmers are trying to thrive in a very volatile, uncertain, and ever-changing environment. The emotional strain this can bring to a farmer is tremendous and will most likely effect the decisions made on the farm. This is why having a foundation anchored by numbers is so critical.

There have been many impressive and powerful tools developed recently for crop producers to track their profitability and input ROI by sub-acre levels. The issue that many growers are realizing is that these tools are extremely difficult to implement because of the inherent challenges of data collection and management. We need to focus and simplify our efforts to foundational levels first before attempting to implement higher level tools such as these. There is also a wide array of companies that boast their products as being the cutting edge in the industry. These also are poor investments if a solid business foundation has not been established. The foundation needs to be laid first before moving to the next level.

The key component to a strong foundation is knowing your numbers. Some of the most successful farmers may even tell you that they have gotten to the point when they needed to know their numbers in order to sleep at night. Every farm needs to know their breakeven levels, return on management practices, individual field accrual performance, cash flow, and P&L’s. These are critical components to any business’s foundation.

So let’s look into the individual fundamental components that makes up a strong farm foundation. The first that we need to cover is the exercise of researching different markets and deciding which you would like to target. For example, if there is a production facility nearby that produces non-GMO corn chips, there may be a significant opportunity for you to capitalize on this specialty crop option. The same goes for many other market opportunities that sometimes get overlooked by the majority of producers. It is very important to know the market and the environment in which you are running your business.

Another key component of the farm foundation is understanding your costs of production which gives you an understanding of your break-evens and margins. Without this understanding, how does a grower know how to formulate an effective marketing plan, land rental proposal, or financial projection for obtaining financing? You can’t. It’s just simply not possible.  Some may say that these things are obvious, which they are. The problem isn’t that they are not obvious, it’s that this takes focus and a lot of work and time. These are commodities that today’s farmers are generally short of, due to the complexity of their operating environment. This is where farm management software can be extremely beneficial and profitable to a farming operation. Not only do these farm management software tools provide an intuitive platform with which a farmer can input operating information, but it also provides the organization needed to provide excellent accountability and structure. Also, given the importance of this foundational set of tasks, if there is a need for physical assistance in these areas there are helpful options in the industry for business consulting. If needed, it’s well worth the investment.

One foundational piece of this pie is the quantification and validation of decisions made on the farm. Impacts of decisions on the farm are extremely difficult to quantify given the vast range of variables that come into play. Since it is arguably impossible to guarantee complete accuracy of decision results, the only way to get as accurate as possible is to continually record our activities and the impacts associated with these decisions and activities. By increasing the sample size in this manner, we can start to accurately trend results to see some valuable insights that will help us with future decision making. One way we can obtain these kinds of results is by tracking profitability by field or management practice, such as planting date or tillage program. After having these insights to work with, a farmer will not be able to operate without them. They become necessities to the operation.

Financial statements such as cash flows, P&L’s, balance sheet, and income statements are all parts of this durable foundation. Not only records, but projections. It is necessary to show accurate projections to the bank in order to obtain financing. It is also important to show them how you came to those numbers. This is when having a detailed projected operating plan complete with field level, accrual P&L’s is extremely beneficial and important for the future of a farming operation.

Other critical, foundational components in farming are people, processes, legal matters, and communication practices, but I won’t to dig into those right now. My focus is on the numbers. I want to make sure that farmers have a clear understanding of the makeup of a strong foundation so that when the storms come, their farming operations will stand strong and remain financially healthy and viable for the future.