Lifestyle or Business
Are you in business for the sake of business and profit? Or are you in business to enjoy the lifestyle it provides? Maybe your farm/ranch allows you to enjoy both. Whatever the case we simply want to share some observations from Banker's side of the desk. This is not intended to be an exhaustive or scientific study but rather simple observations of the habits and tendencies of a wide variety of producers over time. Even though a lot of the individuals we deal with are agricultural producers, the tendencies seem to apply to business owners of all types.
As a business owner how often do you review:
- Cost of production
- Profit per year/per acre/per head/per hour/per bushel etc.
- Net worth
- Trends of the market
- Risk factors for your business
The list could go on but you get the idea. The next question to ask yourself is "Why did I review these elements of my business?" Was it because your lender required it or were you trying to improve your management of the variables?
Without a doubt we have recognized that it is the profitable producers that generally have a strong sense of their own numbers. Even if they rely upon a consultant or an advisor they still are very aware of where they stand. On the other hand other producers never take the time to analyze their own numbers. They're making everyday management decisions without knowing how they effect the overall operation. Choices seem to be based on "doing what I have always done" rather than adapting and evolving with the various elements of business.
It is rare that someone would work through all of their financial and production data and then make foolish management choices. Information is key to management. The old adage that ignorance is bliss seems to hold true for "lifestyle" producers but not profit driven producers. A lifestyle only operator tends to lean away from critical information for fear that the knowledge may require a change in lifestyle. The profit driven producer seems to lean toward obtaining and understanding the critical data. He wants to know as much as possible about the operation in order to make the best decisions as they arise. This profit driven producer can't sleep well if there are too many unknown factors encircling the farm.
These tendencies reveal themselves in different ways. A common desire for most any operator is to purchase or rent the property next to his own. While this has it's obvious appeal, it will only benefit the overall operation if it can fit within cash flow limitations for a purchase. For considering additional rented land it will only be a positive addition if the new acres can be operated at a profit. Knowing your cost of production is critical to making the right decision. More acres are often the "beginning of the end" for some. While economies of scale are important, a money loser is still a loser. On the other hand if it works, hurry up and sign the papers. In a similar way equipment purchases have the same effect. A new piece of equipment must be afforded in the cash flow. A profit driven producer knows what his cost per acre or per hour will be for any equipment in the line-up. In fact, by knowing what the economic depreciation of an item is over a period of acres/hours/years, a good decision can be made regarding the update of any piece of equipment. In this age of technology trading for new or newer equipment may be the most cost effective choice. The decisions should be made by weighing all the factors rather than a preference of lifestyle.
Another area of distinction among producers is they way they manage risk. Every business owner faces numerous risks. Two of the most notable risks in agriculture seem to be rainfall and commodity prices. Outside of irrigation there is not much hope for managing rainfall. Price risk however, does have at least some level of control. Even though the grain and livestock markets have both seen large swings, they both have afforded opportunities to manage price risk at a profit. As you also know risks related to weather can be partially mitigated by using insurance products.
The lifestyle operator will generally concentrate on production only at the expense of marketing and other risk management. After all that's what he does best not to mention that's what he enjoys the most. The profit driven producer has a broader plan. One example of dealing with the bigger picture would be marketing a crop (or part of a crop) 12 or even 24 months ahead of the cash sale if the opportunity is present. Another example is retaining an "option" to take advantage of a positive market move after the cash sale has occurred. While these tasks seem burdensome and tedious to some, marketing and price risk management are critical pieces of the management puzzle.
In short, a lifestyle producer will generally take the path of least resistance. He will work very hard at the tasks he can master but avoid the uncomfortable issues. The profit driven operator generally chooses the most profitable option. He has the discipline to face even the most arduous task. He eventually will enjoy a profitable lifestyle!
At Haviland State Bank we know that the answers are not always black and white. But we also want to serve our producers by providing them with good information and the financial tools to succeed.
Stop in or call one of us to discuss your specific operation.
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