Sharpen Your Pencils

Are our pencils as sharp as they were back in the late 80’s?  I would argue NO. 

In the past few years, we’ve had both favorable markets and low interest rates.  Those are external factors that farm management can’t really influence tremendously.  It isn’t due to good management that a farm broke even. 

One farmer who didn’t break even last year, bragged to me about the fact that his assets (land) rose 30% in valuation.  This isn’t due to management, but dumb luck. 

However, if your region had a micro drought and corn was trading at $3.80/bu what would the situation be within your farm?  What is your cost of production?  Is the next generation doing as good of a job as good of a farm manager as they think they are?

What metrics does your family measure success?  That should be a critical question. 

One farmer wanted to know only one metric from his accountant.  Did we make or loose money this year?  That was all that he cared about.  Yet with wildly variant crop prices/weather, that metric simply isn’t a good measurement of personal success in the future.  That sole metric doesn’t really give you an accurate picture of how good of a manager you are and also doesn’t allow you to determine rate of real management improvement year to year.  In parts of the country with favorable weather, you’d have to be a fool to not have a profitable year due to sky high corn prices and it was because of external not internal factors.  Due to rising land values, banks are willing to “give away” money and too often this credit is being used to cover up management mistakes.  Some day bankers won’t be so “forgiving” of low margins of profitability….

Often on a farm, mom does the books and the sons simply glance at the farm’s year end financials.  Everyone in the community might be under the impression that the son “knows his numbers” but for most farms, there is a real veil of ignorance.  This culture has to change dramatically and the kids need to know their numbers cold. 

The farm financial standards council (www.ffsc.org) recommends 16 financial ratios that farmers should use as a dashboard for business success.  While these ratios are good for every farm to pay attention to, some metrics will be more relevant to your farm than others, depending on the farm’s strategic emphasis and critical concerns. 

There also might be other critical metrics to measure, which aren’t financially related.  For instance measuring the number of hours between when you first plant corn until you were finished, is critical.  How much time did “fill ups”, break downs and not getting into the field until 8am during spring planting cost your operation in corn yield?  It’s over a bushel per day per acre difference, which between neighbors can make a huge year end profitability difference. From the first minute you started planting to the last seed was in the ground, how many hours did it take you where the conditions were fair?  Measuring this metric annually is what will drive changed behavior and change crop yield more than any Agribusiness can change the effect corn genetics has on yield! 

Within a lot of farm families, the measurement of success is a BIG ISSUE between generations and often siblings. 

On one farm the son screamed “there is money in the bank, why worry about things”?  The son was disgruntled that no matter how “successful’ the farm was, it was never good enough for his father. 

Yet the father had gotten through the 80’s by the skin of his teeth.  He remember getting the letter from the bank and knew that had it not been for a few strokes of good luck, things could have been much different.  He was simply trying to teach his son financial frugality and discipline, so that should the father not be around when the farm goes through another 80’s like financial crisis, the son could survive on his own. 

Constantly negative/bickering isn’t a way to instill harmony and peace on the farm.  More importantly, it isn’t really teaching the next generation anything. 

Every family should have a conversation about what are the top ten metrics for success within the operation.  This should represent both financial variables and production variables.  The farm should set targets and ideals.  Then the family should meet at least quarterly to discuss how the farm is doing in hitting these goals. 

By getting the family to objectively set metrics for success externalizes the discussion of success.  Either you are hitting the mark or need to change. 

If a son/daughter is able to meet/exceed these set metrics for success, he/she will have proven himself.  If not, then the argument can be had that the son/daughter isn’t suitable as a successor for the farm’s future.  It’s really that simple. 

Why should a son/daughter get a sweetheart deal at succession planning of assets instead of splitting equity equally amongst siblings if he/she is “going to frittle away” due to mismanagement.  How can you objectify if he/she deserves the farm? 

Financial Discipline isn’t just a practice that should be instilled when times are tight, but also when times are good.   It teaches high caliber management and acts as an external acid test as to whether the next generation is capable of taking over. 

Because good numbers never lie…