Are You Really Prepared?

Following the dismal prices of the last three years, especially in the dairy industry, I am certain that if I asked anyone if they were prepared to receive higher prices, they would respond by saying, “Of course, I am. Are you kidding me?” Yet, I would ask, once again, are you truly prepared? Are you 100% ready?

Here is how you will know. As prices in your industry rise, are you totally prepared to hit the ground running? I know it’s been tough the last three years in the dairy industry (and this can apply to any industry), but if you are really prepared, you should have a plan to complete the following tasks:

  • To move forward & return to profitability. A sound financial projection will tell you how soon you can expect to reach this level.
  • To catch up on any and all Accounts Payable that are not current.
  • To pay down your Lines of Credit as much as possible, as soon as you can.
  • To make the changes & improvements necessary to boost your Profitability.

If you don’t have this plan in place before your revenue levels increase, you could fall into the trap I’ve seen so many times before:

  • You slog along with your Accounts Payable, reducing them somewhat, but with a fear that if you pay them all the way down to current levels, you might need that money later. While that need may be partially true, if you get these paid down, I’m sure your Vendors will be more willing to work with you in the future. Likely, your banker will be, too.
  • You resist reducing your Lines of Credit, fearing, once again, that you may run short of cash & justifying this inaction by saying, “Hey, it has been rough.” No one will disagree that it has been difficult, but lenders can only work with you within their standard lending guidelines, so do all you can to reduce your lines of credit when you are able to do so.
  • You just get your plans in place to initiate the improvements you know you have needed to complete, and then, “BAMM,” you are hit with low prices again.

There is a better way. Here is your Call to Action:

  • Develop a Plan, as outlined above.
  • Set your priorities. If you are behind on Accounts Payable or other items, you may not be able to correct them all at once. However, do not let what you cannot do (e.g. paying them all back at once), keep you from doing what you can do (e.g. an orderly repayment of Accounts Payable).
  • Determine what you will need going forward to make your business more successful. Then, you won’t get caught flat-footed, wishing you had taken action sooner. Instead, maybe you’ll be talking to your banker about your next great move forward!

If you would like some assistance with this process, I offer you the following. On July 31, 2017, our completely redesigned website at Success Strategies, Inc. went live. You may want to take a look at a new video series we call The Strategic Gameplan Series, which will be listed under our Financial Techniques at www.success-strategies.com. Check it out. It may be just what you need for an entirely new game plan!

 

What’s the Difference?

I’d like you to think about two words and compare what they can mean to you as you move forward in your business and life.  The two words are “Reactive” and “Creative.”  While they are both spelled with the same letters, they have quite different meanings, don’t they?

When I am working with my clients to develop their business strategies, one of the greatest gifts that I believe I can give them is to teach them to be more creative and less reactive.  This is especially true when we are seeking financing from their bankers, and I will get into that more in a moment.

I believe it is crucial that we always remember that each of these Clients, or any other person for that matter, is going through a transition.  This is their “journey,” if you will.  Whether they have been on the brink of a financial disaster and want to restore their solvency and then go on to higher levels of prosperity, or they simply desire to get better at what they do, they all want greater levels of clarity.

To achieve this, the key is to know where you currently are in terms of your finances and proximity to your long term objective.  Understand what you want to accomplish, and just as significantly, understand your “Why.” Why do you want to expand your business?  Is it to earn more, to allow for your son or daughter to join you in the operation, or is it to position your business for a better sales price when you decide to retire?

Believe me.  If you know where you currently are, what you want to achieve, and have a firm grasp of “Why” you want to accomplish this goal, the steps you’ll need to take will become much more evident.  You will start to see what you are lacking and then be well positioned to obtain those necessary items.

This has always been the case whenever you need new financing to complete your goal.  If you can explain to your lender what your goal is, why you want to pursue it, and the steps necessary to get there, most bankers are quite good about providing the funding you will need, assuming it makes financial sense.

I believe that if you really want to accomplish anything in life, this is the process you need to follow.  Know your starting point, where you want to end up (the Goal) and then evaluate what you are lacking in order to refine the steps you should follow to get it done!

On August 1, 2017, our totally redesigned website at Success Strategies, Inc. will be completed, so you may want to take a look at a new video series we call The Strategic Gameplan Series, which will be listed under our Financial Techniques at www.success-strategies.com.  Check it out, because it may provide you with the foundation you need for an entirely new game plan.  I think you will be glad you did!

Building Your Business Confidence

Have you ever had a time in your life when you didn’t necessarily feel like your confidence was as high as you’d like it to be? I have. In fact, I think we all have some times like this, especially when things around us are not going as smoothly as we had planned for them to go…

It’s hard to feel very confident when industry events put you in a position of losing money regularly. Unfortunately, negative financial returns can cause us to start asking ourselves some tough questions: “What am I doing wrong? How long can I hold on, given my losses and my current equity levels?”

I am sure you’ve heard the age old advice: “Be careful what you ask for. You just might get it.” With that in mind, let’s shift our focus to a much more proactive approach, because these negative questions can, indeed, take you to some very disappointing and depressing results. I have had the honor of being directly involved in the financial turn-around of numerous businesses during the past 19 years. However, in each of these circumstances, I felt it would be beneficial, rather than focus on how long this Client could “hang on,” to shift our attention to a far more proactive direction.

While the “dangers” of their financial situation were always in the back of my mind, I believed their business turn-around would require us to correct their course and get back on track. Oh, wait a minute. Getting back on course would require us to know what our destination actually was. It would require us asking: “What’s next? What do we want to achieve? What do we need to do in order to get there?”

My advice has always been: Slow down, Think & Plan. Remember, if this was easy, everyone would do it. However, it isn’t always easy, and so, people don’t do it. We all like shortcuts, but don’t fall into that trap on this task. I want you to be different. I want you to do better. I want you to succeed!

Rather than focusing on what can go wrong or how long you can hang on, focus on something totally different – what you want for your outcome! Following this strategy has served me well in these turn-around situations. I’ve seen businesses that lost $2.5 million one year turn a profit of $39,000 the next year. Was that phenomenal, in and of itself? Probably not, but even their banker had to admit that there was some hope going forward, which allowed them to work with us to get the business refinanced. They did go on to turn larger profits in future years, and this was a much better outcome for all those concerned, including the lender, as we moved forward.

What to do?

  1.  Set your Goal.
  2.  Know “Why” you want to reach this objective.
  3.  Lay out the necessary steps to achieve this.
  4.  Put dates for each of these action steps.
  5.  Take Action and continually move forward.

If you follow this process, I assure you, it will build your confidence and prepare you to discuss these steps with your lender, simply because it will equip you with answers to the questions that she will be asking. What do you want to achieve, why do you want to do this, and what are the actions necessary to accomplish this? With the answers to these questions in front of her, we can both be more confident she will be better prepared to help you.

If you would like some assistance with this process, I offer you the following. On August 1, 2017, our redesigned website at Success Strategies, Inc. will be completed, so take a look at a new video series we call The Strategic Gameplan Series, which will be listed under our Financial Techniques at www.success-strategies.com. Check it out. It may provide you with the foundation you need for an entirely new game plan.

 

The More it Changes, the More It Stays the Same…

Recently at the Western Dairy Management Conference in Reno, Nevada, we heard an excellent presentation by Mike Lormore, Director, Cattle & Equine Technical Services at Zoetis, regarding the various profitability variables all producers contend with in their daily operations. The presentation, entitled “What Drives Financial Success on a Dairy?” was based upon extensive research with Ag Star, a leading dairy lender in the upper Midwest.   I believe this presentation was exactly on target with what I have seen in my consulting work during the past 19 years. While there are many profitability variables to contend with, and this research does not suggest that ignoring one of the lower correlated variables would ever be a good idea, the top three are all ones that I have had the opportunity to deal with in each and every financial turn-around situation. They are the ECM level of the dairy operation, its 21-Day Pregnancy Rate and its heifer survival rate.   Let’s explore why these are the top factors:

  • Energy Corrected Milk per cow per day – This is fairly basic. Most dairies get paid for the amount of milk they ship to their creamery, whether it is higher in components or simply greater in milk flow quantity. As long as they are keeping feed costs and other expenses in line, the higher ECM herds will tend to be more profitable. Now, before you write me to tell me about the exception you found to this rule, please remember that we can always find exceptions to every rule, but this rule holds for most herds. Somatic Cell Count is also a factor here – think milk bonuses! Creameries only give these financial incentives for lower SCC.
  • 21-Day Pregnancy Rate (or risk) – I have seen this in so many difficult financial situations. Low Pregnancy Rates equal financial challenges ahead. Simply stated, a higher pregnancy rate leads to more pregnant cows, which leads to more fresh cows, which then leads to more milk, which certainly helps to pay more bills, assuming all other factors are consistent within a given dairy business. More ECM, as outlined in #1 above, is more profitable. For most dairies, this higher ECM only comes via more fresh cows, which is a direct result of getting cows pregnant sooner. I have Clients who regularly push a 30% PR, and their higher PR leads to more fresh cows and higher levels of ECM.
  • Heifer Survival Rate – It is incredible to me how many operations that have financial challenges ignore their heifer survival rates. Do so at your own risk. Keeping more heifers alive is like putting money in the bank. Often, I hear that selling heifers is the last step before the death of a dairy… I say, not so fast. Selling heifers, if it is part of your regular financial plan (and not a “fire sale…”), can generate some nice cash flow, which, if you sell them as fresh two year olds allows you to be taxed only at Capital Gains rates (and you can keep their heifer calves, too, adding more to the value of your herd!).

These are just the top points from Mike’s excellent presentation. However, if focus on your level of ECM, your 21-day Pregnancy Rate and your Heifer Survival Rate, your profits will not only increase, but many of your related variables will also improve.   Remember, as I previously stated in my February 28, 2017 blog, and as presented by Dan Sullivan, Founder of The Strategic Coach:   “If you measure something, you can understand it. If you understand something, you can control it. If you can control something, you can improve it.”   I hope you find these discussion points helpful. If I can assist you with your business in any way, please let me know. Be sure to watch for upcoming announcements of my new program entitled Six Hours to your Best Year Ever! available at www.success-strategies.com soon.

In Defense of the “Mean” Vendor

I recently had a very interesting conversation with a producer. After asking him how things were going, he replied, “Man, these feed companies are really getting pushy. They expect me to be current every month.” I thought to myself, “Oh really… so does Wal-Mart.” I am not making light of the fact that the dairy industry has had a tough 2015-2017, or, for that matter, that all industries have their moments when cash flow is tight. However, the vendors that he was referring to had been extending him as much credit as they possibly could these past 27 months. However, they were running into two big issues: 1.) Their own cash flow was being pinched. 2.) Their lenders were pressuring them to clean up their Accounts Receivable. We have been through an interesting evolution. 40 years ago, supposedly no dairy ever made any money… Yet, they still were able to pay for their herd, their feed & operating expenses, provide owners with a living and an eventual retirement. 20 years ago, our markets changed to a global outreach, putting additional pressure on our revenues as we attempted to compete more with the entire world. Costs increased but at a fairly reasonable pace. However, the last 10 years, particularly during 2008-2009, the global swings have been wild! Despite assurances from the Federal Reserve Board that we have only minimal levels of inflation, almost all fixed and variable costs have climbed dramatically, pushing our break-even price levels to all time highs. Often, these were even pushed above a reasonable level. Suddenly, more businesses, particularly dairies, started to fail financially or, at best, began to liquidate. As a result, some vendors, whether secured or unsecured, received far less than what was owed to them. Not only did this crimp their margins, but the legal fees and other costs associated with collections became overwhelming. Even if they collect the 18% interest they often charge on “past due” balances, does that cover the cost of their financial manager or legal fees? I doubt it. Hopefully, this will provide you with some perspective the next time you hear about a “vendor coming down on one of your neighbors.” Remember, most vendors are in this game for the long haul (and those who aren’t will sort themselves out…), but they can’t very well serve your needs if they aren’t around any more. Think about it.

Are You Ready for Some Positive Change?

Do you ever feel like your operation needs some fresh thinking? I do. That’s precisely why I read so many different books and publications…to get great new ideas. It helps to build exciting new challenges into our daily activities. Maybe it’s time to change our thinking in the Dairy Industry, too!! Author Seth Godin, in his book The Big Moo, explained his thoughts on organizations. This can include your business, your bank, your vendors, and even your milk cooperative. He states: “There are two kinds of organizations. One kind likes to be on the cutting edge, to do what hasn’t been done before, to embrace the new. The other kind fears that, and holds back to allow someone else to go first. The United Way was facing tough times because they were afraid to change. The Saddleback Church in California was doing wonderfully (10,000 percent growth over several years) because they love to change. Companies that are good at being edgy will always find a way to thrive. The sure way to fail, it seems, is to attempt to compromise that affinity for edginess for the mass market. It’s harder than it looks. But what if your organization embraces its stuckness? What’s it going to take for you to start changing? What do you do when the market is moving away from you, not toward you? It seems to me that if you wait too long, it’ll be too late to do much of anything at all. Instead, recognize that change is coming, that the reality you operate in is dying out, and start practicing how to do the next big thing. Betting on change is always the safest bet available.” The lesson here is quite clear. We all need to be open to change. The outcome for businesses that refuse to change is equally obvious: They’re going to get crushed! I’d like to conclude with one of my favorite quotes from the Successories Corporation in Chicago, Illinois: “Our destiny is shaped by our thoughts and our actions. We cannot direct the wind but we can adjust the sails.” So, always be open to change and new ways to operate! Also, be sure to watch for my upcoming program in early 2017 entitled Six Hours to Your Best Year Ever!

Changing the Way We Look at Business

As you proceed through this year, it might be beneficial to change the way you approach your operation. No doubt, most producers will be excited about changing the way they look at their business, particularly following the blood shed on dairies the last two years. However, the first step to attaining different results will be to change the way we think. In their book entitled Change the Way you See Everything authors Kathryn Cramer and Hank Wasiak remind us that we need to “Leap out of bed with Your Vision Turned On! The difference between a person who is vitally engaged in life and someone who is merely going through the motions is a vision fueled by passion.” They go on to describe some of the “side effects” of this passion: Enthusiasm, Confidence, Optimism and Unbridled Conviction. Sounds like a very positive change after 2015-2016, doesn’t it? So, how do we get there? How do we increase our passion levels for the dairy business, given the “pain” inflicted these past two years? To start, I believe it is beneficial to review what one of my favorite economists of all time had to say. The Italian economist Vilfredo Pareto stated that: “Increased productivity comes from continually identifying areas where you can achieve 80% of your results from 20% of your efforts.” You know this as Pareto’s Law or the 80/20 Rule. Can this work on your dairy business? I believe so, but this is not an invitation to take shortcuts. Rather, it is a chance to identify those areas with the greatest payback for your efforts and to spend your time on those specific areas to produce the most optimal results! So what are those areas that will produce the most optimal results? Only you can answer that question. However, I am happy to provide you with a couple examples. I work with a client with whom I hold Management Team Meetings once per month. During a recent meeting, one of the partners mentioned to me, in private, that his brother was not spending as much time as he was “out with the cows.” While I recognized this, I believe it is important that we apply Pareto’s 80/20 Law here. The same partner who was not spending as much time with the dairy herd had just completed a negotiation with two of their vendors that provided them with a savings of $125,000! Could your operation have benefited from an extra $125,000 last year? That result appeared to me to be an excellent example of applying Pareto’s Law. A second example that comes to mind was with a Client whose son was also not spending as much time with the herd as his Dad would have liked. However, the son had managed, through the use of a combination of fixed price contracts, Put Options and several Call Options, to achieve an overall milk price of nearly $14/cwt for all of 2009. Was this smart? Absolutely! Can he pull this off every year? Not likely. However, his actions in 2009 provided their business with a substantial benefit at a crucial point. Management Guru Peter Drucker stated that “the business enterprise has two basic functions – marketing and innovation. The rest are all costs.” Managing this producer’s margin was an excellent example of how using innovation can provide your business with genuine benefits. What are the specific areas within which you need to focus more of your efforts? What activities will provide you with the largest return on your investment of time? Is it your milk marketing? How about your business planning and goals for this year? You are probably the one best suited to decide. However, I am confident that if you put your phone on “silent” for 60 minutes and give this issue some serious thought, you will come up with the right answer. As a result, you will likely hit your business objectives this year by focusing on your desired outcome. Give it a try. Remember, it’s your business!  “Wherever you see a successful business, someone once made a courageous decision.” Peter Drucker    

Are You Putting Your Business at Risk?

When I meet with my Clients, I often remember reading an article in Inc. magazine written by Adam Hanft that was entitled “The Risk of Doing Nothing.” I thought the article had some themes that were particularly fitting for the dairy industry. I realize that it is often more comfortable to do nothing when so many items look bleak.  However, doing nothing can often put you at greater risk than boldly moving forward with what looks like the correct option.  Look what happened to Montgomery Wards as they stood by and watched Wal-Mart become, not only the largest retailer around, but also one of the largest companies of any kind.  As I write this blog, I am comfortably seated at my favorite café owned by a company called The Roasterie in Kansas City, Missouri. While they appear to be thriving, think about the comparison between this company and Folgers, who also had a large operation here at one time. Wow! The key is to break the “Continuum of Paralysis.”  As Adam Hanft so accurately states, “No one decision to defer action ever looks all that monumental at the time.”  However, over time, look out!  The sad part is that indecision rarely punishes current management, but it often “mortgages the future.”  Thus, for those of you with another generation potentially coming into your business, can you do better for them? Here are some things to do to get through the current situation:  

  • Do not misinterpret the industry situation of the last two years as an excuse to keep your finger on the Hold Button.

 

  • Rather, look at your Costs/cwt, your Volume of milk produced, Labor Utilization, and how you might spread your Fixed Costs out even further.

 

  • Just as important – Ask yourself, “Is there a better way we could do this…?” Often, your Management Team can offer you some suggestions.  Recently, one of my clients made some simple changes in their feeding program and also changed the age at which their heifers were being bred.  These adjustments boosted production nearly five pounds per cow per day and reduced their heifer raising costs.  This has been very helpful to their bottom line!

 

  • Along that same line, be open to new ideas. We must overcome the ongoing temptation to think that it is more risky to try new ways of completing tasks than it is to keep everything unchanged.  In this dairy industry environment, doing nothing can get you run over!

 

  • Put together an ACTION AUDIT and see how well you stack up against the rest of the industry. Are you currently doing everything you can to stay competitive?  Are you taking the time to complete and measure the small tasks that can have a large impact on your operation?  This is not just about costs per cwt.  It is also about how your operation is faring in terms of Cows Milked per Hour, Labor Efficiency (cwt shipped/employee), Heifer Efficiency (e.g. age at first calving) and many other items.

 

  • One other thought as you compare yourself to the industry. You will likely notice that you are doing better than others in terms of costs/cwt in some areas and not as well as other producers on other items.  Sometimes your facility can restrain your performance in comparison to a new operation, but how are you doing compared to your results five years ago? Are you doing better or worse?

  To summarize, don’t just resist change.  Remember that the best time to plant an oak tree was 20 years ago, but the second best time is TODAY!  Make an appointment with greater levels of success.  As one of my favorite motivational speakers, Les Brown, said about making improvements in your business, “You gotta be hungry!”  Consider the possibilities of his statement as you continually strive for excellence. Remember, it’s your business!

BANKING ON RELATIONSHIPS

One of the most common problems faced by many business people today revolves around their ability to obtain the financing they need. This challenge becomes even more pronounced when we are faced with a tight lending environment. It also shows the importance of maintaining a solid relationship with your lender. Whenever someone gets turned down on a loan proposal, we have to review the facts and explore possible “whys”.

  • How do the historical numbers look? i.e. has your business been profitable in the past?
  • How reliable are the numbers in your financial reports to the bank? Are they CPA prepared?
  • What do your current cash flows look like? Have you completed some projections, and if so, do the projected trends look positive or negative? Even if they look soft in the interim, is there a projected turning point sometime in the future?
  • What are your plans for the next 12 months? In less detail, how about the next two to five years?

I’ve never seen a loan turned down without reasons. All loan officers have a dual and often difficult role to play. They are attempting to accommodate your need for loan funds, while protecting the assets (i.e. loaned money) of the bank. Most lenders are willing to provide you with their reasons for turning down a loan request. Let’s review common reasons for a loan request being denied and what to do in response.

  1. Weak financial history. Often this can be countered by a plan to implement changes. Can you suggest changes in your operation that make economic sense? “Insanity” has often been defined as “doing things the same way and expecting different results.” Make sure you are making changes to “turn the corner” and get back on the track to profitability.
  2. Lack of a clear plan. Do you have a defined plan and established goals for your dairy business?
  3. Maybe they are correct. This is a tough one, but if we cannot justify our investment in the proposed financing, perhaps we need to consider other options.

We each need to remember that a banking relationship, just like a good marriage, is a two way street. We need to always be showing improvement in our operating results, demonstrating we have a clearly defined plan with reliable historical numbers and sound cash flow projections. After you plan your work, then work your plan. Fine-tune your agenda as needed. At that point I believe lenders will be looking for you!

Redirecting Your Business Focus

Recently, I read a great article on business focus in the January 2017 issue of Inc. magazine entitled “Keep Your Head in the Clouds and Your Feet in the Mud.” While I found the title, in and of itself, interesting, I thought it would definitely be worthwhile reading this at length. It was authored by Gary Vaynerchuk, founder of Wine Library, whose book I had read several years ago. He started out by saying: “If you’re an entrepreneur who is struggling with average results, there’s a good chance you’re stuck in ‘the middle.’” Interesting, I thought, particularly with the average results we have been seeing in the dairy industry with its low milk prices during these past two years. He went on to explain: “By the middle, I mean you’re probably too focused on the minutiae, the 99 percent of the stuff you encounter every day that has nothing to do with what you want out of your business and is not part of the hard work it takes to get it.” Wow! This is true for so many of us that run our own businesses, including myself. I would like to suggest that we start to focus on the items that really matter, the reasons you are actually in business to begin with. Aside from providing for your family, what are your specific reasons? Do you want to provide consumers with the #1 beverage available? Do you want to develop the very best genetics in the marketplace? Is it your goal to successfully continue your ancestors’ dream farm? Whatever that objective is for you, this should be your primary focus today. As Vaynerchuk explains:   “The clouds are a metaphor for strategy. They’re the high end beliefs that are at the heart of everything you do, everything you want out of your business.” It’s easy to shift our focus away from these when we are in difficult times.   It should certainly not be whether the banks are going to start calling in their lines and loans since dairies have not been cash flowing with $13/cwt milk, even if you have been hearing such rumors. One of the best practices I have utilized over the past 19 years as an entrepreneur is to simply ask myself: Will this activity get me closer to by goal? This forces me to do two tasks. First, it helps me to consistently focus on my objectives for my business. Additionally, it reminds me that, in order to reach those objectives, I need to remain focused on the items that will guide me toward them. You probably know the Biblical reference that stated: “What got you out of Egypt is not necessarily what’s going to get you to the Promised Land.” It is the focus on your strategic initiatives and “Why” you want to reach them. If you know your “Why,” you will undoubtedly figure out the how of accomplishing these objectives. The “dirt” that Vaynerchuk describes refers to all the detailed items that have to be done to succeed. You know, within your expertise, the many things that you need to execute correctly. While these all need to be done by you or someone on your team, the problem lies with our inability to get above these tasks. If we are not careful, spending too much time on these activities can put you in a vulnerable position! We all need to look up occasionally and check out the macro-economic trends and what is happening in your marketplace. This is precisely why I hold regular Management Team Meetings with my Clients, to make certain that we periodically look at what is going on around us, in addition to how we are performing vs. our goals, and to check what we are truly focused on. This process should also include one other item. While having the answers can often be beneficial, remember that asking the right questions can often be even more powerful. Think about it. It’s your business!