Where are you now? Do you know where you are headed?

Let’s face it. This year and 2015 have both been tough financially! So, how are you faring these days? You know, recently I thought I was having a rough day when I completed four flights in two days and then six flights in four days… until I was sitting next to a lady who had recently experienced an “emergency landing.” Apparently, one of the jet’s engines had stopped functioning, all of which wasn’t leading to a very positive outcome…   So, just as with my bemoaning the numerous flights in one week, things are often a direct result of how we look at them. With that in mind, as part of a new program that I am presently developing entitled “6 Hours to Your Best Year Ever,” I am introducing a new self-evaluation tool entitled the “Know Your Score,” which you can use at your convenience and at no cost by using the following link:   http://knowyourscore.coach/scorecards/c36a14133f28f0d3edca51f685c161a4/surveys   As you take this evaluation tool, ask yourself two questions: 1.) What are my scores today? 2.) What do I want them to be in five years? As you find yourself struggling with the current negatives of our industry, please understand that you are not alone in these challenges. I understand how you are feeling. Every one of my Clients is feeling much the same right now. In fact, I’ve felt the same challenges almost every time I talk to one of them, but what I am finding is that if you remember that this, too, shall come to pass, it can really clear your thinking.   I recall the story about the professor who, on the first day of class, told his students that they could earn an A, B, C or F in his class. He outlined the requirements for each specific grade. Their assignment before tomorrow’s class was to simply decide which grade they wanted to receive and turn it in to him. They could move up (in grade) or out of the class, but if they stayed and skipped any of the required steps for a given grade, they would receive an F. Sounds just like real life, doesn’t it? What “grade” do you want to receive?   After you have determined where you currently are in your thinking and where you would like to go in the future, can we help you get to where you want to go? If you would like a follow-up call, please shoot me a quick e-mail at john@success-strategies.com, and we’ll schedule a 15 minute call. Know anyone else who can benefit from this tool? Please feel free to forward this to them with its link, or if you’d like, just share their e-mail with us and we will do it for you. Thanks!   My business coach Dan Sullivan, who developed the original Mindset model called the Optimum Maximizer™ said you should always talk yourself into a better future, not a worse one! Of course, that is the objective with this model. I hope you find it helpful.   “Success is not a matter of where you stand, but in what direction you are moving.” Quote on Excellence from the Successories™ Calendar

Measuring Up To Success

Recently, I was introduced to a concept by my Business Coach Dan Sullivan that I believe is very applicable to any business today. He stated:   “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.”   Wow! It sounds so simple, but let’s explore this quote more deeply. We all know that it is important to take measure of many facets of your business operations. Yet, many of us, in spite of knowing this is true, still don’t do it. I am not certain why many people resist doing this, but, frankly, it’s the best way I know to make any type of improvement. For this reason, I have spent years putting together measurements of my Clients’ business results. Please allow me to provide you with several examples:   As a follow-up to completing Annual Cash Flow Budgets for my Clients each year, I also track their Actual vs. Budget results every month. Obviously, this is the measurement part. Understanding this information comes from the analysis we do whenever an item is “highlighted” for being more than 5% over our budget. One of my Clients calls these his “Amber Alerts,” because they point out the areas we need to focus on improving or, at a minimum, grasp a better understanding of why these items are over budget. Sometimes these cost over-runs are out of our control, but 95% of the time they can be controlled. Just understanding what is going on within your business provides you with an opportunity to control it, and, clearly, if you can control an item, you can also improve it.   My Management Team Meetings with Clients also measure their results compared to six months and 12 months ago. On a dairy operation, these are items such as Milk Production per cow per day, their Pregnancy Rate, Heat Detection Rate, Percent of the herd that is pregnant and many other items. These are the measurements. We can grasp a better understanding of these simply because we measured them vs. prior periods’ results. If we understand these items, we can understand why they are getting better or worse and gain better control over our outcomes. As I said before, if we can control something, we can improve it.   I also work with Clients who have fairly labor intensive businesses. In their case, because they can automate some tasks rather quickly, we measure their cash flow results, not only vs. their budget, but also on a “per hour billed” basis. Completing these measurements helps us understand what the results are, but also gives us a grasp of the trends in our expenses per hour billed. Once we understand these items, we can take steps to better control their bottom line, allowing us to also improve their results.   I hope you find these examples 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.

WHERE HAS ALL THE MONEY GONE?

Are you tracking your monthly cash flows? This probably sounds like a silly question, but there are some producers who, believe it or not, still don’t do this on a regular basis. The rationale behind this is questionable, but, for whatever reason, they just simply pay bills as best they can and move forward or, sometimes, backward. Some possible reasons I believe people fail to do this include the following:

  1. They may not feel that they have the time. For some, this can be a daunting task. It can also be overwhelming if you get done and realize that you’re going to run out of money before you run out of month. Of course, this has been happening to a lot of dairymen lately.
  2. They might not want to face reality, especially if it is indeed negative.
  3. They may not know where to start. That challenge I can deal with. Let’s talk about it and review the benefits of monitoring your cash flow regularly.

Matt and Diane had operated their 600 cow dairy for over 20 years and had been quite successful, both in terms of production where their herd averaged close to 80 pounds per cow per day and, as a result, in selling purebred Holstein bulls and heifers. Yet, they had an issue to confront. They never really felt comfortable with the cash flow of their business. It often seemed like “feast or famine.” When milk prices were good, they had a lot of cash, and the IRS was always standing by waiting for their share. Additionally, it seemed that these good times also boosted their purebred sales and gave them even more cash to account for. However, when milk prices started to skid, Diane, who did most of the financial tasks at their dairy, was struggling just to keep their suppliers current. She was simply writing checks and hoping that this process would all work out for the best. What could she do? I’ll explain in a moment… Reasons to consider this: Most everyone has been watching and/or complaining about their monthly expenses, but are they really watching each and every expense item? Milk prices have been dropping like a rock since December 2014. While we have seen relief on feed prices, they were a nightmare as well until this year. The justifications for tracking your cash flows are numerous. Currently, however, the biggest justification for this process is survival. The dairy industry is under pressure from vendors, banks and regulators. Our entire economy is in an upside down state. Knowing where you stand in your cash flows can provide you with additional comfort because even if you are struggling, you will be more aware of your upcoming needs for cash and other financing, and also be able to answer questions that arise from your suppliers or banker. Where do you begin? How do you go about completing this process? My favorite starting point is to develop a budget for what you feel will occur during the next 12 months, preferably January to December. This can represent a different set of dates if you wish or if your operation is a corporation with a fiscal year end that is different. For a simple example, check out our “Home Page” or our “Success Tools” on our website at www.success-strategies.com. There you will be able to acquire what you need. Here is what we did with Matt and Diane’s dairy operation. We reviewed each and every expense item to see if the amounts they were paying made good financial sense. Often, particularly during periods of high milk prices, producers will add labor or other items that can be detrimental when prices go back down. Not surprisingly, we found several expense areas that had just simply gotten out of control and got them back in line with industry standards. We also set Diane up with QuickBooks Pro and allocated their various costs within categories that matched their Accountant’s Chart of Accounts. This will save them money down the road when their CPA is completing their annual tax return and developing CPA prepared financial statements, which will, in turn, help them to better manage their business going forward. After you have your budget format down, project what levels of production and corresponding expenses you will encounter during the upcoming 12-month time period. When you have finished this task, you are ready to complete a comparison each month throughout the year. Your Cash Flow Comparison will equip you to examine how you are doing in comparison to your month-by-month plan, just as Matt and Diane were able to do. In terms of tracking your actual results, why not do what most of my clients have been doing successfully for many years?

  1. QuickBooks Pro (QBP) is a good place to start. It allows you to input and print your checks as you pay you bills, categorize expenses into their correct categories and provides you with a Year-to-Date Profit and Loss Statement. You can print this out at the end of each month (e.g. 1/1 to 3/31) and use it for the comparisons process that we discussed above.
  2. As an alternative, you can also track items directly in Excel, but why not use QBP, especially when you have the capability to convert your QBP file into an Excel file if you want to.
  3. Others have their CPA track these items for them, although this can get expensive. Besides, he or she will probably also be using QBP.
  4. Financial Advisors, like myself, often include a comparison of what is being spent each month vs. what you budgeted. This allows us to really evaluate where you are financially each month. If you are already doing this, great. If not, start it immediately. Feel free to check out our Finance Matters™ software this fall at www.success-strategies.com or www.financematters.solutions. A comparison to your cash flow projection is so crucial to understand your financial progress.

Matt and Diane’s banker was thrilled with the progress that they made. Making your lender’s daily overdraft list is not something you want to strive for. Staying off of this daily list is far better for three reasons:

  1. It keeps you “out of the doghouse” with your loan officer.
  2. It saves her from having to advance funds unexpectedly to cover your excess checks written.
  3. It saves you money because whenever the bank covers an overdraft, they will charge you interest. Additionally, this “loan” is not usually priced the same as your other loans. Its pricing is normally at the prime rate plus 5% (or 8.25% today)!

Their banker was also pleased to see that they were executing business decisions with more confidence, simply because they were more aware of their current position, the potential issues they were facing (such as any future cash flow shortfalls), and what their potential options might be. As a result of these changes, she was able to lower the interest rate on their line of credit by ¼%, saving them several thousand dollars per year. Eventually, we were able to refinance their real estate loan with an insurance company, which provided them with further improvement in their long term cash flows, a lower fixed rate of interest, and an opportunity to fund an expansion when their son returned from college. This then became part of their long-term succession plan. What to do if you find negative variances?

  1. If you have expenses that are considerably over your projected levels, you have to take action. What are some possibilities?
  2. Are you using too much, e.g. supplies?
  3. Are any items disappearing? Do you track inventory closely?
  4. Are there products that have become too high priced to justify any longer? ________________________________________________________________
  1. Are there less expensive alternatives available?
  2. Finally, do you even need the item? I know this sounds silly, but I have seen occasions where a producer has been using a product because his Dad had used it. However, he continued to use it even after he had also adapted a superior alternative product. Sounds like what we used to call the “belt & suspenders routine” in banking. We’ll save that concept for another time.
  3. Who is controlling the acquisition and delivery schedule of this item, if in fact, it is a product. Is the delivery schedule matching the rate of usage? Is it in line with what we would expect? Accountability and a degree of control over the process are imperative in this area.

Action Steps:

  1. Where do you begin? Develop a Cash Flow Projection to provide you with a solid idea of what your cash flows are expected to look like during the next twelve months. This will allow you to plan for those months, if and when your bottom line may be negative. If you know those months are coming, you can plan for them by holding back some extra cash or plan to borrow more on your lines of credit.

What should you do next? Decide how you will track your cash flows. As I explained above, I suggest that you use QuickBooks Pro to pay your expenses, track your revenue and costs, and complete your taxes with your accountant. Its Year-to-Date Profit and Loss Statements can be used to complete your comparisons process. Knowing what your strengths and weaknesses are compared with your monthly budget will help to keep you on track and avoid the age old problem of getting to a point beyond repair on particular expenses, whether it is on feed, labor, repairs & maintenance, or some other item. Knowing where we stand on each expense area compared to our budget and to industry standards will keep your operation moving forward in a positive manner. The key is to know what is really occurring in your business.

WOW! ALL I NEED ARE MORE OPTIONS!

People love to be offered options in life, up to a certain point. Unfortunately, if they are faced with too many options or ones that they do not understand, the choices available to them become overwhelming. Actually, that may describe the current situation with Milk Options. There are so many options available that the choices can, indeed, be confusing. Several years ago, I wrote an article for the Western Dairy Business publication centered upon what I felt were the “Top 10” steps to take in preparation for the coming year. One of the most critical of these steps was the development of a Milk Marketing Plan.  This is an absolute must today, particularly with the increasing amount of volatility and fluctuation in milk prices. Understanding your break-even price level (check out: www.financematters.solutions today) and knowing how to position your business to achieve that price will continue to be essential to your financial future. Get involved in your own marketing plan by working with an options broker that you trust. He or she can be invaluable to your business. About the same time, I also had an opportunity to moderate a panel of Agricultural Lenders in a discussion on the availability of financing. One of the recurring themes that seemed to surface was the issue of whether or not a producer should be using milk options, also known as Puts and Calls, in the management of their dairy business. Their response was unanimous. About the same time, I was asked to describe a scenario when I felt it would be smart to make use of a Call Option. When would it be wise to make use of a Put Option? In a moment, I’ll share my response to those two questions as well. However, I feel it is important to consider what all “options” are about. Who, in fact, needs them? The key to successfully using milk options revolves around a task known as “Margin Management.” You may know this as “Risk Management.” Several of our lenders on the panel emphasized how important they felt that was for any borrower. Their explanation covered some of the aspects of how you should use milk options to almost ensure that your margin is more positive. Our lenders also discussed a term called your “Burn Rate.” This is the rate at which you will eliminate your entire Net Worth if you continue to lose money each month. For example, if you milk 2,000 cows that produce 70 pounds per cow per day, you will produce about 42,000 hundredweights in a thirty day month (2,000 X 70 X 30 / 100). If you have a Net Worth of $2,000,000 and are losing $2.00 per cwt, your Burn Rate is about 24 months ($2,000,000 / $84,000). In other words, you could potentially operate for about two years at that rate of loss until you ran out of Equity. Your lender would much prefer that you consider making reductions in your costs or somehow place a “floor” under your milk price prior to that occurring. That is what you can accomplish by using a “Put Option.” The Put places a floor under the price you receive. Puts are all priced using Class 3 Federal prices, which can create some issues in California, Idaho and possibly several other states due to the difference in basis. These states’ systems may be somewhat correlated with the Federal Pricing system. However, they do not match it. By purchasing Put Options through a broker affiliated with the Chicago Mercantile Exchange (CME), you essentially put a floor under your milk receipts/cwt on the portion of your milk you cover. If you purchase a Put Option for $15/cwt milk for June 2010 and the Federal Order Milk price at the end of June lands at $14/cwt, you will still receive the $14/cwt from your Cooperative. However, you will also receive the difference in a separate check from the CME ($1.00/cwt e.g.). If, on the other hand, the market price comes in higher than the level your Put Option is set at, it expires unused, and you only lose the cost of the premium you paid for that Put. This is an extremely simplified example of how Put Options work. You can only purchase these through licensed, qualified brokers, for good reason, but there are many great firms out there for you to access. Why would you use Puts? Let me give you four reasons: 1.) Your loan renewal is coming up, and your banker is worried about your projected profit/cwt. 2.) Your “Burn Rate” is looking rather small. 3.) You are a young producer just getting started and need to be certain that you protect your bottom line. The use of options may help. 4.) You are highly leveraged, either as a result of past losses incurred or due to a recent expansion you’ve undertaken. How about using “Call Options” in your dairy business? These allow you to “buy” milk at the CME (not literally) at a pre-set price. Primarily, I see these used when a milk buyer offers a “Fixed Price Contract” for your milk. If, for example, you agreed to a $15/cwt price with your milk buyer for the next 12 months and during that same time period the Federal Class 3 Milk Price climbed to $18/cwt, you would still only get $15 from the buyer of your milk. What can you do? If you simultaneously have Call Options in place for some level such as $15, they will allow you to buy milk at $15 when it is worth $18/cwt, allowing you to collect the difference from the CME. This information covers only the basics of what you need to know before using Milk Options. However, I think it is important to consider how they might benefit you by smoothing out the highs and lows of the dairy industry. The easy days of managing dairy prices and margins are over. It will be critical to your future that you master the art of margin management, which requires knowing your true cost of production, particularly on feed, with which you can also use options (Hint: See www.financematters.solutions). If you have developed a better system, I hope you succeed greatly with it. However, for most producers, options offer the best insurance against devastating losses. Talk to some brokers and other dairy producers who have actually used them and develop a plan. A number of my Clients used a combination of Options and Fixed Price Contracts with their milk buyers during 2009 & 2015. Several Clients averaged almost $16/cwt for their milk and netted out over $2.00/cwt before their personal draws from the business. This was excellent, but, more importantly, it happened because they’d set themselves up to have more “options!”

DECISIONS, DECISIONS!

We are all faced with numerous decisions every day. Simple as it sounds, your daily decisions begin with deciding what time you will be getting up in the morning, what you will wear and what you might have for breakfast. Then, I would suggest, the big decisions need to be made: What cows need treating today? Should I add another employee? Can I afford that new tractor? Sometimes you can defer these decisions. However, often they need to be addressed immediately. The problem with delaying decisions is best summarized by Adam Hanft in his article entitled “The Risk of Doing Nothing” in the December 2002 issue of Inc. He was discussing the absence of action on the part of Montgomery Ward (remember them) as Wal-Mart grew from 125 retail stores in 1975 to become one of the largest companies of any kind in the world. Mr. Hanft reviewed how Folgers and Maxwell House did little or nothing as Starbucks redefined coffee as an “experience,” rather than just as a beverage. He added that “there were numerous points along the way where any of these companies could have broken the continuum of paralysis – but at each point the consequences of change were judged greater than the risk of doing nothing.” He goes on to say: “That’s what’s so insidious about the absence of action: no single decision to delay or defer ever appears monumental at the time. Inaction also takes time for the contours of its dumbness to be revealed, so it rarely punishes current management; only the future gets mortgaged.” So how and where does this fit within the realm of your dairy operation? This is an excerpt from my 2005 book entitled A Roadmap for Success. See if, perhaps, you can find yourself in this story: “3:00 a.m. Your herdsman approached you earlier today about an offer he has received. He has been approached about taking his 200 cows and 140 heifers (about 20% of your total herd) and moving them to another dairy where the owner is getting up in years and would like to take on a partner in an effort to fill his new facility. While your herdsman is not anxious to leave, this represents a positive opportunity for him. He will make considerably more money and will immediately become a partner in both the herd and the land & facility at the new place. He has been a great herd manager for you. He has been a solid team player, loyal and conscientious. You wonder if you could even find an equal replacement. You are adamant in your statement to him that “this is just not the way things work around here.” You really hate to see him go, particularly since your cash flow seems quite tight. However, he has offered to stay, but only if you provide him with a $45,000 retention bonus so that he can purchase a new home not far from your operation. He feels that will help compensate him for the “proposed” ownership plan that you started talking about 15 years ago… You rationalize that you could simply borrow the $45,000 on your herd loan, but it’s the principle of the matter, you reason. Perhaps you can discuss this with your banker when he (or they) arrives later today. 3:10 a.m. To divert your mind from this, you start thinking about the value of your ranch or farm. It is a great place to operate, you reason, one where you hope to continue your business for a long time. After all, you do have two sons who are in Junior High now and whom have expressed an interest in continuing the operation. However, you are hearing rumors of many changes in the neighboring regions. There are new homes being built just nine miles east of you. While these developments are planned to go only eastward from where they currently are, the winds from your farm location could create a problem for these residents. You and one of your neighbors had resisted establishing an “agricultural zone” 10 years ago, thinking that might prevent your land from being bought for development in the future. Now, he is in financial trouble with his bank and has his place on the market for $500,000 less than you paid for yours four years ago. 3:30 a.m. The dairy again: You have had some inquiries or you haven’t had them… The most successful A.I. firm in your area has inquired about your availability. Either way, you worry that if you leave now, what will that mean for the future of your sons in this business? If you hold out, will you be leaving a lot of money on the table? Could this industry implode if you hold on? Will your sons really want to come home after five and six years of school, respectively, plus another four years of college? How could they possibly even know at this point? After all, they are only 14 and 13 years of age. You try to go back to sleep. 3:50 a.m. Your banker has been calling to follow up on a letter that was sent to all of his borrowers. The “directive” you received by mail two weeks ago sits like a rock in your stomach. They expect you to come with up with five-year goals for your dairy, along with a five-year plan for achieving them. You have been told that you will need to provide marketing plans for your milk, an outline of feed needs and potential contracts, an overview of labor laws and your compliance with them, and a Nutrient Management Plan and any plans for future business growth or an exit strategy. While this all may not seem like such an unbearable task, they have informed you that their new Division Director (since being acquired by another Super-Regional Bank) will be reviewing your quarterly results to determine if you are staying on plan. Unfortunately, you are already familiar with this Director. In fact, you have had a “run in” with her at your prior lender six years ago. You recall that she seems to have had an unrelenting memory for most of your earlier discussions.” Does this producer have some decisions to make? Yes, absolutely. Can he put these decisions off? Sure. However, he enters a whole new arena of risk if he does. How long can he keep his herdsman if he does nothing? What about the future of his dairy operation? Can it continue successfully? What if the bankers show up and he is not prepared to discuss his plans for the next five years? Sometimes, you just have to make a decision without delay. Are you going to get them all right? No, none of us does. However, the good news is that you don’t have to make the best choice every time – just most of the time. Even Warren Buffet makes some poor decisions, but I think you’ll agree that, on the whole, he has made a lot of great ones. When you are faced with an important decision, I suggest you use the following practice, which was introduced to me by CPA Albert Nunes from the accounting firm Genske Mulder and Company. Ask yourself these four questions:

  • What is the best thing that could happen if I do take this action?
  • What is the worst thing that could happen if I do take this action?
  • What is the best thing that could happen if I don’t take this action?
  • What is the worst thing that could happen if I don’t take this action?

If you go through this process and then, if at all possible, sleep on it, you will probably come up with the best decision for you. A lifelong friend of mine introduced me to the abbreviated version of this decision model in 1976. He said to ask myself: “What’s the worst thing that could happen if I take this action? Can I live with that outcome? If so, go for it. If not, then I better rethink my intended course of action.” Whether you opt for the longer version or choose the abbreviated one, put these steps into practice today. Even in difficult economic times, you need to make tough decisions. You cannot keep your finger on the “hold button.” If you do, at best you risk being left behind. At its worst, this can lead to an economic disaster. Just put your self in the situation of the Client described above in the banking scenario. What if he ignores the bank’s request for an action plan? He could potentially lose his financing or even worse. Ironically, I wrote my book in 2005, but this scenario is a good description of what some producers are facing today. Never allow yourself to be put into that type of situation.

GOALS… WHO NEEDS THEM?!

Dan Sullivan, founder of The Strategic Coach organization stated that “people do strange things when they have no future.” Since this is undoubtedly true, I have attempted to keep my Clients on the leading edge by providing them with a system for setting regular business objectives and keeping them as far away as possible from the dangers often encountered in their industry. The purpose of this article is to demonstrate a working model for completing this process – one that we can revisit as often as needed.   It might be best to start by answering five basic questions. Why take the time to set these goals and develop a Disaster AgendaTM? I often hear people refer to the goals they have set for themselves. When they do, they often say that they have them all firmly planted in their head. However, my experience has taught me that this just does not work as well. It is imperative that we get them down on paper since it makes us completely focused in our thinking about what we wish to accomplish. If you try to do this “just in your head,” you will find that it is too easy to get distracted by other issues, and we are all faced with distractions every day. Thus, commit them to writing, and your goals are much more likely to be reached. Even if you write them down and put them in a desk drawer, your subconscious mind will go to work on them.   How do you get started on this process? I believe that corporate America has done a great disservice in this area. During my time in corporate America, I constantly felt inundated with demands on my time. “Do this, do that, achieve the impossible! We know we didn’t provide you with your annual goals until April and they may be high, but you should have been planning for this type of production demand…” and so on. This is crazy! Why not set aside some quiet thinking time to establish new objectives for the next 12 months.   When to complete this is the best part. While it may be a “corporate sin” to set aside work time to do such planning, you will definitely be rewarded with better results. I cherish the two days each fall that I take to get away and set new goals and objectives for my business. Take advantage of this time to move your business forward.   What should your goals center on? Challenge yourself to set goals in areas that you can reasonably expect to make progress. Please note that I did not say “easily” expect to make progress. Your goals need to be challenging and set high enough to keep you excited about reaching them. However, they also need to be achievable. Otherwise, you will get frustrated with them and give up. You do not need that outcome!   I will leave the when and where part of the process up to you. As I stated earlier, I spend two days per year off site (to minimize distractions) planning my next year. Believe me; this really has paid off for my business. I normally complete this process in November of each year. This allows me to review what happened during the prior 10 months of the current year and also look ahead to what I want to accomplish in the next calendar year. I always do this off site, simply because I want to be able to focus on my objectives without any distractions. I believe the elimination of distractions is imperative to the success of this process, but you decide for yourself.   Now, let’s go one step further. I also work with Clients to develop a Disaster AgendaTM. What is a Disaster AgendaTM? It is a list of the three worst things that could happen in your business and how you would respond to them. When you complete this process, you accomplish several tasks:  

  • You will be better prepared if one of these crises actually does occur.

 

  • You are more likely to avoid these crises, due to your increased awareness of their potentially occurring.

 

  • If one of these problems, or something similar, does occur, you will have a response or action plan ready to go, yielding a quicker turnaround and saving you both time and money.

  Need some examples? Here are some that I have previously written about. They still make sense today, but think of three that fit your experience and your operation.  

  • Environmental Pressure – This is an area that is worthy of some serious review. How will you respond if your dairy business is sued for potential damage to the environment, whether the claim is legitimate or not?  These types of lawsuits are not going away anytime soon!  Litigation is a costly process, particularly when you consider the legal costs and the expenses associated with capital projects “held hostage” in an unfinished state that does not lead to your intended increase in cash flows.  One solution might be to pursue the training that is available from various agencies.  This is time well spent.
  • Losing Financial Control – As the number of dairy operations in the US continues to decrease (76,630 in 2001) and average herd size keeps increasing, it is more critical than ever to maintain control over your operation’s finances. Regardless of industry, businesses often run into trouble when they expand in a rapid, uncontrolled manner.  The primary reason is they run out of cash.  One of the best preventative measures against this problem, as covered in prior columns, is to work within the guidelines of an ongoing strategic plan with detailed financial projections.  Another helpful item is to know your costs/hundredweight on a historical basis and for future projections.  Increasing the size of your dairy is no excuse to lose control over costs/cwt.  Visit us at financematters.solutions.
  • Inability to locate financing – This has been the case for many producers across the US as they attempt to expand their operations. This trend toward tighter lending standards actually began in late 2000.  In an effort to avoid a credit crunch, some borrowers have accepted excessive short-term financing when they should have focused on additional long-term financing.  Unfortunately, having the wrong loan structure always seems to “rear its ugly head” at the most inopportune times, e.g. during a period of low milk prices.  A potential solution: Grow your business with better financial records to help you maintain a loan structure that yields Debt Service Coverage of at least 1.25 times the level required to make your loan payments.  Having good financial information can go a long way toward avoiding unnecessary challenges in finding financing.
  • Loss of your Milk Market – I was visiting with a dairyman who had suffered the loss of his milk market due to a sudden change among the players in his area. It literally cost him in excess of $30,000 monthly for six months before he was able to get the situation under control.  What would you do?  Eventually, he was able to negotiate a better contract with a new buyer of his milk.  However, his losses in the short term were enormous and help remind us of the vulnerability we face as a “price taker.”  This could also occur if your herd was suddenly faced with a major health problem.  These potential cash flow shortfalls further reinforce the need for cash or available credit at all times.
  • Sudden Loss of Key Personnel – Whenever a key worker departs, particularly on short notice, it is essential to have a plan in place to cover for them, at least in the short term. These departures clearly illustrate the need for team development and the cross training of personnel at each key position. Attractive benefits, retirement plans, insurance and competitive pay help to avoid this type of crisis.  However, it still pays to have a backup plan in place.

  This list of potential crises is far from exhaustive, but hopefully it will stimulate your thinking as you develop your own “Disaster AgendaTM.” As Author Jim Taylor stated, “Plan for the future or you will have no future.” It can be crucial to your success levels!

Making the Best of Major Decisions

There is an epidemic going around America today. Thousands of people have a genuine challenge with simply making a decision.

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TAKING TIME TO MEASURE YOUR PROGRESS

Consider using the following questions in the financial analysis of your business. The first question, “What is our current performance?” In the area of finance, we would naturally consider measures such as profitability, cash flow and debt service coverage. Many of us study expense items when our revenue is lower, as in 2006, 2009 or 2015. I would challenge you to review these line items in the good times as well. It is easy to let costs slip upward when there is less downward pressure on milk prices and cash flows. Question number two, “Are we getting better or worse?” “…and WHY?” It is important that we ask why we are improving or regressing. If we are spending money on capital expenditures designed to improve our labor efficiency, are we actually seeing a reduction in direct labor costs? If not, will we at some point in the future? Are we projecting improved cash flows as a result of these expenditures? Monitoring monthly expenses can help you keep them closer to your annual budget. Your banker will be looking at each of the line items throughout the year. Shouldn’t you also? For assistance with this ongoing process, check out our new program (coming out soon) at www.financematters.solutions. The third question, “If your operation is broken, what needs to be fixed?” Many times we resist change because it can take us out of our “comfort zone!” We all need to stretch ourselves. In this case it is by closely examining each expense item and making those tough decisions no one enjoys, but which will assist you to take your operation to a new level of financial performance. The final question, “Are there patterns to which we can apply resources?” Are you seeing some measurable trends that can be improved upon with additional capital expenditures (CAPEX)? The best way to approach this task is to review current trends in profitability, cash flow or other measurements, and then project what you expect to occur with the implementation of your possible changes. Of course, as with all operational decisions, only hindsight provides 20-20 vision, so you have to use your best business judgment to select from all available options. Make what you feel is your best choice and give it a chance to work for you. If you complete the process of reviewing your current performance, checking whether it is getting better or worse, fixing items that seem to be broken, and using patterns or trends to determine where to best allocate your resources, these steps can pay huge dividends and substantially improve your business!!

If I Ran the Circus…

What a tumultuous year! The last twelve months in the dairy industry looked like a cross between two of Dr. Seuss’ children’s books. On the one hand, it parallels If I Ran the Circus with its irrational supply and demand, particularly on commodities that are plentiful in comparison with their current usage, yet, until recently, remained overpriced. On the other hand, our industry scenario seems to be replicating Stop That Ball with an economy that appears relatively lifeless, yet in other ways seems completely out of control when we look at the painful process of loan approvals and the dramatic changes in real estate values. Hopefully, things will become more normal again soon! However, just in case they are not, it may be a great time to re-examine your game plan and determine what your mode of action will be. Whenever I get into a situation like our current one, I like to check out what several of my favorite business authors have to say: Seth Godin in his book entitled, The Big Moo, advises us to “Stop Being Ordinary.” He suggests: “Embrace the Power of Storytelling to bring it all Together” – Be like Medtronic, a blue chip medical technology company, who, when their team needs some motivation, they bring in patients and ask them to talk about how a Medtronic product has changed or saved their life.   Rudy Giuliani, former mayor of New York City, shared the following suggestions in a presentation that I attended several years ago: 1.) “Have conviction and strong beliefs. Stand by what you know is right. Be an optimist. He shared the story of the legendary Coach Vince Lombardi, who, after his team was defeated, was asked by a younger coach how it felt to lose. Lombardi replied, “Son, I didn’t lose that game. I only ran out of time!” 2.) Be positive and always visualize a “hit.” Singles, not just home runs, help to win games, too. 3.) After reviewing what you know and anticipate, take action, and he added, “Remember: Courage does not equal the absence of fear. It is acting in spite of it.” 4.) Practice and rehearse. Have a plan in place to cover most things and even some of those you don’t normally think of. 5.) Remember, teamwork is key! Ask yourself, what are my weaknesses? Where do I need help? 6.) You have to communicate. Let people know what you are thinking. This holds for employees and your banker. They both need to know!   In summary, this is a time to build success. Be sure to keep things in perspective. Is the economy tough? Yes, however, interest rates are still low as I write this blog. As former Microsoft President Rick Belluzo stated, “Enjoy the opportunity to reinvent yourself. When I was displaced, I knew that it wouldn’t be the only hardship I’d face in my career. Rather that dread the future, I became eagerly excited. I looked forward to facing additional experiences that would require me to ‘reinvent’ myself.” This represents good advice for all of us.

Would You Be Ready?

We’ve talked previously about setting goals! There are benefits to being prepared for crises that can occur in your business. We need to have a plan in place for these types of challenges. Futurists Jim Taylor and Watts Wacker, in their book The 500 Year Delta, stated that every business should develop a “Disaster Agenda”. While all of us are faced with negative challenges and nobody wants to dwell on them, we would be well served if we have given these situations some forethought. This is true for a crisis that might occur in any part of your operation: herd health, nutrition, facilities, management, or finances. A Disaster Agenda is a list of the three worst things that could happen to your business, along with what your planned response would be. How do you accomplish this task? By seeing the world as it is; not by trying to wish the bad away, but by acknowledging some things will happen to you and your business. They might even be events we consider to be unreasonable today. Step “out of the box” on this job. Need some examples? What if your dairy was hit with a serious disease and you lost 1/3 of your herd? What if your milk co-op runs into financial trouble and is forced into bankruptcy? What if one of their largest customers files Chapter 11 and is unable to pay them? Unlikely? Perhaps; Is it possible? Absolutely! This is what completing a Disaster Agenda can do for you. It will help you to be better prepared. When you follow this process to completion, you will accomplish several tasks: *    You will be better prepared if one of these crises does occur. *    You are more likely to avoid these crises, due to increased awareness. *    If something similar does occur, you will have a response or action plan set to go, yielding quicker turnaround and saving you time and money. My client was planning to expand from 400 cows to 800 cows since he had a son who was soon returning from college. We began hearing rumors about how his bank was a candidate for merging with another lending institution. What if his bank gets bought and new ownership wants to reduce their dairy lending? Having a positive, long-term history with his lender, we decided to consider other potential sources of funds for the expansion project and, using financial tools at www.success-strategies.com to outline our proposal, received offers from two other lenders with loan structures suitable to his needs. As it turned out, his former bank did sell, and the new ownership did decide to reduce their Ag lending portfolio. What could have happened if we had not planned ahead…Jerry could have lost a lot of time and money in revising his plans at the last minute! Developing a similar contingency plan in your operation is definitely in your best interest. It’s a great example of Next Level Thinking™!