MAXIMIZING YOUR MANAGEMENT SUCCESS

Do you ever have that feeling that your neighbors or brother-in-law seem to be doing better than you in certain areas of their operation? I think everyone has felt that at some point. The more significant question, however, assuming that might be partly true is: “Why?” What is their advantage over the way you normally operate? One item that I have found very helpful to people in assisting them to reach their highest levels of success is the implementation of Management Team Meetings. This is a concept that I introduced to my clients over 15 years ago. As we have seen during that same time period, these sessions have guided many of our clients to achieve items that, had we asked them before, they would not have believed possible. How do Management Team Meetings work? The concept revolves around the benefits of solid communication, positive teamwork and accountability. When we meet as a group, usually every other month, we have a written agenda that we try to follow as closely as possible. The benefits of doing this are two-fold. First, it makes sure that we do not skip over any important topics we need to discuss. Second, it keeps us from getting off on tangents that almost always seem to revolve around insignificant items. In the “Tools” section of our website, www.success-strategies.com, I have included a WORD file for your consideration and use. You may rename this file however you wish to and then use it for your own Management Team Meetings. The primary benefit of keeping a set of written minutes during each meeting is that you create accountability within your Management Team. At the end of each meeting, I send each and every Team Member a copy of the minutes (usually two pages). This is sound because it allows everyone to know what items are supposed to happen prior to our next meeting (e.g. changes in the breeding program, improved heat detection, getting some help on milking procedures or milk quality issues). It is also useful for their review prior to the next meeting. Additionally, as the facilitator of these meetings, you will find these minutes very useful in setting your agenda for the next meeting and to make sure that you cover all the necessary items to keep you moving forward in your operation. For example, if you have discussed the need for improved heat detection at your last meeting and then established a set of steps to take to make improvement, having this in the minutes will remind you to revisit the current situation to see if you are indeed seeing positive results. Otherwise, it can end up on the “back burner” and not really get resolved. Of course, in the case of heat detection or other key management issues, this could spell disaster down the road. Who is involved in Management Team Meetings? This is a decision that you need to make early in the process. Here are a couple guidelines for you to consider:

  • You will want to include anyone who is a “key player” in your operation. Normally, this will include your Veterinarian, Nutritionist, Herd Manager, your Financial Advisor if you use one, your Banker if you wish and you as the owner.
  • Include only people who have something positive to contribute. These meetings are designed to improve your business, not to point fingers at each other and determine who is at fault in an area that needs improvement. The real reason for the meeting is to make sure that you are achieving everything you possibly can. My experience has been that participants who are argumentative or critical of others do not really add to the success of the Team.
  • When you hold these meetings, you can reach a point of saturation in terms of participation. In other words, you can get to the point where you have too many people in attendance. This will tend to impede your progress because it will tend to reduce the level of open dialogue between your Team members. Thus, we typically do not include anyone who is selling a product. For example, your semen salesman may be a great guy and also very intelligent. However, do you actually need him at these meetings? The same goes for feed salesmen & pharmaceutical representatives. Your Nutritionist and Vet can cover their areas of expertise sufficiently.

Why do they lead to higher levels of success? These meetings will lead to greater levels of success in your business because they generate greater:

  • Accountability
  • Teamwork
  • Common Goals
  • A reason for Celebrating Success

Management Team Meetings (MTM) Future Topics: If you want to maximize the success of your MTM, I suggest that you include the following items at every meeting:

  • Herd Management Issues
  • Herd Health Update & Concerns
  • Herd Reproductive Performance
  • Nutrition Update
  • Financial Review, including what is happening within the dairy industry. This discussion can also cover what challenges you are having and how they potentially can be overcome. You should also include your team of dairy professionals in discussions of potential Capital Expenditures, i.e. what items do you need to acquire of build in the next 12 months? A conversation about their potential payback and what your Vet and Nutritionist have seen other places may prove very helpful as well.

Monthly Reminders – W.I.N.     (What’s Important Now?) I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles. Let’s say you are facing a difficult business challenge. Wow!! That sounds like a call to action. I have observed that in this type of situation people often do not want to face reality, as if it will change on its own or the problem will eventually go away. The odds of that occurring are remote. How can you deal with change? How can you turn this into a positive outcome? Here is one method that I’ve used successfully with clients and seems to work even better with tougher problems:

  1. Surround yourself with your entire team. Yes, multiple brains works better here…
  2. Develop a chart on paper or on a marker board. At the top, list the problem to be overcome or the goal that you want to reach.
  3. Work as a group to complete a “brain drain” where every possible idea that the team comes up with gets written on the board. Do not evaluate them, judge them or criticize them at this point. Just write them down with no judgments or laughter (later, it could turn out to be the best response…)
  4. Additionally, each member of the team needs to participate. This is not a passive activity where some of us can just watch. We can only capture the best ideas if we get them all written down.
  5. Finally, after every idea that you can think of is written down, start to evaluate the pros and cons of each idea. However, this should not begin until you have a minimum of 20 ideas listed. I know what you are thinking – “You are kidding, John!” The fact is – I am not joking. This is the only way you can be assured of not overlooking a great option.

To give you an example of how this works, I was working with a client whose facility had become overcrowded. After listing 20 possible options, we concluded that he could reduce his herd, lower his debt levels and improve efficiencies or he could change his facility, which would add to his debt levels. Another option that surfaced was that he could diversify his operations. Eventually, he decided to decrease his herd size and diversify into some tree crops, and this is working out very well. This process of brainstorming for all possible options can be used to work through a crisis. It can also be utilized on a regular basis for ongoing business decisions, as well. Why not try it in your operation today?

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!

Take a Lesson from Jeb Bush

Dairy farmers have a solid business lesson to learn from a prior article in the Wall Street Journal written by Jeb Bush, former governor of Florida, in which he discussed his state’s efforts to reform education and how difficult the process really had been. He stated, “The reality of reform is vastly different from the theory, and change is a lot harder than it looks. But there are a few rules for real reform that makes it possible.” I realized many of the same rules apply to making certain we have our dairy operations “reformed,” especially after prosperous years like 2014.

“The first rule is that when you run for office, you need to say what you’re going to do and then do what you said you would.” The same rule applies at your dairy when you need to make necessary changes for three reasons: Your survival may depend on it. Your management team is counting on it. The implementation of the changes you’ve discussed with your team can only improve your results if they are actually carried out. Your banker is expecting it. These points become even more crucial if milk prices soften. It is quite common for high milk prices such as we have seen this past year to lead us to increase our expenses because “we can afford it.” When milk prices drop, we need to be careful that expenses are still in line with lower revenues.

“The second rule of reform is that if you don’t measure it, you don’t care.” While, on one hand, this might sound harsh, it really is true. If you are not tracking your financial results on a regular basis, you can’t be too concerned with your outcome. I suggest you should outline your plan for what you will do to improve the weaker areas and implement changes to make more positive financial returns.

“The third rule is that big reforms require long-term commitment.” This is also true on the part of the dairy operator and his banker(s). I was asked an interesting question at a conference where I was once speaking. My presentation was entitled, “Taking Your Dairy to the Next Level.” I presented a case study of one dairy’s financial turnaround that we had successfully completed. A member of the audience asked how long it took to complete the client’s financial recovery process. I explained that the complete process took more than two years. We need to exhibit great patience while completing two tasks – planning our work and working our plan. Just be certain that you have a clearly defined plan!

“Another rule – the fourth – is to communicate what you’re doing…” This needs to not only explain what you are doing but also why you are doing it. It is essential that this communication extends to your management team, banker(s), CPA, employees, vendors, and family. Increased communication yields greater commitment from each of your key players and will be crucial to your continued success.

“The fifth rule is that success is never final and reform is never finished.” This is true not only in a financial turnaround process but with everything we do. You either get better or worse, because we are not operating in a static environment. Many things are changing so we need to adjust our course to stay on track. What worked just five years ago might fall short today.

Since the challenges in any industry arrive at our doorstep often without prior warning, use your professionals and your team to your fullest advantage. Follow their lead and “stay the course” to further success. You’ll be glad you did!

The Search for Meaning

Throughout the crazy events sometimes surrounding us, it’s often difficult to find meaning – in effect, to make sense of things that are occurring every day. Victor Frankl was a survivor of the Auschwitz Concentration Camp in Nazi Germany. Many entered Auschwitz; few survived. Victor Frankl in his book entitled Man’s Search for Meaning explained that the key to survival was that people needed to do six things. There may be some guidance for us, too.

First, he said, “Realize that the game of life has changed.” Isn’t that applicable today with our worldwide economic situation? As Frankl stated, the old game is over, a new game has begun. That’s true for the dairy industry, as well. We’ve got to operate under a new set of assumptions because the old game is over. Be open to change – it’s already coming!

Second, every day, you must find something beautiful. For Victor Frankl, from his cell, he could see a mountain range. For us, maybe it’s a sunset.

Third, every day, you must find something humorous, something funny. For Frankl, it may have been the way one of the guards walked. As you face the stress of working through the current dairy downturn, find some humor each day. We all need it.

Fourth, every day, you must find something to be grateful for. Instead of focusing on what we’ve lost or what you don’t have, focus on what you do have; something you are grateful for!

Fifth, every day, you must find some way to be useful. For Victor Frankl, it was helping others by listening to them. What will it be for you? How can you be useful to someone or to our industry today?

Finally, every day, you must find something to help you prepare for the future – a big goal, for example.  We all need a bigger goal beyond this current experience. For Frankl, what kept him going was his goal to write his book: Man’s Search for Meaning.

As Dan Sullivan, founder of The Strategic Coach organization says, “All progress starts by telling the truth.” So, remember, as Victor Frankl stated, realize the game has changed. We’re in a new experience. The sooner we realize this, the sooner we’ll be able to rise above it. Also, don’t forget the other five steps to success:

Every day, find something:

  • Beautiful
  • Humorous
  • To be grateful for
  • Some way to be useful
  • A reason to prepare for the future – A Goal!

Try this today. I think you’ll be glad you did!!!

COMING UP WITH THE NECESSARY CASH

One of the most common problems faced by many businesses 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. Since 2008, this has been compounded by the Sub Prime Mortgage mess and its related financial issues! This certainly has magnified the importance of maintaining a solid banking relationship.

Whenever one of my clients or a prospective client I am working with gets turned down on a loan proposal, it is imperative that we review the facts and explore “why?”

  1. Has your business been profitable in the past?
  2. How reliable are the numbers in your financial reports to the bank? Are they CPA prepared?
  3. What do your current cash flows look like? Have you completed some projections? Do the projected trends look positive or negative?
  4. Realizing I have mentioned this before: What are your plans for the next 12 months?

Business magnate and motivational speaker W. Clement Stone stated, “If you employed study, thinking, and planning time daily, you could develop and use the power that can change the course of your destiny.” This is worthy of consideration for any business.

I have 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 of the bank. If your lender is not willing to explain their reasons, there are other financing sources around. Sometimes a change in scenery is good for both parties.

  1. Financial History of Losses: This can be countered by a plan to implement changes.  Suggest changes in your operation that make economic sense! Make sure you are making changes to get back to profitability.
  2. Lack of a Clear Plan: Author Basil Walsh said, “An intelligent plan is the first step to success. The man who plans: a) knows where he is going, b) knows what progress he is making, and c) has a pretty good idea when he will arrive.” Have a defined plan and established goals for your business!
  3. Maybe they are RIGHT! This possibility is tough to accept, but maybe we need to consider other options. Every successful business plan should also contain a clearly defined exit strategy to be implemented if necessary.

A banking relationship is crucial to your success! Be prepared to show improvement in your operation’s results and to illustrate a clearly defined plan with solid historical numbers and sound cash flow projections in order to acquire the financing you’ll need!

Are You Always Running Out of Time?

This article is based upon the teaching of author Steve Chandler, whose work I admire and follow closely. However, the story is also based upon an actual Client relationship of mine.

On our way to an important bank meeting, my client turned to me and said, “I wish I had more time to prepare for this – I’ve been so busy I didn’t do a thing for the meeting.” “Are you kidding?” I asked. Busy? Doing what? So we analyzed it: 84 hours per week at the dairy, 21 hours firefighting, and 18 hours in meetings!

In a typical week, the rest of his time was spent playing defense – filling out numerous forms, answering many “urgent” requests, and returning calls. He was spending about 6 of the 18 hours in meetings, listening to others talk about what they’re going to do or have recently done. He spent about 45 minutes actually doing work on new projects he’s currently involved in. And he spent exactly 15 minutes a week on inventing his next breakthrough steps.

WOW!!! This is frightening! Is this why this client entered the dairy business? Hardly. What’s the solution?

*    Better Time Management – Perhaps

*    Better Prioritization – Probably

*    More Delegation of Decision Making – Definitely

*    More Outsourcing – No Question! Especially in the areas of government and environmental reporting.

The reason it’s scary is because if you do the math of what his business actually gets paid for, it’s precisely the opposite of the way my Client was spending his time. When he goes on vacation, those minutes of “urgent emergencies” just sit there, and nothing particularly horrible happens. And in the rare weeks when he doubles his big-thinking time, he’s likely to come up with an insight that will pay the bills for the next six months or even a year.

As author Seth Godin says: “So, do you really think you’re too busy to work on something remarkable? In fact, you’re actually too busy to do all that (non-urgent) emergency stuff.” Think about it!

Ahead of the Game!

I love the following quote from General Eric Shinseki of the U.S. Army: “If you don’t like change, you’re going to like irrelevance even less.” What is he saying? We’ve got to keep up with change! Be like the Boy Scouts, who are always ready to – “Improvise, Adapt, & Overcome!” Every producer has lots of new challenges: Higher Feed Expenses, Rising Insurance Costs, and more Government Regulations. We are in a constantly changing industry environment where decisions we made five years ago are not necessarily as effective as they previously were. It is time for each of us to take back the reins of the decision-making process and adopt a more proactive approach moving forward. Management consultant Peter Drucker stated that, “The best way to predict your future is to create it.” Yes, you’re saying, but how can I do that, since I’m a “Price Taker” when it comes to my milk price, and under the present circumstances? I’ll tell you how – get out from under those circumstances. Change your thinking. Alter your approach. It has been said that if you keep on doing what you’ve been doing, you’re going to keep getting what you’ve been getting…I contend that simply may not be true. In some cases, your results could be worse! So, what do we need to do?

  • Embrace change as you encounter it. Of course, we all like the familiarity of our normal day-to-day processes. At times, I am guilty of this, too. However, when things are changing as rapidly as they are in the dairy industry today, we run the risk of getting “run over” if we simply stand still.
  • You are thinking that you just finished restructuring your bank debt and have most of your vendor payables caught up (hopefully). You’re asking: “Can’t I stop and take a break?” My advice: Do so at your own risk.

Take the time to check all of your efficiency measures, and I do not mean just your costs/cwt. These are important, but be sure to look closely at other measures such as cows milked/hour, pounds of milk shipped/full time worker, the average age of your first lactation females at calving, and feed efficiency (pounds of energy corrected milk/pounds of dry matter fed). Improving these items could save your business. Think about it!