12 Tips on Positioning for Success in Times of Economic Resets
12 Tips on Positioning for Success in Times of Economic Resets From Dr. David Kohl
Here are Dr. Kohl’s notes on positioning for success in the economic reset. Even though he was addressing a US audience, we can all learn to be better farmers.
1. FOCUS ON WHAT YOU CAN CONTROL AND MANAGE
This is critical in business. Dr. Kohl’s Homestead Creamery made $68K this year because people kept their glass milk bottles. His milk business had a plan for folks who cherish the glass bottles even when the naysayers said this habit would ruin the business.
2. REALLY GOOD MANAGERS ARE MAKING A COST RE-ADJUSTMENT WHEREVER THEY CAN
Kohl told the story of a young farmer who relinquished marginal land, cut family living costs and added thousands to his bottom line.
What lines on the balance sheet do you need to reset?
3. WORK ON MAKING YOUR SOIL HEALTHIER
Healthy soils support better plants and livestock growth, which is healthy food for healthier people. I overheard one young farmer singing the praises of minimum tillage and the big difference it was making on his farm.
4. HONOR THE AG ENTREPRENEURS WHO ARE RETURNING
Honor boomerangers with skill sets from their engineering jobs to create systems and standard operating procedures on their farms and related side businesses. This is why farm coaches recommend that your college grad successors work for another business and manager to get new insights and system ideas for your farm.
Kohl sees lots of opportunities for diversification within agriculture and outside agriculture. One farm woman at the session had a very successful hair cutting franchise that was surpassing the farm’s income!
5. TWEENERS (THOSE TOO BIG TO BE SMALL AND TOO SMALL TO BE BIG FARMERS) ARE EXITING FARMING
This becomes an opportunity for growth. Kohl says 10-15% of tweeners exit with equity, 10-15% do a partial or total liquidation, and 10-15 % have negative cash flow and negative net worth.
6. $7.00 CORN IS NOT COMING BACK
Warren Buffet said, “when the tide goes out, you find out who was naked.”
Farmers made money in the higher commodity price years, but now they are not making a profit and people are having a hard time convincing landlords to lower the land rent. Kohl depends on the FINBIN database to see where the net farm income trends are moving.
Make 5 percent changes to increase income and decrease expenses across many lines. This is Danny Klinefelter’s 5 percent rule that top farmers use to generate a better net income.
7. MODEST LIVING EXPENSES
This one warms my home economist heart. Often in transition planning, there are shockwaves when the founders want $120K annual draw from the farm, and the next generation can only afford $39K as a draw to the founders. I see this many times where folks are clueless as to what their true family living costs are. Email me for compensation worksheets developed by Dick Wittman to determine farm perks.
If your family living is in the $40K to $70K US ( $50-87K CDN) you are modest, if you are over $90K to 140K/year, you are enjoying the KT (Killer toys) and not using that extra $60 to 80K for cash flow on the farm. We use Quickbooks to track our family living costs. You can change what you measure.Do you follow the habit of “the more you make the more you spend?” Kohl likes to see the monthly family living budgets with an allowance for adding 25%.
Do you follow the habit of “the more you make the more you spend?” Kohl likes to see the monthly family living budgets with an allowance for adding 25%.
8. PAYING ATTENTION TO YOUR FINANCIALS REGULARLY IS CRITICAL
Hopefully, you use the accrual accounting method, know your cost of production for each enterprise, have year-to-year comparisons, benchmark with your peers, and keep important data safe (eg. a fireproof safe). Kohl relayed the story of a farmer whose records burned in the house. Today we have the cloud to store data and backups.
What are you doing to keep your financial information safe? Our accounting firm, MNP, gives us a benchmark chart annually to show us our financial report card.
9. HOW MUCH IS ENOUGH?
The bottom 30 percent of producers have an undisciplined pursuit of more. I’ve seen young farmers do this when they buy campers, fancy trucks, and other items that they truly cannot afford. High maintenance living is causing financial stress.
One hog farmer told me he could live on $50K annually in the good times, and pull back to $18,000. He did not tell me if he was living in his parent’s basement!
10. FOLLOW THE HUT PRINCIPLE
Hear what the issues are that need to be addressed.
Understand the context of those issues and seek creative solutions.
Many folks have financial plans on the shelf right next to their estate plans, unsigned wills and forgotten transition plans. FOCUS and execute. You can only eat a great steak one bite at a time, so take baby steps, but get moving! Sign up for our online course Get Farm Transition Unstuck.
11. CHANGE YOUR ATTITUDES ABOUT PAYING TAXES
Go from focusing on minimizing tax to the dance of managing your income tax. Kohl says you likely will never go broke with managing taxes.
12.WHERE IS YOUR LEGACY?
Kohl says “21% of the farms and ranches in the U.S. do not have a next generation…ie. a successor.” Farming is not fun for folks who have lost their legacy.
What steps can you take today to create certainty for your farm’s future?