Recently at an agricultural lender conference, I received a great question that challenged my thinking, “What is the best approach to turn a reactive or indifferent manager into a proactive manager?” This is a $1 million dollar question, particularly in this stage of the agricultural economic cycle with producers operating much larger farm businesses when compared to 10 to 20 years ago.
If the less-than-stellar manager is losing money, a quick way to get their attention is to determine the burn rate on core equity. Divide the losses, including debt service and living expenses, into excess equity in land, machinery, and livestock. For example, after considering the lender’s advance rate and debt against the assets, let’s assume that the excess equity is $1 million. If the losses are $100,000 per year and nothing is done to correct this situation, then within 10 years no farm wealth will remain. Some tips for this exercise are to dig deep, analyze accrual adjustments, and conduct a three year trend analysis. If the three year trend analysis finds that losses are mounting, then you can divide those numbers into the excess equity.
If the burn rate on core equity gets the attention of the reactive manager, then start with a corrective action plan. Determine where the weaknesses or areas of improvement exist. Are there weaknesses in production, marketing, or family living cost? Is there too much debt service or are there inefficiencies throughout the operation? My team and I developed a business IQ assessment as a method to identify strengths and areas for improvement that may be helpful in developing your action plan.
Enrollment in educational seminars and courses that focus on marketing, finance, and business management can be a great next step. If reactive managers are not receptive to this process, then there is very little that can be done to change their management mindset. An agricultural lender recently asked a producer to complete the business management IQ worksheet. The producer’s response was, “I do not have time for that.” The lender stated that, “If the customer does not have time to complete the assessment, then I am wasting my time working with him.” These reactions are often a sign of the reactive manager’s priorities and overall character.
If a producer agrees to make improvements, then you can assist and celebrate victories, regardless of how small they seem. I call these small celebrations the ARE’s, known as appreciation, recognition, and encouragement.
Finally, someone with a fresh mindset in the business that understands marketing and is financially oriented can be a good stimulus for corrective action. This new viewpoint, along with an effective advisory team that meets quarterly to discuss actions, will be beneficial in both good and difficult times.
Based on years of experience, my very candid assessment is that about one third of the reactive or indifferent managers can become proactive managers. Are you up to the task?
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