Many agriculture producers make decisions somewhere on the spectrum between a gut feeling and the numbers. A decision based on a gut feeling is driven by emotions, experience, and being able to connect the dots given the economic landscape. At the other end of the spectrum, a number driven decision is often more objective and considers the “what if” scenarios. However, sometimes only considering the numbers can lead to paralysis by analysis.
In a recent webcast, a producer asked a question directly related to this dichotomy of decision-making. He inquired, “Over the years, I have relied on the numbers and my gut feeling to make decisions. With the pandemic, my gut is telling me to hold back, but the numbers tell me a different story. What do you recommend moving forward?”
The first step would be to revisit your vision and goals. If you have been farming for 25 years, this could be a transition time in the business. Assessing business growth and opportunities can be a balance between the goals of yourself, your spouse, and business partners to determine if you are on the same page. Revisit your vision every five to ten years.
Sometimes a good old-fashioned SWOT analysis to identify the strengths, weaknesses, opportunities, and threats can bring objectivity into the decision-making process. A SWOT analysis is a great exercise to complete each year.
Next, consider your financials. Is your net income the result of extraordinary events such as government stimulus checks or the recent boom in grain prices as a result of weather, China, and the low value of the dollar? Develop your projected cash flow and determine how a 10 percent decline in revenue and a 10 percent increase in costs would impact your growth decisions.
Of course, pay close attention to the balance sheet. Subtract current liabilities from current assets to calculate working capital and divide the resulting number into total expenses. If the results are more than 25 percent, then you have an adversity cushion or a backup. Adequate working capital creates opportunities and is the “dry powder” needed to position you for growth and efficiency. In addition, maintain your debt to asset ratio under 50 percent.
Finally, when it is all said and done, if you cannot sleep at night, the decision is probably against your internal compass. If the decision is weighing heavily on you, then you will most likely want a more conservative position concerning your financials and how it will impact the business in a worst-case scenario.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.