Editor’s note: This is the fourth in a series labeled ‘From the boardroom’ that focuses on the role of a farm board – policies, planning, and leadership. Watch for more in this series in upcoming weeks.
A key part of the farm board’s role in setting the strategic direction of the business is formulating a strategy for business growth. Once the owner board defines a strategic position, management can build an execution plan to identify and capitalize on growth opportunities.
For decades I have quizzed producer audiences asking how many have a clearly defined strategy for growth. Rarely does more than 2-3% of the audience raise their hands. When re-phrasing the question, “How many of you wish you could have said you have a clearly defined growth strategy?” a majority in the audience raises their hands.
The reality is, most have a reactive, not proactive strategic approach to growth. This results in lost opportunities, and often serious consequences to the business when growth occurs in a haphazard manner.
So how do you develop a growth strategy that’s right for your farm? Consider these five issues:
- What is the optimal scale for balancing labor, equipment and owners’ long term goals? Factors to consider can include current competitive position, cost of production vs. industry peers, interest in existing and future successors to work in and invest in the business, and capital available to support growth or expansion.
- How do advances in technology influence growth? And what acreage base or animal use size do you need to justify owning the core production resources needed to produce commodities you raise? Wider and more efficient combines, tractors, trucks, and sprayers enable one person to do what several did decades ago. Conversely, the cost of these business tools is also ramped up. The business has to seek a target size that optimizes the use of critical support assets.
- What is the primary metric being used to measure growth – physical measurements such as acres, animal units, or quantity of commodity produced? Or should it be sales or profit? If the key metrics are sales and profit, it challenges the board to ask, “Are we getting maximum revenue and efficiency out of the current resources?” before looking to strategies that expand the size of the business.
- Once growth targets are set, will the board support budget changes needed to implement growth plans? Do management and staff have the skills to manage growth? What changes will be needed in the staffing and governance processes to avoid sacrificing quality of life for business owners, managers and their families? Are you prepared to adjust compensation and support shifts in job roles needed to avoid chaos often created by unplanned growth?
- What is a sustainable growth rate? A key financial principle is: You must grow your retained net worth at least as fast as you grow the overall size of your business. Has the board been tracking this metric? If you don’t, working capital and debt/asset relationships can erode quickly. This challenges the board to analyze how much of historical earnings have been withdrawn versus retained in the business. If retained earnings growth has been nominal, are current or prospective owners willing to inject capital to fund growth opportunities?
Farm businesses that aspire to excellence articulate and execute a clear strategy for business growth. What is your board’s position on this subject?
Wittman and his daughter Cori are partners with other family members operating a ranch in Idaho.