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May 2011 Archive for Ask a Margins Expert

RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Supplier Relationships & Price vs. Value

May 30, 2011

 

Relationships are the cornerstone to any solid business exchange. Trust and loyalty open many doors of opportunity. Working with suppliers to focus on mutual benefits will create a long-term working relationship which can dramatically improve your bottom line.
Try thinking of your suppliers as partners rather than just companies or servants. If you make their job easier that value will be returned directly back to your bottom line. For example, by purchasing products such as seed or equipment from one supplier instead of several suppliers you will improve your buying power. Customer loyalty from a supplier’s perspective is generally one of their primary sales goals. Therefore, if you are willing to be a loyal customer you’ll have the opportunity to receive better services and most likely better prices. Ultimately, the benefit to your operation would be an increase in quality services. It's much easier for a company to go out of their way to work with and help a customer who is loyal. Most suppliers won’t go out of their way for a customer that's always complaining and beating them down on prices.
Let's look at understanding the difference between price and value in purchasing a product. It's easy to focus on price however; value always improves margins over price alone. It's definitely like the old saying goes: “You get what you pay for!” Here are some basic definitions of price versus value to keep in mind as you purchase products. Ask yourself, for your business which is more important price alone or value? For clarity, let's define the terms of price and value.
Price: The amount of money exchanged for a given product or service.
Value: The quality of features and benefits received from purchasing a given product or service.
Have a conversation with your suppliers with regard to price versus value. Once suppliers have a clear understanding of what you value and your specific needs, it will be much easier for them to meet your needs. Suppliers can’t read your mind. Every producer they work with is unique and has different needs. Invest some time having detailed discussions with your suppliers about product features and benefits. Discuss features that are important to your operation but then expand on what benefits are most important. For example, you may be interested in the feature of a new transmission on a tractor. However, what's truly important to you may be the benefit of increased fuel efficiency which will save you money. By having detailed discussions with your suppliers it will help them to understand how you make your decisions and what's truly important to your operation. Once a supplier has accurate information about your specific needs and can count on your loyal business you can rest assured that you will be receiving the best value from your products.
With the high tech complexity of many products and services in today's world, value can widen margins much faster than price alone! It's difficult for individual producers to keep track of the rapid changes and opportunities that new agricultural products bring us every year. Because of these product complexities, we are fairly dependent on supplier’s information and guidance. If we focus on relationships, loyalty, and value with suppliers, we can count on them to return the same!

Spring Invoice Review

May 21, 2011

 

Spring is always a sprint to the finish line. Fast-paced action, long hours, and very little sleep can lead to overlooking some important margin management processes. As things begin to slow down to a more normal pace it's time to review your invoices for your spring inputs. While things are relatively fresh in your mind; invest some time and effort into a line by line review of each specific invoice for your operation.
It's amazing what can be overlooked when everyone is operating in high gear. We are all human, including our suppliers. When workloads are double or triple and invoicing is part of the equation there are bound to be some mistakes along the way. Therefore, it's worth some extra effort to review invoices line by line. If you don't completely understand some of the individual information on an invoice, call the supplier for a detailed explanation. Suppliers value your business and want clearly understood and concise billing; however, even some of the best systems can create questions that need to be discussed. Questioning an invoice is just another important part of managing your business. It also tends to demonstrate to yourself and your suppliers that you are a detailed business manager. Make regular invoice reviews a general procedure of your business.
Here is a list of key analysis topics for spring invoice reviews.
  1. Seed - breakdown costs of individual crops if multiple crops are on a single invoice.
  2. Fertilizer - analyze rates and compare differences from farm to farm
  3. Nitrogen- analyze rates, be sure that rates and costs per acre match price per ton prices
  4. Equipment repairs - review all labor and parts provided by service technicians
  5. Warranty coverage- versus your charges
  6. Parts-what did you use versus what you were billed
  7. Supplies-what did you use versus what you were billed
  8. Labor - review hourly wages or other labor structures
  9. Fuel -try to manage your beginning and ending inventory, this makes it fairly easy to track usage.
 
Keep in mind, now is a good time to break down these costs into per acre and per bushel expenses. This will help you as you analyze your overall cost of production.
A detailed invoice review which includes a discussion with suppliers serves two purposes. First, it may help you catch an overcharge, an application mistake, or an incorrect product for a specific line item. The second and possibly more important purpose is the peace of mind that your expenses are accurate.
Managing margins effectively includes many facets of your business. Keep in mind, 50% of the equation starts with your expenses. You may as well start out with correct information.
 
 

Have a Lender on the Bench

May 16, 2011

 

As we manage our farm businesses during these volatile times it's more important than ever to manage risk. With high grain prices and the prospects of potentially wide profit margins we need to consider some of the potential challenges that may be hidden among what looks to be a time of great opportunity. One potential challenge that needs to be considered is the access of cash during volatile times. Cash access is currently not a problem for most producers, therefore, now may be the best time to develop some new relationships with potential lenders in case you need to make a change down the road.
Ag lenders currently are solid lenders, however, as time progresses things we cannot predict may change and adjust within our industry. As these changes occur, lending requirements, regulations, focus, and priorities can and will adjust. It's important that we keep close tabs on our lenders, just as they are focused on the quality of our business decisions.
Let's assume that your lender informs you of an internal change or adjustment and will no longer be able to meet the needs of your farming operation. In most cases this is unlikely, yet these questions need to be asked. What would your response be? If you had 30 days to transition to another lender, are you prepared to do so? Do you have the proper documentation prepared and ready to present to another lender under short notice? These are just a few considerations in the event you would need to make a change from one lender to another.
Even though switching lenders may seem unlikely, working through the process and developing new relationships may ultimately open some new doors of opportunity. Spending time discussing possibilities with a different lender, is just good business. Discussing your plans, interest rate opportunities, or other possible benefits from a new lender are always worth looking into. Just as you shop around for machinery or other supplies, it's just as important to have options when it comes to managing your financial situation.
Transition is never easy; therefore, by having a “Lender on the Bench” in case you need to make a change will make this adjustment much less painful. I would recommend having at least one if not two other lenders who have a complete and full understanding of your financial situation. During this process of building new relationships you will refine your skills of putting together the proper information to acquire lower interest rates with some of the best services in the industry.
Here is a list of discussion topics to work through with your current lender. Once you have these refined with your current lender, it's fairly easy to duplicate the information and sit down with a prospective lender and share this information.
 
1. Build a written strategic business plan which clearly defines your goals and business objectives for the next 3 to 5 years.
2. Be sure to have clear communication with your lender at least twice a year to review any changes or adjustments to this plan.
3. Discuss potential challenges up front in order to minimize the possibility of any surprises.
4. Review specific cash flow and margin projections to ensure a clear understanding of your current financial position. (Review: short, intermediate, and long-term loans)
5. Review current interest rates and discuss your options.
6. Discuss your current financial ratios.
7. Discuss Plan B in case your original plan would run into any significant challenges.
During volatile times having multiple lender options may be the key for your operation if the ag economy were to change. If something happens to your lender and you’re depending on their services it's nice to know that within a short period of time you could have a seamless transition to another lender.
 
 
 

Attitude: The Key to a Successful Business

May 06, 2011

 

Numbers are critical; attitude and motivation on the other hand are components that give you the ability to properly analyze the numbers. During days with long hours it’s challenging to always keep the proper perspective. Sometimes it's very difficult to keep an upbeat attitude and stay focused on the appropriate tasks. One of the best ways to stay focused is to have some written quotes to uses as guideposts to steer you through challenging situations. Springtime can be challenging so I thought I would share with you some of the key quotes that we uses as guideposts within our operation.
1. “The problem is not the problem; the problem is your attitude about the problem”
2. “Efficiency is doing things right, effectiveness is doing the right things” by Peter F Drucker
3."Never mistake activity for achievement.  " John Wooden
 
4."Success usually comes to those who are too busy to be looking for it." --Henry David Thoreau
5.”I'm a great believer in luck, and I find the harder I work the more I have of it." --Thomas Jefferson
6.”You've achieved success in your field when you don't know whether what you're doing is work or play." --Warren Beatty
7. “If you don’t have daily objectives, you qualify as a dreamer.”  ~ Zig Ziglar
8.“People often say that motivation doesn’t last. Well, neither does bathing.. that’s why we recommend it daily.”  ~ Zig Ziglar

10.“Efficiency is doing better what is already being done.”
Peter F. Drucker Quotes

 When faced with challenges keep some of these quotes in mind. With every challenge or struggle there are always hidden opportunities, sometimes we just need the right frame of mind see them.
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