In every business decision, you have to measure the risk versus the reward. That can be really daunting in today’s volatile economic environment.
"Success in business is about sweating the small stuff," says David Kohl, professor emeritus of agricultural finance at Virginia Tech University.
He provides insights for some big-picture business issues you may be considering.
1. Should I purchase land now or wait?
With softer land values and farmers exiting the profession, you will likely have the opportunity to acquire some more land. Is it a good idea?
“Land is a good investment, but you have to keep working capital—at least one year of payment as cash in the bank,” Kohl says.
You don’t want to be in a spot where you have to leverage off-farm income to buy land.
2. What are some considerations when a junior partner comes into a business?
Expanding your farm team is exciting and challenging. Don’t let this be a rash decision, Kohl says.
“Make sure you have your roles and responsibilities defined,” Kohl coaches. Make sure a junior partner adds real value to the operation. He says a good goal is for a new partner to generate $45,000 of net income.
Also, factor in the expanded network of a new employee. “When you hire an individual you hire their spouse, partner or significant other,” Kohl says. Be open and honest about the community, especially factors like the education system, access to internet/technology and lifestyle amenities.
3. Should I diversify?
A diversified business can weather economic challenges. Just be sure that the new venture is complimentary of your other assets, Kohl says. Also analyze how much time will it take away from the core business.
Consider these 10 questions before you commit to new or expanded ventures.
4. What are the best tools to monitor growth?
A few key ratios include liquidity, capital, debt, return on assets and family living expenses. Track these all on a monthly and quarterly basis, Kohl suggests.
Another helpful exercise is to do a shock test on your financials. What would happen if expenses increased by 5% to 10% or if you saw in a 5% to 10% decrease in profitability?
5. What are some things to consider if I’m thinking of bringing my son or daughter into the business?
The first step is to build a culture so your children want to come back to the farm, Kohl says. It’s also important for both the senior and incoming generations to write goals—family, business and personal.
“They must be in writing,” Kohl says. “Do goals separately first, then compare notes.”
Read some more wisdom to ponder from Kohl. He's always great for a thoughtful quote!