DOLLARS & CENTS
Balancing Growth and Risk
Dr. David Kohl energizes agricultural
lenders,
producers
and
business
professionals with his keen insight
into the agricultural industry through
extensive
travel,
research, and
networking around the globe. He
is a Professor Emeritus of Agricultural
Finance
and
Small
Business
Management and Entrepreneurship
at Virginia Tech, Blacksburg, VA.
Dr. Kohl has traveled over 8 million
miles in his career and conducted over
6,000 workshops and seminars for a
variety of agricultural audiences.
Additionally, Dr. Kohl’s personal
involvement
with
agriculture
provides a unique perspective into
the future trends of the agricultural
industry and economy.
10 HEARTBEAT | WINTER 2018
A common question from producers who are engaged in my farm seminars
is, “How do I balance business growth with risk?” One may question why
producers are considering growth during a down agriculture economic
cycle. As I crisscross the country, I have found that 30 to 40 percent of
businesses are in a selective growth mode. This decision is being made in
an environment with razor thin margins and extremes in economic and
financial volatility.
First, in balancing growth with risk, execution of the business plan is
critical. This requires key stakeholders to identify their vision and business,
family, and personal goals in writing. One- and five-year objectives with
quantitative measurements are preferred.
Once the goals are established, one must consider whether the
growth or expansion is consistent with existing land, labor, capital, and
information resources. Will an expansion lower the cost of production
by spreading fixed costs over more production units? Will the expansion
require additional capital investments in land, equipment, and/or livestock?
A rule of thumb is to overestimate both the time and money required for
an expansion by at least 25 percent when developing projections to account
for unforeseen issues.
Underestimating the amount of capital that needs to be borrowed is
a critical mistake made in some expansion projects. If the correct amount
of funds is not borrowed, the capital expenditures are funded through
liquidity reserves or cash flow, which often results in cash flow and
working capital issues 12 to 24 months later.
The balancing act of growth and risk includes an internal assessment
of management capability. I have developed 15 critical management
characteristics that represent business IQ. These traits include knowing
the cost of production, developing and executing a marketing plan, and
developing and monitoring a cash flow. Growth, without management
horsepower, often results in system failures and profitability issues down
the road.
In some cases, the existing management team must allow the
possibility of new players to bring their ideas to elevate the business to
the next level. This is one of the biggest challenges of family business
transitions.
There are a few key financial metrics that a business can evaluate to
provide a pathway to balance growth and risk during an expansion.
• If the business is in a growth mode, the adequacy of working
capital must be evaluated. Working capital is a measure of liquidity,
calculated using current assets minus current liabilities. Before
expansion, the ratio of working capital to expenses should be at least
30 percent or greater to provide flexibility in case of macroeconomic