THEMANAGEMENT MINDSET - TEPAP
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T HE M ANAGEMENT
M INDSET
Dr. David M. Kohl
Professor Emeritus, Agricultural and Applied Economics
Member of Academic Hall of Fame, College of Agriculture & Life Sciences
Virginia Tech, Blacksburg, VA
(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu
Macro Clinic Video Blog: www.compeer.com/education
Road Warrior of Agriculture: www.cornandsoybeandigest.com
January 12, 2021 Ag Globe Trotter: www.northwestfcs.com
Dave’s GPS & Dashboard Indicators: www.farmermac.com
2 Management Mindsets for the 2020s
Poll #1
Which would best describe your business? (select
one)
a) startup from scratch
b) family business in transition
c) existing business in growth mode
d) scaling down, becoming more efficient
e) stable, no change
3
Median Net Farm Income- All,
High 20% and Low 20%
2019 Update:
High 20%= $236,000
Low 20%= $ -49,000
4
Aligning with Mindsets
Producer A Producer B
How do I compare? Will a lender finance me?
What are others doing? Will I survive for another
think longer term & what is year?
on the horizon often a know it all or
victim
School vs. Real World Perspective:
In school, you get the lesson first, then the test.
In the real world, you get the test first, then the lesson.
5
Management Assessment
Greens Yellows Reds
adaptive to a success because of waiting for prices &
situation- proactive equity & history vs. markets to save
5% rule profitability & cash them
flow excuse game, not
get efficient before
getting bigger preparing the next my fault
generation lose money, equity
sweat the small stuff
bigger before better, keeps them going
plan, strategize, examine human
execute & monitor 80/20 rule is alive &
horse power well
process oriented magic bullet- the
advisory teams next big thing
6
Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist Your Score Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production Written In head No idea
2. Knows cost of production by enterprise Written* In head No idea
3. Goals - business, family, & personal Written* In head No idea
4. Record keeping system Accrual Schedule F (one & done) No idea
5. Projected cash flow Written* In head No idea
6. Financial sensitivity analysis Written* In head No idea
7. Understand financial ratios, break evens Written* In head No idea
8. Work with advisory team and lender Yes* Sometimes Never
9. Marketing plan written and executed Yes Sometimes Never
10. Risk management plan executed Yes Sometimes Never
11. Modest lifestyle habits, family living budget Yes* Sometimes Non existent
Written plan for improvement executed &
12. Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan Yes Working on plan Non existent/controversy
14. Educational seminars/courses Yes Sometimes Never attend
15. Attitude Proactive* Reactive Indifferent
Total 0
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancingBusiness IQ Exercise
After completing the Business IQ: Management Factors
Scorecard, what are three areas/points in your business
that you will continue and three areas/points for
improvement?
Three areas/points to continue: Three areas/points to improve:
• ______________________ • ______________________
• ______________________ • ______________________
• ______________________ • ______________________
8How Can Team Members Use Business IQ as a Tool for Producers? screener for attitude to improve each family member, business partner, spouse complete the Business IQ separately assists in prioritizing improvements communication tool- internal and external to team of advisors customer develops plan for improvement to improve or buy in objective way to measure management monitoring tool, year over year 9
Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist HUSBAND Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production 3 Written In head No idea
2. Knows cost of production by enterprise 4 Written* In head No idea
3. Goals - business, family, & personal 4 Written* In head No idea
4. Record keeping system 3 Accrual Schedule F (one & done) No idea
5. Projected cash flow 4 Written* In head No idea
6. Financial sensitivity analysis 4 Written* In head No idea
7. Understand financial ratios, break evens 4 Written* In head No idea
8. Work with advisory team and lender 4 Yes* Sometimes Never
9. Marketing plan written and executed 2 Yes Sometimes Never
10. Risk management plan executed 3 Yes Sometimes Never
11. Modest lifestyle habits, family living budget 4 Yes* Sometimes Non existent
Written plan for improvement executed &
12. 4 Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan 3 Yes Working on plan Non existent/controversy
14. Educational seminars/courses 3 Yes Sometimes Never attend
15. Attitude 4 Proactive* Reactive Indifferent
Total 53
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancing
(See pg. 2 for Progressive and Attempting Turnaround definitions)Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist WIFE Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production 3 Written In head No idea
2. Knows cost of production by enterprise 2 Written* In head No idea
3. Goals - business, family, & personal 3 Written* In head No idea
4. Record keeping system 3 Accrual Schedule F (one & done) No idea
5. Projected cash flow 3 Written* In head No idea
6. Financial sensitivity analysis 3 Written* In head No idea
7. Understand financial ratios, break evens 1 Written* In head No idea
8. Work with advisory team and lender 3 Yes* Sometimes Never
9. Marketing plan written and executed 2 Yes Sometimes Never
10. Risk management plan executed 3 Yes Sometimes Never
11. Modest lifestyle habits, family living budget 3 Yes* Sometimes Non existent
Written plan for improvement executed &
12. 2 Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan 3 Yes Working on plan Non existent/controversy
14. Educational seminars/courses 2 Yes Sometimes Never attend
15. Attitude 3 Proactive* Reactive Indifferent
Total 39
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancing
(See pg. 2 for Progressive and Attempting Turnaround definitions)Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist DAUGHTER Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production 2 Written In head No idea
2. Knows cost of production by enterprise 2 Written* In head No idea
3. Goals - business, family, & personal 3 Written* In head No idea
4. Record keeping system 3 Accrual Schedule F (one & done) No idea
5. Projected cash flow 2 Written* In head No idea
6. Financial sensitivity analysis 2 Written* In head No idea
7. Understand financial ratios, break evens 2 Written* In head No idea
8. Work with advisory team and lender 2 Yes* Sometimes Never
9. Marketing plan written and executed 2 Yes Sometimes Never
10. Risk management plan executed 2 Yes Sometimes Never
11. Modest lifestyle habits, family living budget 4 Yes* Sometimes Non existent
Written plan for improvement executed &
12. 3 Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan 3 Yes Working on plan Non existent/controversy
14. Educational seminars/courses 3 Yes Sometimes Never attend
15. Attitude 3 Proactive* Reactive Indifferent
Total 38
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancing
(See pg. 2 for Progressive and Attempting Turnaround definitions)Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist CFO Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production 3 Written In head No idea
2. Knows cost of production by enterprise 3 Written* In head No idea
3. Goals - business, family, & personal 3 Written* In head No idea
4. Record keeping system 3 Accrual Schedule F (one & done) No idea
5. Projected cash flow 2 Written* In head No idea
6. Financial sensitivity analysis 3 Written* In head No idea
7. Understand financial ratios, break evens 2 Written* In head No idea
8. Work with advisory team and lender 2 Yes* Sometimes Never
9. Marketing plan written and executed 2 Yes Sometimes Never
10. Risk management plan executed 2 Yes Sometimes Never
11. Modest lifestyle habits, family living budget 3 Yes* Sometimes Non existent
Written plan for improvement executed &
12. 3 Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan 3 Yes Working on plan Non existent/controversy
14. Educational seminars/courses 3 Yes Sometimes Never attend
15. Attitude 3 Proactive* Reactive Indifferent
Total 40
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancing
(See pg. 2 for Progressive and Attempting Turnaround definitions)Business IQ: Management Factors
Critical Questions for Crucial Conversations
Farmer Checklist LENDER Green (3 points or 4*) Yellow (2 points) Red (1 point)
1. Knows cost of production 3 Written In head No idea
2. Knows cost of production by enterprise 3 Written* In head No idea
3. Goals - business, family, & personal 2 Written* In head No idea
4. Record keeping system 3 Accrual Schedule F (one & done) No idea
5. Projected cash flow 3 Written* In head No idea
6. Financial sensitivity analysis 3 Written* In head No idea
7. Understand financial ratios, break evens 3 Written* In head No idea
8. Work with advisory team and lender 3 Yes* Sometimes Never
9. Marketing plan written and executed 1 Yes Sometimes Never
10. Risk management plan executed 1 Yes Sometimes Never
11. Modest lifestyle habits, family living budget 1 Yes* Sometimes Non existent
Written plan for improvement executed &
12. 1 Yes* Sometimes Non existent
strong people management
13. Transition plan/Business Owner plan 3 Yes Working on plan Non existent/controversy
14. Educational seminars/courses 3 Yes Sometimes Never attend
15. Attitude 2 Proactive* Reactive Indifferent
Total 35
*Extra Points: Score Overall Analysis
- Progressive Business may receive 4 points for #2,6,7,8,14
35-50 Strong management rating & viability
- Struggling Business Attempting Turnaround may receive 4
points for #3,5,8,11,12 20-34 Moderate risk & viability; will most likely show previous refinancing
(See pg. 2 for Progressive and Attempting Turnaround definitions)15
Financial Ratios Across
Business IQ Percentiles
Debt/Total Asset
58.20%
50.08%
32.30%
28.70%
20.52%
17.45%
TOP 1/3 MIDDLE 1/3 BOTTOM 1/3
Median Mean
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study
at University of Kentucky
16Financial Ratios Across
Business IQ Percentiles
Return on Assets
3.16%
2.25%
0.94%
0.173%
0.45%
-0.20%
TOP 1/3 MIDDLE 1/3 BOTTOM 1/3
Median Mean
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study
at University of Kentucky
17Financial Ratios Across
Business IQ Percentiles
Net Farm Income
$202,120
$123,766
$109,947
$45,243 $53,406
$14,349
TOP 1/3 MIDDLE 1/3 BOTTOM 1/3
Median Mean
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study
at University of Kentucky
18Other Key Ratios
coverage ratio
top third - 114%
bottom third - 10%
operating expense to revenue ratio¹
top third 68%
bottom third 90%
¹ excluding interest and depreciation
19Management Tests for
Farms/Ranches/Businesses/Households
volatility
agility
resiliency
opportunity
20Passing the Test for Volatility
• working capital 20-25% of expenses
• cash in household budget, 4-6 months of
expenses
• marketing program
• commodity
• value added
• risk management program
• crop insurance
• health insurance, disability
• coverage, equal to or greater than debt levels
21Passing the Test for Agility • working capital/cash • Is it business driven? • Is it lender driven? • optimization versus diversification • resources • talents, skills • marketplace • plan B, C, and D non-farm/ranch gig income/revenue find the balance 22
Passing the Test for Resiliency
• competitive cost of production
• break evens and benchmarking
• trend analysis, positive
• modest to low family living withdraws
• family business needs to prepare for the next
generation – 6 year rule
• startup mentorship
• term debt/EBITDA < 6 to 1
• EBITDA includes farm/non-farm income
23Passing the Test for Opportunity • manage the controllables & manage around the uncontrollables • goal focused • 80-16-4 rule • process focused • follow fundamentals • plan, strategize, execute & monitor • team of advisors • strong Business IQ • 35 = opportunity 24
Chat Question #1
What are your top three actions for
2021?
Click on the Chat button at the
bottom of the Zoom window.
Toggle the drop down to ‘All
panelists and attendees’ then
type your response.
25Lenders Wish List for 2021 For
Producers
projected cash flow
accrued adjusted statements
break evens - cost of production
marketing risk management plan
personal family living budget
written goals
26The Feisty Fifteen: Problems
Your Business Should Have (1)
Your business pays lots of taxes.
find sweet spot of paying taxes vs. deductions
Your lender wants to loan you money.
strong profits/cash flow
war chest for working capital - greater than 25% of operating expenses
You have growth frustrations, just can’t grow fast enough.
overestimate capital and time by 25%
term debt to EBITDA < 5 to 1
working capital to debt service > 5 to 1
human horsepower & management acumen
Everyone wants to work for you.
attract & retain the right people, including family members
be a work culture magnet
over compensate productive people
27The Feisty Fifteen: Problems
Your Business Should Have (2)
Your business has excess cash sitting around.
cash is queen
blocking capital in adversity
opportunity capital for purchases or acquisitions
In a family business, the older generation suddenly wants to exit, and they
have at least 50% of retirement income generated outside the business.
You have time for family & friends when neighboring businesses don’t.
2,500/500 hour rule
You could walk away from the business for one month and it functions fine
without you.
You left money on the table when marketing this year’s crop or livestock.
The younger generation spends too much time in the office on the
computer and in the books.
You must spend money for a facilitator and team of advisors for your
transition/estate plan.
28The Feisty Fifteen: Problems
Your Business Should Have (3)
Your neighbor comments that you spend too much time at seminars and
conferences, and you have heard it all before.
Even though you are financially successful you still spend time refining your
written business plan.
You don’t have to bring your personal checkbook to the business board
meeting.
Mom & Dad, Grandma & Grandpa are upset about those tough questions
that you are asking in developing the business plan.
29Dr. Kohl Unplugged (1)
Do you see any trends in business IQ results across the different
generations? i.e. older generations having higher or lower business
IQ than more recent generations? If so, any ideas of why that might
be?
Often we find producers make quick decisions based on cash flow
for the month. Given COVID volatility, that is understandable. How
would you present the “cost of not doing something”… sometimes
referred to as Type 1 vs. Type 2 error? Do you have an analogy or
examples of these types of discussions?
Based on groups of producers, green, yellow and red; how do you
feel this influences and impacts marketing decisions?
The top 20% of class have a high business IQ. How do they decide
on what investments to make? (Big or small). What gets their
attention when making a purchase?
30Dr. Kohl Unplugged (2)
What are the 2-3 key things that I need to learn from a producer’s
banker/lender to help me be a more effective advisory board
member?
Will COVID-19 change the university education model long-term?
What do you see interest rates doing in the next decade?
You had mentioned that non-meat and non-dairy alternatives gained
more market share when processing plans were hit this year. Do
you think this will continue to grow at an increased rate once the
COVID bug passes?
31Chat Question #2
What is the most enjoyable aspect
of being involved in agriculture?
Click on the Chat button at the
bottom of the Zoom window.
Toggle the drop down to ‘All
panelists and attendees’ then
type your response.
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