There’s no secret to business success. So why is it so hard?
When I was studying for my MBA– we learned about business principles through the “case study” method. We read a narrative about a real business with some sort of challenge. We looked at their financial statements, and then answered some questions. We’d see cost accounting, inventory management, cost of capital or leverage in action. We could see how the concepts we read about in the textbooks happened in “real life;” and how to manage them.
“Real life” is relative. I recall reading about the multi-national beverage company, Brown Forman, whose revenue were (and are) in the billions. While still technically in the “food and beverage” industry, it was far and away so different than my “real life” in food and beverage. A few of my clients generate over $2 million per year in revenues; most are under $250,000 (including my own business, Interactive Cuisine). Certainly, none of the companies I worked with were publicly traded.
While the principles are the same, the applications differ. As an example, all manufacturing companies (of which farms and auto plants both fit) track inventory to some degree. A company like Toyota, hires a team to regularly track inventory. It’s probably automated with RFID tags. They pass along this information to the accounting/bookkeeping team who makes the adjustment in the accounting software. The plant manager can then read the reports on a daily, monthly and annual basis, and monitor whether the cost of production is being effectively managed. On a small farm or in a restaurant, the staff is decidedly smaller, and the roles of inventory tracker, bookkeeper and CFO are often the same person. With the limited time in the day, inventory gets tracked once a month, at best. No fancy software – it’s usually just an excel spreadsheet, printed out onto a clipboard.
While the concept of tracking inventory is the same, the practical application for the farming (and food) industry vary widely from other industries.
Small business entrepreneurs understand the concepts, and that they should apply them to their business. The tools that work for farmers, chefs and other food entrepreneurs need to be adapted to their “real life.”
Here are six ways that farm businesses are different than others. As a business advisor, coach or lender, the way in which you support farmers needs to be modified to respect these differences.
- Farmers are often their own bookkeepers
As alluded to above, farm businesses operate on limited staff. The owner of the business is often the field manager, marketing manager and bookkeeper. With all of these different hats, something falls through the cracks. They may get done, but with varying degrees of proficiency.
- Profits are not their #1 priority
Of course, farmers want to earn a profit, but it’s not the first concern. If you can believe it, some farmers even consider it a dirty word. While they want to earn enough to support themselves, they’re not looking to take advantage of anyone. As a consumer of local farm products, this may be hard to fathom when the prices are so much higher than “comparable” products at the supermarket.
The seemingly high prices reflect the true cost of growing food on a smaller, ecologically sustainable scale.
- They rarely sit at their desk
I tell my clients that they should spend about 15 minutes a day on bookkeeping tasks. This may seem like a small commitment, but if you don’t work at a desk, then a 15-minute “quick task” turns into a 30+ minute chore. By the time you get to your computer, log-in, settle in, etc… it can be a half hour before you return to your other work.
Creating a manageable routine for bookkeeping is just as important as having good systems.
- The business/cash cycle is long, and it sucks.
No doubt, cash is king and queen! Without cash, no business can survive. And all businesses manage cash like oxygen for a patient on life-support. It is the life of any organization.
For businesses like a restaurant, the cash cycle can be quite favorable. You purchase your ingredients on, say, a Tuesday. You don’t have to pay for them until 2 weeks hence. Meanwhile, your customers come in on Tuesday, Wednesday and Thursday, and the cash enters your bank account within 24 hours. You have your cash for 2 weeks ahead of when you need to pay for your ingredients. This in addition to the pass through taxes (like meals and payroll) that can sit in a restaurant’s checking account for weeks.
Farmers have the opposite cycle – and it can be quite a challenge. They purchase supplies (seed and livestock) and need to pay up front; most of their vendors don’t extend terms. It’s then another 6 weeks minimum (if you’re growing radishes!) and often as long as two years (for cattle) before they have a product to sell. Then, it can take your customers another 30 days to pay. At a minimum, farmers pay for their supplies 3 months before they get paid, and they need cash in the bank to float the business in the.
This protracted cash cycle is far more difficult to manage than the cash flow of a restaurant.
This cash flow cycle also mirrors the trial run of a new product. If a farmer wants to test, let’s say, a new breed of chickens, it may be 6 months before they have enough data to determine if it’s a success or not.
- During Peak Season, there are no days off.
I’ve written about this before…the food business and farming have an immediacy about them. The chickens need to be fed and watered every day, or they die. They don’t take a vacation.
In the restaurant business – you need to feed all of your customers the day they come in. They can’t push off a project until next week, much less tomorrow.
Just yesterday, I had a called scheduled with a client to review her cash flow to make sure she was in line with her budget. But she cancelled because she was short-staffed and up to her eyeballs in zucchini. If she didn’t deal with the immediate need of harvesting (and more importantly, servicing her customers), it didn’t matter if she had cash in the bank or not. No produce, no customers, no business.
With so many operational tasks that require immediate attention, the time for “on the business” work is limited. How can you create a plan to ensure you have time to focus on your financials, even when you’re flooded with crops?
- It has a lot of uncontrolled risk.
Certainly, all businesses have some level of risk. Will your customers like your product? Does the competition come out with a similar product? Did you hire the right employees?
These are “controlled” risks. You can predict that these challenges will arise and have a plan to mitigate them. You can create a product review plan to ensure you creating needed and desired product. You can create an employee hiring and training book. Sure, risks still exist, but you can manage them.
And then there are the uncontrolled risks – things like weather. You can’t control whether we have a hurricane or 3 weeks of rain. These types of events can wreak havoc on a farm business by taking out an entire crop or dampening customer turn-out at farmers’ markets. The best a farmer can do is diversify crops and have multiple sales channels.
While the principles of good business management are the same, understanding how your business is different can help you create the tools and systems that work for you and your clients.
Are you thinking about becoming a business coach for farmers? I will be offering my 9-week course, “The Farmer’s Edge – A Coach’s Primer” starting in September. In this class we’ll cover all the business concepts important to market gardeners, wholesale farmers, middle agriculture businesses, and food producers. You’ll learn about the tools and how to coach business owners to use them.
