Building a behavioral mindset for uncertain times

The inspiration for this article occurred on the convention floor of the recent Berkshire Hathaway annual meeting. This was a historical event as the CEO, Warren Buffett, announced his retirement. In his four hours of questions, answers, and profound thoughts, he mentioned managing a business in an unsettling type of environment many times. He stated that successful businesses will have owners and management teams that have a behavioral management mindset that can respond, execute, and monitor results.

 Let’s examine the elements of this behavioral management mindset to help you to determine how you stack up.

First and foremost, you will need a good set of financial spreadsheets or written budgets. Do you know your cost of production and breakeven level? Many operations have multiple enterprises, thus budgets and breakeven calculations for each are critical. They allow for the proper distribution of energy and resources in the appropriate way to ensure profitability and sustainability. Knowing your cost of production and breakeven level also helps you position for new opportunities. 

Many factors create uncertainty in planning:

• Tariffs and sanctions.
• Export market concerns.
• Global competition.
• Dollar value fluctuations.
• Interest rate changes.

An important aspect of the behavioral mindset is to continually conduct “what if” or financial sensitivity analysis. Alter production, price, cost, and interest rate levels to determine the guardrails or boundaries of outcomes.

Your lender will often examine the worst-case scenario to determine their potential risk level. The average case provides clarity when you have historical trend analysis. Develop the best-case scenario to test your goals and aspirations from a “cup half-full” vantage point.

Create cash flow discipline by transforming your budgets into monthly or quarterly cash flows to determine the seasonality of revenues and expenses. This promotes disciplined behavior rather than emotional decision-making. Don’t get caught in the trap of spending a dollar to save $.20 in taxes, which results in long-term financial obligations or forfeiting reserves in cash, working capital, and financial liquidity. Too often, financials are only examined once a year with an accountant for tax reasons. This reactive approach limits your strategic flexibility.

Leverage risk management tools. A behavioral advantage in agriculture is using marketing and risk management programs effectively. Crop and livestock insurance plans vary and need customization for your specific situation. An outside advisor can be valuable as a sounding board. The key is incorporating your budgeted breakeven and risk tolerance levels into the plan.

Risk management plans must examine:

• Farm liability coverage.
• Crop, livestock, and equipment insurance.
• Disability insurance.
• Life insurance.

A good rule of thumb is to have enough life insurance to cover debt obligations.

Plan your management transition. A behavioral management mindset involves developing, executing, and monitoring a management transition plan. Warren Buffett had his plan in place before his announcement.

The sobering reality is that less than 50% of farmers and ranchers have basic wills. Our research shows fully developed transition and estate plans exist less than 25% of the time among top producers.

A business builder often struggles to give up control, particularly management and sometimes assets. There’s an old saying, “To maintain control in transition to the next generation, owners must give up control.”

Separate business and personal finances. Lifestyle creep and the increase in family living costs, burdens cash flow. This becomes more complex when multiple families from different generations withdraw proceeds for living expenses, creating complexity, confusion, and conflict.

Maintain separate business and family living budgets. Co-mingling expenses can be a killer, resulting in overdrawn credit lines or lender refinancing requests.

Living costs continue rising and include insurance, education, everyday expenses, and daycare and adult care. However, clarity in this area is critical for success.

Finally, take care of yourself. Physical and mental health are critical. Take time to:

• Shut off technology.
• Listen to hear what is being said — and what isn’t being said.
• Read and listen to podcasts.
• Explore business authors of yesteryear.

You’ll find that as much as things change, basic principles often stay the same. Mark Twain’s favorite saying captures this well, “History doesn’t repeat itself, but it often rhymes.”

Dr. David Kohl is an academic hall-of-famer in the College of Agriculture and Life Sciences at Virginia Tech in Blacksburg, Va. Dr. Kohl is a sought-after educator of lenders, producers and stakeholders with his keen insight into the agriculture industry gained through extensive travel, research and involvement in ag businesses. This content was provided by AgWest Farm Credit.