The cost of waiting: Lessons in failing fast

The business and economics of agriculture are not getting any easier. Many sectors of the agricultural industry are experiencing cyclical changes driven by shifts in the supply and demand for both outputs and inputs. Geopolitics, weather, consumer and societal trends, and the occasional Black Swan event or other unusual occurrence create extreme economic volatility and can throw a proverbial wrench into an otherwise smooth-running business model. Structural shifts resulting from increased global competition can quickly alter profitability, cash flow, and the ability to build and preserve wealth on the balance sheet, ultimately affecting the long-term sustainability of a business and the quality of life it provides.

AQ (Adaptability Quotient)

A management term emerging in this challenging, but opportunistic environment is AQ, short for Adaptability Quotient. AQ is the ability to assess, adapt, and, more importantly, execute and monitor decisions. Success, both in the short and long term, requires making critical decisions, some of which will inevitably lead to failure. The key is to “fail fast,” learn from the experience, and avoid repeating the same mistakes. Observing and studying the experiences of others can also be instrumental in avoiding common failure traps.

Let us examine some of the most common failure traps observed over the decades through my experiences as an educator, business owner, and speaker. While this list is not all-inclusive, it provides a valuable perspective on the trials and tribulations of effective decision-making.

Leaving money on the table

The top of an economic cycle can often be the time when some of the most critical management mistakes occur. One that has been observed over the decades is that producers seeking the absolute peak in prices often have a fear of leaving money on the table. However, prices can fall very quickly and, in some cases, drop below the cost of production, resulting in losses. The proverbial “swing for the fences” or the pursuit of the home run can ultimately lead to a strikeout or failure.

A valuable tool in making these decisions is knowing the cost of production for your farm or ranch and understanding your breakeven price. If your business has multiple enterprises, enterprise budgets can be extremely useful in determining how to allocate capital resources, time, and energy. Financial sensitivity analysis that tests production, price, and cost assumptions can help establish guardrails, allowing for more objective, rather than emotional, decision-making. Historically, identifying marketing windows throughout the year for selling outputs or purchasing inputs can produce a series of base hits or successes rather than waiting for the perfect home run. Consistently making these sound decisions often results in positive entries in the profit ledger at the end of the year.

Failing fast: The metric

One simple metric is often used in business enterprise analysis when deciding whether to continue or shut down an enterprise. Simply put, if an enterprise cannot cover its variable costs over multiple years (typically two to three years), then a tough decision must be made to shut down the enterprise.

Begin by outlining your variable and fixed (overhead) costs. Ideally, the enterprise should cover all costs and generate a positive profit margin. In the short run, covering variable costs while generating some revenue to offset fixed costs, although not ideal, may justify a “wait-and-see” approach. However, if revenues fail to cover even the variable costs, it is time to fail fast and move on!

Tight Economic Times 

Over the years, positive economic times have often led businesses to expand their acreage or overall size. In turn, this expansion can result in placing marginal land and other less-productive resources into operation.

A grain farm in a prairie province in Canada illustrates this concept. After analyzing their operation, the owners decided to reduce the amount of rented acreage on several satellite farms that were only marginally productive and had become a logistical nightmare. Their cash flow and enterprise budget analyses clearly supported the decision.

Two years later, when I visited the business, the owners said it was one of the best decisions they had ever made. They wished they had failed faster or, as they put it, pulled the trigger sooner. By focusing on their core assets, they improved profitability, simplified their operation, and ultimately achieved a better quality of life.

The 96-4-50 rule

There is an old saying about employees and customers: 96% will perform well and create few, if any, issues. However, the remaining 4% often create the majority of the hassles. If you are not careful, you will spend 50% of your time dealing with that 4%, leaving less time and attention for your top performers and best customers.

Here are a few situations where failing fast may be the best course of action:

• Family members whose poor performance and lack of accountability reduce productivity and negatively affect the morale of other employees. These individuals are often value detractors rather than value creators. 
• High-maintenance landlords who are constantly seeking rent increases or repeatedly changing the terms of an agreement, creating unnecessary time, expense, and frustration. 
• Slow-paying customers who consistently delay payment for custom work, products, or services provided. 

The key is to be firm but fair and to establish clear expectations and accountability from the outset. Doing so can prevent many of these situations. When expectations are consistently unmet despite reasonable efforts to resolve the issue, it is often best to fail fast and move on.

Fair and equal

A common failure in family business transitions is treating all family members equally rather than equitably. This has become an increasingly significant issue as more nonfarm heirs demand their share of the estate and often want it immediately. This places tremendous financial pressure on the family members who are actively operating the business and attempting to purchase it and carry on the legacy while dealing with tight profit margins and inflated asset values.

In these situations, difficult conversations must occur early. In other words, fail fast rather than allowing unrealistic expectations to persist.

A $100,000 inheritance is often spent within 17 months, leaving little to show for it. Meanwhile, the family member who has successfully operated and managed the business should not be expected to buy the business twice, once through years of hard work and again through an inequitable estate settlement.

The control freak 

One of the most common issues in transition management is the senior generation’s reluctance to give up ownership, management, or control. Unfortunately, this often leads to long-term failure. There is an old saying: “To keep control, you must first give up control.” In other words, you either teach and share or ultimately destroy the business.

Sometimes the younger generation waits too long for the opportunity to lead. When it becomes apparent that meaningful responsibility and decision-making authority will never be transferred, they may need to move on quickly.

These are just a few of the common failure traps observed in businesses over the years. Adaptability Quotient, the ability to quickly assess, adapt, and, more importantly, execute and monitor decisions, can be a critical success factor in navigating both cyclical and structural change.

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.