Strategy and Planning

A matrix to trouble-shoot tough times

"How much are those maps?," inquired a lost tourist to a clerk behind the counter.

"They're $5.95," the clerk replied.

"Is that right?," said the tourist as he handed $6 to the clerk. "No, it's not right," the sympathetic clerk said, "but that's what they cost."

David Kohl figures farmers can relate to that tourist. The unexpected often upsets farm finances, and solutions sometimes seem limited.

"For example," says Kohl, an ag economist and farm finance specialist, "when the bottom line takes a beating, many farm managers see refinancing as their only option."

Explore every option, says David Kohl.

Is there an alternative? Kohl believes there is.

"I call it a trouble-shooting matrix," he explains. "A matrix strengthens a structure. A trouble-shooting matrix helps managers deal with circumstances that threaten farm viability."

It's a tool he developed in the 1980s when agriculture was in the middle of a financial crisis. "These were very emotional times, and many farm managers believed their only option was to refinance. Many had options they hadn't considered because it's difficult to think clearly and assess options fully when you're stressed." Here are his suggestions:

Fine-tune costs. Rank your top three to four expenses for each enterprise. Then, pencil-out a 10% reduction for each. You might think there are no places to cut, but do the analysis anyway. You might be surprised! But remember, the overall goal is to reduce costs without impacting production.

Increase income. What does your farm produce most efficiently, and how can you market that production most profitably? Should you produce more? Improve efficiency? Or add value? Price takers rely on commodity prices; adding value provides the opportunity to work with other business people in the ag sector and share in profits generated further along the food chain.

Sell assets. This is a tough one. In some cases, you won't pocket what you paid; however, you could reduce debt load and/or free up capital. The question of leasing versus ownership is also worth considering. You'll want to run some numbers.

Work off-farm. Many farm families have already exercised this option. Those who haven't will find the workplace much more technical than it was in the 1980s. Many positions require computer literacy, for example. What are your job skills? Where can you market them? There are family issues to consider as well.

Cut living expenses. Live within a budget, and review use of credit cards. Discipline is a big factor here.

Restructure debt. Refinancing costs money and traditionally reduces your equity about 5% to 7% each time. Frequent refinancing (every two to three years) might suggest your farm needs larger size and scope, has expanded too quickly or living expenses are too high. Refinancing can be a good option but it's not your only option. For further information, please contact David Kohl by e-mail: sullylab@vt.edu

Some challenges have more than one solution. That's how David Kohl's trouble-shooting matrix points the way to rebounding from the unexpected.