Kohl's rulebook
Facts and figures condensed into food for thought by RBC Royal Bank's David Kohl*.
It was a near-fatal encounter with a first-calf heifer that made David Kohl truly appreciate his disability insurance coverage.
That was the origin of his "cow 7" rule, one of many in his "rulebook" for farm managers. You won't find it on bookshelves; it's just a collection of facts and figures gathered from surveys, news reports, research, personal experience and anecdotes that he uses to underscore key messages in presentations to students and farm managers.
His rules provide food for thought on issues ranging from cash flow to succession planning. Here's a sampling:
The 1-in-7 rule. For every new acre of land you buy and mortgage heavily, you should own seven acres to underpin farm stability. Break this rule only if:
- Your ratio of net working capital (current assets minus current liabilities) to farm expenses averaged over the past five years is greater than 20%.
- Or you have an excellent risk management strategy.
- Or you're prepared to sacrifice lifestyle.
The 23-year rule. Use credit cards wisely and repay charges as soon as possible. It takes 23 years to retire a $2,000 credit card debt if you repay only the required monthly minimum amount at 18% interest.
The 5-5-3 and 10-10-6 rules. Before committing capital to expansion or diversification, "shock-test" an opportunity by reducing projected cash flow by 5%, inflating expenses by 5% and assuming interest rates will rise by 3%. If it still flies, go for it! Double the shock to 10-10-6 if risk warrants.
The new Corvette rule. Budgeting is the best way to track family living expenses, but here's a shortcut to a quick estimate: for any 10-year period between 1967 and today, family living expenses will average between 75% and 80% of the price of a new Corvette.
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| It was a near-fatal encounter with a first-calf heifer that made David Kohl truly appreciate his disability insurance coverage. |
The 10- to 15-year rule. A risk-management strategy is an absolute must in today's global agriculture. Here's why: in the 1970s and ‘80s, farm businesses could rebound from poor crops or low prices within two or three years; today's narrow margins can put a farm business "in the hole" for 10 to 15 years.
The cow 7 rule. Cow 7, a first-calf heifer, injured Kohl severely a few years ago. Only Webster, Kohl's Black Lab Retriever saved the day by distracting the heifer while Kohl staggered to safety. Accidents and injuries are commonplace in agriculture, and things can change forever in a moment. Anticipate the worst, and insure against it.
The 5- to 7-year rule. Alarm bells should ring if farm debt must be restructured more often than every five to seven years. More frequent restructuring impacts cash flow, capability to expand, and retirement and succession options.
The 51/49 rule. Equal (50/50) partnerships are truly democratic, but operations can grind to a halt if someone doesn't have the final say. A 51/49 arrangement can break deadlocks. Whether it's 50/50 or 51/49, however, mediation can resolve disputes, consider all points of view and possibly minimize ill-will.
The 3- to 5-year rule. Encourage children to get their education and work off-farm for three to five years before they join the family operation. Work experience and exposure to other managerial styles provide valuable insight and training. Research shows this strategy benefits both profitability and succession management.
The 6-year rule. Give young adults some degree of managerial responsibility within six years of their rejoining the family business; otherwise, they can become employees for life who might not possess the confidence and skills necessary to succeed parents.
* Dr. David Kohl is a highly respected teacher, author and speaker. He is presently serving as advisor to RBC Royal Bank management, staff and clients while on leave from Virginia Tech University in Blacksburg, where he is a professor of agricultural finance, and small business management and entrepreneurship.
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