TLDR
Industry leader Dr. David M Kohl shares his perspective on how agricultural business owners can develop an effective management mindset by focusing on business and financial IQ, emotional intelligence, and adaptability.
Business and financial IQ prioritizes effective production, cash and risk management, marketing, and employee efficiency.
Emotional intelligence refers to the importance of business culture, where profits are built upon return on relationships and collaboration.
Businesses should focus on their ability to assess, adapt and be held accountable in order to capitalize on innovation, technology, or marketing trends.
The agricultural industry, with its tight margins and extreme economic volatility, can require an elite-level management mindset. This mindset is essential as costs escalate, technology and innovation evolve, economies of scale shift, and global competition continues to intensify. Considering surprises in geopolitics and weather interspersed with changing consumer and societal trends, even the most forward-looking manager could become overwhelmed. Thriving in today’s agricultural environment requires mastering three dimensions of management: Business and financial IQ, emotional intelligence, and adaptability.
My experiences as part owner of a value-added dairy creamery as well as a standard agricultural commodity beef cow-calf enterprise are invaluable. This practical awareness has shaped my years as an educator, teaching entrepreneurship and adult education programs and finance, providing me a platform to develop the characteristics of the 2030 owner and manager regardless of size, enterprise, complexity of business, or business structure.
Business and life magic happens in agriculture when a three-dimensional owner mindset drives every vision, goal, strategy, and activity. Let us explore the elements of this trifecta skills mindset that can place the odds of business and life success in your favor.
Skill 1: Business and financial IQ forms the foundation of your business
The first dimension is developing the framework of strategies and actions with a focus on the four pillars that provide a strong foundation for any business:
Production excellence: High levels of production, efficiently produced, rise to the top. This often requires production management techniques aligned with resources: Land, labor, capital, and information.
Disciplined cost management: A good set of budgets and timely cash flows should be monitored and benchmarked year-over-year, and, if available, benchmarked against similar businesses in the industry.
Marketing and risk management: A risk management program protects the business from adversity, both external and internal events. A marketing program, whether for commodity or value-added products, should capture profit windows and mitigate losses in the down cycle.
Capital and human efficiency: Farm record databases find that capital efficiency, measured by capital asset turnover or revenue divided by assets, is an effective metric. On the human efficiency component, ask whether employees and management are productive within the core values of the business. Lazy or underutilized capital and human assets can be a net margin killer.
Here is the bottom line metric to remember: Profitability and sustainable businesses are about “earns and turns” – net profit margin times capital turnover is equal to return on assets, or ROA.
Skill 2: Emotional intelligence holds your business together
The glue that holds any business together regardless of size, complexity, or enterprise is the business culture that perpetuates emotional intelligence, or “EQ”.
Communication is at the top of the list whether it is with family, partners, lenders, stakeholders, employees, or community members. Historically, agricultural producers were independent, preferring not to deal with people. A trend I am observing with young and beginning producers is a shift toward being interdependent. In other words, profits are built upon return on relationships and collaboration where the art of negotiation seeks a win-win outcome benefiting the whole. People over profits is a high priority. A vintage dairyman on my winter speaking tour indicated his profits were generated by more production while his daughter, who is the new owner and manager, believes profits will come from her ability to work with people. Another participant indicated that he would rather have a good neighbor than acquire their neighboring farm, placing emphasis on community and connectivity.
When selecting your team for high EQ culture it is important to follow three principles:
Hire for attitude
Train for aptitude
Hold people accountable, particularly family members and friends
The “glue leader” or “role player,” your key person working behind-the-scenes, is often the difference maker in discretionary effort and the one willing to go the extra mile. Remember, role players win championships, often rising to the occasion, and are sometimes ignored in the evaluation process.
Skill 3: Assess, adapt and be held accountable to capitalize on opportunities
The newest dimension I see becoming important is “AQ”, the ability to assess, adapt, and be held accountable. The quickly changing economic and business environment often rewards this coefficient by capitalizing on innovation, technology, or a marketing trend. The “fail fast but fail small” mentality is alive and well, which often challenges the senior or the risk-adverse culture. If your strategies and actions do not work out, it is important to have alternative plans A, B, C, and D—and even an exit plan—thought through ahead of time.
An important part of AQ with the next generation coming on board is apprenticeships. This experience provides management decisions with accountability, often with new enterprises, which are a welcome step in an attempt to build confidence through being held accountable by all stakeholders, including lenders and suppliers.
The integration of these three dimensions is where success happens. Elite managers combine all three. They analyze with discipline, lead with clarity, and execute for resilience, agility and nimbleness. In our industry where chaos and opportunity often arrive at the same time, the three-dimensional mindset is your most durable and renewable resource.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
