TLDR
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By managing cash flow, prioritizing working capital, and staying focused on long-term goals, agribusinesses can increase their resilience and improve their chances of success in uncertain times.
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The 60-30-10 Rule can be a useful framework for agribusinesses to follow, allocating 60% of profits towards efficiency, 30% towards working capital, and 10% for discretionary spending.
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Working capital and cash can be considered “Queen” rather than “King” because, like the Queen piece in chess, they are mobile and strategic, allowing businesses to take advantage of opportunities in a volatile economic environment.
Extremes in economic volatility are often a given at the quarter-century mark of the 21st century. Geopolitical shifts, extreme weather events, currency valuations, trade fortunes, society and consumer trends can alter a business game plan overnight. Whether it is an agricultural family business or agri-entrepreneur, regardless of the size of the enterprise or geographic location, being resilient, nimble and agile are the foundations for business and life success.
Economic cycles are a fact of life, and the ability to manage both challenging and prosperous sides of the cycle requires wisdom and perspective. Success can look different in our current agricultural economy, where some commodities and enterprises are struggling and others are seeing positive numbers.
Row crop and grain farmers are currently challenged by price and cost squeezes, and for them, a win may be breakeven or a slight profit. Some may want to minimize losses to reduce the drain on working capital or equity if refinancing is in their plans. Knowing the level of losses and the timeline for burning through the reserves can allow for objective rather than emotional decision-making.
Those who are prospering due to economic cycle dynamics have a different approach to economic wins. What is your profit plan? As an educator, speaker and business owner, I recommend employing the 60-30-10 Rule of Profit.
The 60-30-10 Rule of Profit
60% – Build efficiency
60% of your profits need to be deployed to build efficiency without reducing effectiveness. Don’t get caught in the trap of knowing the cost of everything but neglecting the short and long-term implications or the unintended consequences of change. I often advise producers to get efficient before you grow, or “better is better before bigger is better.” The bottom line is that a balance of efficiency and growth is a priority in a chaotic economic environment.
30% – Build working capital
Next, a high priority must be placed on working capital and financial liquidity, which can be a chokepoint whether it is government, business, or personal households. 30% of profits should be used to build working capital. Financial liquidity is the ability to generate cash or use working capital and cash to meet financial obligations without disrupting operations or compromising lifestyle. Replenishing working capital reserves should be a deliberate priority in the profitable portion of the cycle. Be careful of making capital investments just to save on taxes. I find that too often, agribusiness owners and managers will invest a dollar to save $0.20 in taxes. However, the debt obligations or draw on working capital may continue for multiple years, reducing the agility and nimbleness of the business.
Working capital and cash are Queen
Historically, it’s been ingrained that working capital and cash are king. However, an RBC team member in Ontario suggested that I rethink this phrase. She indicated that working capital and cash are Queen. Her explanation was that if you play chess, you would understand. The chessboard is analogous to a business, which is a game of strategic moves. The Queen is the most powerful piece, mobile, strategic, and protective; she’s there to block adversity and take advantage of opportunities. This philosophy reinforces the economic volatility concept of resiliency, nimbleness and agility.
10% – Your discretion
The final 10% of profit is there to use at your discretion to invest, play or whatever you choose. Remember, life is short and you need to enjoy life and your business journey.
Finally, prosperous times are like a winning streak in sports. Often winning teams become complacent and move away from the basics developed and cultivated in tough times that kept them on the pathway to prosperity! Disorganization and complacency combined with the lack of planning, execution, and monitoring are business and personal financial management killers.
The game plan
Manage the controllables and manage around the uncontrollables with a business and personal culture of focused energy. In a chaotic economic environment with wide access to breaking news events and information, it is not uncommon to become very distracted. A winning strategy is to stay informed and apply it to your situation. Think globally but act locally.
To develop the discipline of focus, one must know where your North Star or vision lie within your core values of business and life. Along the journey, enjoy the northern lights or the little joys of life. Another component of focus that is basic but overlooked is the power of goal-setting: You may find that writing your goals down can help to bring clarity to your priorities and keep your progress on-track.
In goal setting, balance it with business, family and personal goals along with mental, physical and spiritual goals. Winning is more than business success, and it is a balanced approach which is often observed in families, businesses and individuals that stand the test of time.
Finally, develop a good old-fashioned monthly or quarterly cash flow. This is 80% of a business plan because one must think through production, pricing, cost, debt service, capital expenditures, living expenses, taxes, etc. Most importantly, develop an operational plan or, in other words, how’s it going to get done within the timeline?
Yes, every generation has challenges. The ability to adapt and adjust to plans and processes will place the odds in your favour.
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.
