In a recent seminar in Utah, a producer asked what other producers are doing differently in their approach to 2017 operations. In meetings and interactions with those in the industry over the last several weeks, this topic continues to emerge. According to these perspectives, the differences in approach depend on which group of producers you are referring to; the proactive, the zombies, or those in between.
The proactive producers are monitoring financials and methodically making adjustments.The zombie group is in a type of trance, hoping and wishing for something like a weather event to bring back better times. The last group of producers falls somewhere in between the proactive and zombie groups. They are trying to make sense of the finances, but are still somewhat reactive in their decision making. So, in answer to the producer’s question, let’s take a look at what the groups are doing differently.
The proactive group is focusing on the 5 percent rule, as named by my good friend Dr. Danny Klinefelter of Texas A&M University. Specifically, they strive to improve by 5 percent in many areas of the operation.These areas may range from record keeping, financials such as projected planning, production, or marketing. Whether it is a reduction in expenses, an increase in revenue, or both, the 5 percent improvement is in efficiency. It is important to note that the other two groups of producers continue to look for the one, larger (and usually hypothetical) change that can resolve all issues.
Next, the proactive group monitors finances monthly and quarterly.They make the necessary cuts in costs without compromising production. They come to the lender with projected cash flows, and an updated balance sheet with accrual adjusted statements. Contrast that to zombie producers who turned finances over to an accountant and do not invest time in the financial process. Zombie producers instruct accountants to minimize taxes without concern or knowledge of the overall financial picture.
Like the zombie producers, the reactive producers also try to minimize taxes and are likely to make impulsive decisions for tax reasons only. In short, the zombie producer thinks tax minimization, while the proactive producer thinks tax management; the balance of paying some taxes and retaining some profits in the forms of cash and working capital.
Many producers fell into the zombie group after expanding their businesses faster than their business acumen. For many in this category, losses are mounting and working capital is rapidly being depleted, along with core equity in appreciated land. Understandably, these factors are concerning to lenders.
While certainly not an exhaustive list, these are some differences for 2017 among different groups of producers. Before making any changes, consider to which group of producers you may belong. Then ask, “How does my business stack up and where are the best places for improvement?”