I recently had the opportunity to interview Mike Scott over the phone and give him an opportunity to expound on some of his ideas from the seminar. One of those is a model with a box of accountability and box of tolerance. The goal is to shrink the area of non-performance and expand the box of accountability in your organization.
Day 4 of TEPAP was kind of like sitting on a launch pad at NASA and then suddenly going from zero to 500 mph instantly. Jeff McGee is high energy and talks at a pace that packs 8 hours of material into 3 or 4.
The Trajectory Code
He walked us through several models about implementing change, but the one that really sticks in my mind is what he calls the trajectory code. You can listen to him in this quick interview by clicking on the link below.
The trajectory code model states we are always either moving towards success or something less than success from some starting point. In the diagram seen above, that means we want to move towards point C. Here is the simple concept he stressed which is so true. It is easier to make a 1% adjustment earlier on than having to make a bigger adjustments later.
Last spring, I had a real world example of this during planting season. I had pulled into a field Continue reading →
For anyone that has attended TEPAP, the days get long and conversations run late into the evening so I’m a few days behind on my posts.
The first speaker on Monday was Jim Nolen from the University of Texas. One of the key points he made is public companies get feedback from the market. For private companies, the only place to get financial feedback is from their accounting systems and managerial accounting is critical to provide that.
He also made a good distinction between accounting and finance. Finance is generally focused on managing the balance sheet while accounting focusses on the P&L. He emphasized the need to understand the relationship between the balance sheet and desired growth rate. Growing too fast can kill a business when sales grow faster than the balance sheet can support that growth. For many operations, this will probably be their downfall in the next couple of years.
We also had a discussion on relationships with your banker, especially during tough times. As someone who has served on bank boards, he gave us some good advice on working with your lender during times when margins are tight.
I had a chance to get his comments after his discussion and you can listen to those here.
The second speaker was Peter Zeihan who gave us an overview of world geopolitics. His big message was that the United States is positioned to be the world leader for several decades. The two driving factors behind that are people and energy. Demographic trends throughout the world are working against most countries as their populations are aging and their won’t be young people coming into the work force to support social programs or spur economic activity.
The second factor is energy. The United States is in the process of disengaging from the rest of the world because we are functionally energy independent and no longer dependent on the middle east. The rest of the world due to debt levels and shortage of energy in the future will be in a much weaker position than America.
For agriculture specifically, he was bullish on American agriculture in the medium to long term because we will have access to capital and resources which won’t be guaranteed for the many agriculture producing regions. If you would like to read more, you can get his book entitled THE ACCIDENTAL SUPERPOWER
On Sunday, Dick Wittman did a presentation on basic farm financial skills. As a class, he had us take a set of financial numbers and report them on both a cash and accrual basis. I would say less than 10% of the class got the right answer.
Dick emphasized the need to be able to report your numbers on an accrual basis in order to understand if you are really making money or losing money. Tax basis reports are of little value for managerial accounting. If you don’t do this, chances are the banker does and can help you generate reports like this.
That was followed up with a discussion on deferred tax liabilities. Dick provided two examples in particular that really hit home on the danger of managing around taxes only. Using section 179 depreciation on machinery while financing that equipment with debt can leave an operation vulnerable to this current economic downturn. Many operations now have loan payments coming due, have to sell grain to pay for that equipment, but have tax due on the income because they have used up the deductions with accelerated depreciation.
The second example focused on how deferring taxes can make you a poor marketer. The example of holding grain when at a high price and waiting until prices are lower costs way more than selling and paying the high price. Marketing should be a separate decision from tax planning. If not, it often drives sales at low price or the wrong time of the year.
Finally, we talked about several key ratios. Debt Repayment Capacity is one of two we discussed that I think is critical to know. Basically when calculated, it simplifies things down to how much cash flow do I have vs. how much debt do I have to service every year. The last ratio that we discussed is the Sustainable Growth Rate Ratio. If your business is growing, this is the maximum rate your business can grow without depleting your assets.
I had a chance to catch up with Dick for a quick interview and you can hear his comments here.
You can find a lot of good free resources here on his website. I use his workbook with many of my clients and have found it to be very useful.
I’m writing this between switching planes in Dallas. I’m on my way to TEPAP or otherwise known as The Executive Program for Agricultural Producers. This is an amazing program. I attended Unit 1 last year and can’t wait to get started tomorrow in Unit 2.
There are two aspects of the program that make it so special. First, the speakers and classroom sessions bring together some of the brightest minds in the agricultural industry. For those who go over to the website and look at the schedule you will probably recognize many of them. Two of my favorites from last year were David Kohl and Dick Wittman.
One of the unique aspects of the program is the evening sessions where the speakers do 1 or 2 hours of Q&A. That to me is a great bonus you get that doesn’t happen at most seminars you attend.
However, the really special aspect of TEPAP is the network of producers you join. Continue reading →