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THE FUTURE of agriculture is likely to look dramatically different in the next 10 years, says David Kohl, professor emeritus, agricultural finance and small business management and entrepreneurship, Virginia Tech. Are your customers going to change with the times or will they fall by the wayside?
Because 80% of all new business will be with your existing customers, it will be important to distinguish the “achievers” from the “strugglers” now and adjust your strategies accordingly, Kohl says.
How can you distinguish between the two? Kohl notes that the “great” producers or “achievers” will possess:
Six percent annual growth in net income
Return on assets of more than 6%
Excellent soils, water, markets, infrastructure, services and community support
Knowledge of their production costs
Management transition plan
Strong alliances with business associations
Balance of business and lifestyle (In the future, lifestyle will drive the business model more than the business model will drive the lifestyle as producers want more family time.)
Written business plan Contrast this with the “fair” producer or “struggler” profile. Strugglers
Achieve 0 to 3% annual growth in net income
Need to refinance feed bills and open accounts every three to five years
Have debt-to-equity ratio of less than 1:1
Have low-maintenance lifestyle
Have fair soils, water, infrastructure
Focus on production revenue versus margin
Do not know production costs
Do not provide the next generation of management with proper environment for motivation
Have a business plan, but not in written form
Achievers and strugglers make up about 60% of the average agribusiness company's customers. Making up another 20 to 30% are what Kohl classifies as “good” or “hot shot” producers, and he says “poor” producers or “miners and coasters” make up the remaining 20 to 30%.
Like the achievers, the “hot shots” realize 6% annual growth in net income, but they have low equity or working capital reserves. Kohl observes a debt-to-equity of less than 2:1 and working capital of less than 10%.
If the producer has had negative growth in net income for eight to ten years and a sketchy management plan, he could very well fall by the wayside.
For more information, call David Kohl at 540/961-2094 or send him an e-mail at sullylab@vt.edu.
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