Dr. David Kohl of Virginia Tech has a solid grasp of what it takes to run a successful ag business. He has spent a career speaking, studying and writing on what separates those who are successful in ag business management from everyone else. I was recently reintroduced to Dr. Kohl’s Business IQ test and want to share it with you. Dr. Kohl states that there is high correlation with the Business IQ score and return on investments (ROI) of an ag business. I’d encourage you to give this self-evaluation to your key team members, compare your scores and see if you identified the same areas for improvement.
Here are my comments on a few of the criteria in the assessment:
Knows Cost of Production and Cost of Production by Enterprise: Let’s call this knowing the gross margin of each enterprise. If you’ve attended the Ranching for Profit School, then you know what a gross margin analysis is and how to do it. There is no better tool for getting your hands around the economic part of your business than understanding how each enterprise is contributing to the overheads and profit of the business and what you can do to improve it.
Goals – Business, Family and Personal: The components we teach are mission, vision, and a timeline based action plan tied to the vision. These have to be turned into specific actions at some point or it is just a dream. What are you going to do, by a certain time, to make progress toward your goals?
Financial Sensitivity Analysis: This makes it sound complicated. It doesn’t have to be.If you have your gross margin analysis done then throw some best case, worst case scenarios at it. What if calf prices went this low, or hay prices went this high? Vice versa. How would our business adjust? What ripple effects might this have? How will you insulate your business from these or respond when they occur?
Understanding Financial Ratios: Ratios like debt:assets, return on assets, and key benchmarks like gross margin ratio and overhead ratio are some that we teach at the Ranching for Profit School. How has your debt:asset ratio changed over time? What about return on assets and return on investment? Economically how is your business doing in the key benchmarks of gross margin ratio, overhead ratio, gross product per full-time employee? More importantly, what is your strategy to drive improvement?
Work With an Advisory Team: I love this one! This is the reason Stan founded the Executive Link Program where businesses form peer-advisory boards. I know of no other program more successful at helping business leaders implement change and maintain discipline in their businesses. What business wouldn’t benefit from insights of others on strategic level issues and the accountability created by frequent meetings? Having a formalized advisory team should be a part of every business plan. Of course, this only applies if it is a real business and not just an expensive hobby.
Educational Seminars/Courses: Dr. Kohl suggests a target of five educational seminars a year with one outside of the industry of agriculture. I love his suggestion of at least one of these outside our industry. There is so much ag can learn from non-ag business management, whether it is in the area of human resources, leadership or economics. I would add to this that at least one of these educational seminars should be significant enough to require time away from the ranch. The 2-hour luncheon style workshops hardly count as a significant educational experience. Stephen Covey, author of The Seven Habits of Highly Effective People, lists habit 7 as “Sharpen the Saw”. Defined as seeking continuous improvement and renewal professionally and personally. He would often ask, “Do you ever find yourself so busy cutting wood that you don’t have time to sharpen the saw?”
I’ll just comment on those few. Dr. Kohl has done an amazing job of assimilating the key management activities that separate the successful ag businesses from the others. I encourage you to answer the final questions he asks on the tool. Let us know in the comments below what are three areas for your business to continue and what three areas need improvement? What is your action plan to address these?