Coffee shop conversations typically include the struggles faced as a farmer, including the increasing and unstable price of gas, disease, weather, the falling dollar and increased international competition. These uncertain and uncontrollable conditions, coupled with an increasing debt load, put tremendous pressure on the bottom line and your lifestyle.
The agricultural community is a vital part of the Canadian economy. Many different variables will affect the profitability in a given year. Yield production and market rate fluctuation for commodities will determine the success of a crop year. Because of the range of variables, many business owners make the choice not to prepare forecasts and budgets. Given the current economic instability, it is essential to ensure the variables and their impact on profitability is understood.
Although some of these conditions may not be directly controllable, well-managed businesses are better able to “weather the storm.” The key is to manage what you can, and prepare yourself for the effects of factors that you cannot. A proactive strategy will be much more successful than a reactive strategy in the long run.
EARLY WARNING SIGNS
Early warning signs are generally abundant, however, human nature gets the better of us and business owners convince themselves that next year will be a better year without determining the root cause of the declining profits.
Warning signs of business decline include, but are not limited to:
• Declining profitability.
• Stretching suppliers’ payables in order to fund cash flows.
• Difficulty in collecting customer receivables.
• Reaching the maximum operating line without business growth.
When this happens, you need to take note and act on the deficiencies.
THE FOUR STEPS TO SUCCESS
The following four-stage approach is a useful means to a successful turnaround:
The first step to any successful turnaround is to admit there is a problem. Many business owners see the warning signs, but deny it or blame others. The earlier the problems are addressed, the better the chance of a successful turnaround.
Determining the basis for the problem(s) includes an analysis in order to determine “what has happened.” Comparison to industry standards or other benchmarks will highlight areas for improvements. The key is to safeguard the business assets and stop the decline. Quick-hit improvements are essential to turn the company towards a brighter future.
The next step is to determine the potential options based on the current environment. A dissection of the current business is necessary to keep and build on the successes, and divest of those areas not supporting the business direction. A contingency plan should be put in place in order to prepare for “what if” strategies and exit plans, if necessary.
Preparation, maintenance and monitoring a “go forward” plan are essential in order to effectively implement “strategy change.” The plan must be understood by all stakeholders, and a buy-in is required from the entire business team.
Many tools exist in order to obtain timely measurables, for example, comparing yields and average sales prices to the same period in the previous year. Additional important measures include understanding the cost of labour, supplies and overheads in order to maintain cost control.
FLEXIBLE BUDGETS AS FORECASTING TOOLS
Flexible budgets are an important forecasting tool and can be utilized in order to predict cash flow crunches. This allows the business owner advance notice in order to determine the next course of action and shore up the cash flow deficiency.
The practical use of a flexible budget allows the business owner to adjust the variables given a change in circumstance or to answer the “what if” questions. Flexible budgeting allows the business owner to determine the effect on profitability and cash flow. For example, it will help you determine the effect of a commodity price decrease or a change in the exchange rate on profitability.
The final step is an effective implementation. The most successful implementations will include the entire team. Keep in mind that while there will be bumps in the road to a successful turnaround, the keys are continuous monitoring, early detection, communication and immediate response.
By taking this approach and coupling it with a strong business strategy, future coffee shop conversations may be more about successes and less about struggles.
Wendy Santoro is a senior manager with Deloitte’s financial advisory team in Windsor, Ontario. •
MANAGING DURING PERIODS OF UNCERTAINTY
The earlier the problems are addressed, the better the chance of a successful turnaround. A contingency plan should be put in place in order to prepare for “what if” strategies and exit plans, if necessary.
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