Agricultural lenders are using Business IQ and the REM Management Mindset (Respond, Execute, Monitor) to objectively assess the often-gray area of management ability. And they’re finding that leaders who study and strengthen those skills are better able to manage through volatility.
Farm Credit University’s Commercial Ag Lender Class and the recent 39th annual Kansas-Nebraska Agricultural Lending School included a session that outlined 15 business and personal characteristics that differentiate levels of management ability. The Farm Credit students then used those tools to evaluate various producers, assign them scores and compare the results with each producer’s financial performance. The Kansas-Nebraska school assessed producer panelists and used case studies. Here’s what they looked at and what they found:
What do lenders evaluate? The attributes assess somebody’s understanding and follow-through on cost of production, goal setting, cash flow management, understanding financial ratios, marketing and risk management, transition management, and family living costs. The assessment also incorporates an educational plan, the use of advisers, and an evaluation of one’s attitude and management mindset. Each attribute is scored on a scale of 1 to 3, with 3 representing strong performance and 1 representing weakness, and then totaled.
Historically, producers in the lower tier score 28 or below, while those exhibiting a stronger management mindset typically score 32 or above.
Where do producers fall short? Lower-scoring producers often display weaknesses in key financial management areas, including knowing their cost of production, developing and monitoring cash flow, and understanding critical financial ratios. One of the most significant deficiencies is the lack of a well-executed and monitored marketing and risk management plan.
Agricultural lenders conducting these assessments also note another common weakness among lower-scoring producers: the absence of a deliberate educational program and commitment to continuous learning.
Where do producers excel? Higher-scoring producers tend to excel at the fundamentals of business management. They know their cost of production by enterprise, have written goals, develop and monitor written cash flow projections, and understand how to apply key financial ratios to their business. Their marketing and risk management plans are also significantly stronger than those of lower-scoring producers.
A common gap: transition planning. One management gap observed across all scoring levels was the lack of a management transition plan. This weakness is common not only in agriculture but also among many small businesses and family enterprises.
The missing piece: analyzing financial sensitivity. Developing and using financial sensitivity analysis, or stress testing, was another identified weak spot, even among the highest-scoring farm leaders. In today’s environment of economic extremes and heightened volatility, lenders see this capability as imperative for effective communication with lenders, stakeholders and other business partners. It also encourages objective rather than emotional decision-making in both marketing and overall business management.
The bottom line
Overall, lenders found a positive relationship between Business IQ and financial performance. Although the relationship is not perfect, producers with stronger Business IQ scores tend to generate higher profits, demonstrate greater repayment capacity, develop and monitor cash flow, and are more effective financial planners. They understand their businesses and are proactive in their decision-making.
The leaders with the strongest management mindsets are not necessarily leading the largest businesses. They do plan ahead, monitor financial performance and make deliberate management decisions. Lenders concluded that while strong managers cannot eliminate risk entirely, they have the REM Mindset and position their businesses to better assess, adapt, execute and monitor decisions when conditions change.
Agricultural producers who are curious about where they land can visit the University of Minnesota’s Finpack for a free Business IQ assessment.
With volatility, margin management is critical on the modern farm and ranch. This is another tool in the toolbox for success.