Profits Under Stress

Stress can mean many different things but could be defined as being “uncomfortable”.  The dictionary suggests that stress is “pressure or tension” exerted on an object; or a “state of mental or emotional strain” or finally “a particular emphasis or importance”.  While all of these seem to be slightly disconnected, they all point towards the same dilemma.  This could be described as a situation where difficult choices need to be made between several alternatives which are equally undesirable!  Other words that spring to mind are worried, overstretched, pressurized, hassled, accentuated etc.. all of which have a direct impact on the wellbeing and success of a project / situation.

When businesses and individuals come under pressure from some external event, be it financial or physical, there is a tendency to put your head down and just work harder almost hoping the issue will go away or resolve itself.  Sometimes this does happen, but in my experience it is rare.  Often what is happening is that we learn to cope with the situation and it becomes the new “normal”.  This in itself does not actually address the underlying problems that are often the issue, whereas if we could be more realistic and address the true issues head on, a better outcome may result.

The stress caused in the last year or so due to financial problems has become a real concern to many people.  Currently some of the pressure appears to be getting less as milk prices and arable prices recover.  But is this a temporary or permanent cure?   Many of the pundits are claiming that prices will remain volatile over the coming years and that certainly seems to be a possibility.  The scale and timing of a future downturn are however unknown.  Thus a question to ask is “how will I cope when a downturn next occurs?”  For many situations, there is a need for a few good years to enable the businesses to get back on a sound footing.  Will this happen and how should you cope for the future?

These questions are in the back of many peoples’ minds and are festering away causing mental stress to a greater or lesser degree.  The difference between some farmers who are managing better with this stress than others is down to mental strength and the attitude adopted by them.  Those who are being realists and facing their issues head on, or at least endeavouring to understand what the issues are, have the ability to modify plans and take action.  In all too many cases businesses have grown in a very undisciplined manner over the years.  There has not been a master plan with a clear goal of what is trying to be achieved.  People have followed trends without stopping to understand why they are doing what they are.  For this reason many businesses have grown to a scale larger than their resources allow and thus the whole business has become stressed (staff, animals, facilities and finances).  To be successful you need to know what you are trying to achieve and by when.  Obviously, a certain scale of business has a limit to what it can achieve.  There is a need to understand what this realistic outcome can be.  Every situation has an optimum outcome or “sweet spot”.  This is not the same as maximising the situation.  If you have a dairy that can keep 100 cows and you cram 130 on, maybe you will produce more milk (maximise), but will you make more money (optimise) as inherent costs increase disproportionately?  What is being suggested is that the business may have overstepped the optimum situation for the resources available.

Many farms are trying to run more cows at higher yields through inadequate facilities.  This is leading to more feed being bought in and the animals are being placed under increased pressure in terms of accommodation, disease and competition from other animals.  The staff are also working harder and with less time for routine maintenance and time to manage properly.  Effectively the business is becoming stressed and all too often profits suffer.  This situation has crept up on many people and is hard to resolve without taking some positive actions.

It became obvious last year when many dairy units (also arable and pig units) were suffering from income downturns that some people managed to limit the scope of their losses by effective cost cutting.  In these cases, they managed to assess what was relevant to their output.  For many they cut feed input with limited reduction in milk produced, in many situations by challenging the cows to graze better or to milk off silages.  This in reality was an improvement in efficiency achieved off the farm.  In good times when efficiency slips, the impact is cushioned by the high prices.  However, when the prices are low, every input has to count and be seen to produce a return or benefit.  Waste must be curtailed to ensure that everything counts.

So, the question that should be asked by everybody becomes, “are we being as efficient as possible and are we optimising the situation?”   What is clear to me is that where a situation or person is under stress, then the potential profitability and thus cash generation will be compromised.  This has been shown up clearly by actions taken last year by individuals to cut waste and make their business breakeven.  They survived a near 50% reduction in output.  While some costs that were cut may have to be reintroduced to remain sustainable, care must be taken not to fall back into old habits of spending and inefficiency.

Stress has a direct adverse impact on profits.  This is the perfect time to reflect on past and future actions to be adopted to ensure that profits are optimised without causing stress.  Times look reasonable for the next year, so make long term changes now in preparation for future unknown situations.  Where are your weaknesses?

Contact Ian at ianbrowne@fcgagric.com or your local FCG office for an independent assessment of your business.

Posted in Business Management, Stafford.