Ever had that feeling of utter and total business confidence when you know that your business is humming, profits are good and you’ve got a great team of people in all your key roles?
Chances are, you probably felt quite bullish about expansion or further investment, along with feeling good emotionally.
Lately farmers may have been feeling just the opposite, weighed down by low commodity prices (until recently), bank pressure and environmental and social pressures.
In the primary sector, confidence has been distinctly uncommon.
What is called, “broader agricultural economy net confidence” (source: Rabobank economic survey, last version Dec 2020) has been net-negative since early 2018, which is a long time despite commodity prices increasing to near record highs.
This article is not about where sector confidence is at, but how to get it back and why it is so important.
Firstly, what is business confidence?
Put simply, it means that your expectations about the future of your business and your industry are more positive than where you are today.
And this simple statement is so important for an economy and for your business.
How you feel often drives how much you invest or spend and if that is business capital spending and not consumer spending, it probably means the economy, and your business, are expanding.
This is likely to mean more profit, a growing balance sheet and more shareholder wealth.
You can probably reward your staff more and attract better talent. This, in turn, increases both your business performance and your staff engagement, for example. It’s an ever-increasing circle.
Another aspect of confidence is how much confidence your stakeholders have in you, especially your bank.
Given the high degree of subjectivity in the banking process, the confidence a bank has in a customer is so critical as to whether it provides you with more capital to invest, or worse, ask for it back in a seemingly unreasonable manner.
At best, that can be the ability to purchase another farm; at worst, it can be the difference between holding or having to sell an asset.
History shows these decisions can be made at the worst time, when not just the confidence of your bank is low, but that of the whole sector.
That means the asset is probably not going to sell well.
Just a word about overconfidence.
It can manifest in the fear of missing out, leading to unsustainable business decisions and a prolonged period of loss of confidence taking years to unwind.
Overconfidence can turn investment into gambling, which can lead to arrogance and loss.
Being counterintuitive with confidence is also a consideration.
When confidence is running high in a sector, asset prices are elevated as businesses seek to expand against a backdrop of excess demand for assets and limited supply.
When confidence is low, the opposite happens and better value can be achieved when investing or expanding.
To sum up, steady confidence and not overconfidence is one of the most important aspects of your business.
Here are nine tips to remain confident in an uncertain world:
1. Have a clear vision and strategy for your business. Vision keeps you focused in both the good and bad times.
It evolves into strategy, which is understanding what you are good at and doing more of it (your sustainable competitive advantage) and shoring up your weak spots, that might stop you being successful in the future.
Strategic objectives need to be developed into designated actions to achieve – all prioritised, measurable and delegated.
Don’t keep this to yourself, articulate it really well and share it with your bank and your senior business team.
2. Have a fit-for-purpose balance sheet. To cope with the volatility so inherent in farming you need retained earnings.
This doesn’t necessarily mean you’ll have a bucket full of cash somewhere to access when things go down, but it does mean you have a reasonable likelihood of accessing more capital, probably from your bank, when these events occur.
3. Stress test your business against all possibilities, and this means running an actual scenario of lower product prices and lower asset values.
This might sound negative but think how confident you will feel about investing if you know what the impact will be at ‘xx’ low payout and what plan you will rollout.
4. Remember history. While “past history is not a predictor of future results”, cycles do tend to be predictive in commodities.
When prices go up, it can stimulate supply, decrease consumption, encourage investment into substitute production and increase consumption into substitute products.
5. Consult widely and don’t make your investment decisions on your bank’s settings.
At least in part, your bank’s settings reflect its appetite for agricultural loans and they should never be a proxy for your investment decision making.
6. Use specialists. The world is far too complex these days to employ generalists for your advice.
The best businesses (and this is the same for advice) focus on one part of the supply chain and do it really well.
7. Keep an eye on future trends, but don’t get paranoid.
It is very easy at present with the rate of technological change to think that an industry might be gone in a few years.
While it is important to stay abreast of this, look to point 4.
8. Remain agile because things change and it can happen quickly.
You have to be regularly assessing the impacts of these changes with your cashflow and your operating model.
This might also mean changes to your strategy, which is not cast in stone and can change as the environment changes around you. But at the same time, don’t run a knee-jerk business.
9. Communicate with your whole team, including your advisors, your bank and most of all your family.
The power of collegiality and having everyone on the same page is so important, it’s almost worth another article.
These are some suggestions for keeping confidence in a non-confident world.
If you have other things that you do, we would love to hear about them from you.
Who am I? Andrew Laming is based in Timaru and is a director of NZAB, the NZ-wide agricultural loan broker. Formerly, he was an agribusiness banker for 17 years.
