Good Economic Times, Bad Management Decisions

Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University

There is an old saying that it’s not the downside of the economic cycle that results in business issues, but the good times. What are some of the bad management decisions that are often made during stellar economic years?

Non-recurring profits
The current positive economic situation in the grain industry is conducive for possible issues. As with many economic events, this cycle is a result of several converging variables. China is stockpiling a supply of commodities and is in the process of rebuilding its protein complex. Adverse weather conditions, particularly in the Southern Hemisphere, have reduced global grain production. Accommodative monetary and fiscal policy in the U.S. and throughout the world has devalued the dollar, which means that U.S. exports are more favorably priced. Is this economic upswing temporary or here to stay? Over the decades of observing agriculture decision-making, I’ve seen long-term financial decisions based on non-recurring profits lead to financial adversity when servicing debt, as well as a strain on working capital and liquidity.

As a general rule of thumb, non-recurring profits should be used to build working capital reserves and shore up the balance sheet. Investments to increase operational efficiency and management should be a priority before embarking on a major expansion. The old adage of getting better before getting bigger is particularly true during the best of economic times.

Financial monitoring 
There can be a tendency to take the foot off the “management pedal” in the ascending part of the economic cycle for farm and ranch profitability. Following a marketing and risk management plan, cropping plan and livestock marketing plan are sometimes placed on the back burner during the good times. While the good economic times can provide a cushion to absorb financial shocks, use this chance to position your business for opportunity in case of an impending down economic cycle. The saying, “When everybody else is running, you walk. When everybody else is walking, you run” applies in this case. This mantra is very appropriate for cycle management. If positioned correctly, down economic cycles can provide opportunities for cost and competitive advantages.

Personal consumption 
Everyone needs to enjoy the fruits of their labor and management; however, this enjoyment often entails extra family living expenses. A case for moderation may be necessary. Decisions made outside the business often mean excess withdrawals from the business. A good personal budget that includes an allocation for enjoying life's pleasures would be a good way to monitor results, and to keep business and personal finances in balance.

In conclusion, weigh the economic and financial pros and cons of making long-term commitments, and think about both the financial and non-financial unintended consequences. Sometimes running the decisions by a trusted mentor or sleeping on the decision can bring objectivity into an emotional process.