They say nothing succeeds like success, but it can also be a ticking time bomb that can blow your business out of the water.
“It’s definitely terror mode when you grow,” says Carl Bragg, president of Doug Bragg Enterprises.
“Every business that starts to grow will very quickly run into cash-flow issues. You can make a profit every year, but if you run out of cash you’re out of business.”
Bragg has pretty much been in constant terror mode for the last few years. The manufacturer of blueberry harvesters and other equipment has seen business grow by a sizzling 20 percent a year over the past five years. However, every time the Nova Scotia businessperson expands production, he risks his company’s financial health by spending money today for sales that won’t show up in his bank account for a year or two.
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“It’s the same whether you’re expanding your cattle herd or building harvesters,” Bragg says. “You’ve got to feed and care for those critters just as I’ve got to pay for steel, wages and production costs.
“Well, if there’s a downturn and all of a sudden prices are down or people are buying fewer cows or harvesters, you’ll have cash-flow problems. If you’ve been growing at three percent a year, you’ll struggle but probably be able to get through it. But if you’ve been growing at five percent or more, it can consume you.”
Part of the problem is that banks will lend only a portion of what inventory is worth. For example, you might get only 60 percent of the value of grain inventory. Bragg would be thrilled with that. He’s only able to borrow 20 percent because of lending caps.
“I don’t blame the banks for being careful,” says Bragg. “It’s not the individual business they’re looking at, it’s the big picture. The banks have experienced some fairly steep losses in agriculture in Atlantic Canada and that’s curbed their appetite for lending.”
Bragg notes that cash-flow problems are especially difficult in farming.
“In agriculture, you usually just get to turn your inventory once a year,” he says. “In our case, there’s one period in the year when people are buying blueberry harvesters and we’re taking in money. The other nine months of the year we’re basically just spending money.”
Expanding the business compounds the problem.
“You hit these cash-flow speed bumps and your whole business grinds down to the point where trying to catch up with cash flow will keep you from being profitable.”
And this is what happens when everything is going well, which is why Bragg says growth is terrifying. You’re making record sales and profits, but your cash needs and borrowing are also at an all-time high and you’re wondering if your next business milestone will be an ulcer.
This is not to say that growth is bad. In fact, if you plan to bring a child into the farm business, you likely need to grow at a rapid rate.
So Bragg’s final piece of advice is to get good financial help from an advisory board or mentor. He relies on a former banker with experience in business development loans and a retired chartered accountant, who regularly review his marketing and financial strategy.
“You want to find someone who has experience further up the financial food chain,” he says.
“It doesn’t have to be expensive. Often people who have recently retired still want to keep their hand in the business world and for 50 bucks an hour, you can bounce all of your ideas off them and tap into their wealth of experience.”
The worst thing you can do is try to do it on your own, says Bragg.
“That’s a recipe for disaster.”
So if you’re successfully expanding your farm business, give yourself a pat on the back. Then go get yourself a good financial adviser.
The website of Doug Bragg Enterprises is www.dbe.ca.
Glenn Cheater is editor of Canadian Farm Manager, the newsletter of the
Canadian Farm Business Management Council. The newsletter as well as archived columns can be found in the news desk
section at www.farmcentre.com.
