Recently, I had the opportunity to sit in on an Advisory Banking class at the Graduate School of Banking at LSU, which was taught by Steve Abercrombie, an excellent instructor from Seattle, WA. Steve has worked as both a banker and small business owner for nearly 40 years, so he has some interesting perspectives on the game of business.
His firm works with over 10,000 businesses annually on business consulting. He indicated that when surveyed, approximately 25% didn’t know that assets minus liabilities equal net worth. When asked, “What is working capital?” 50% of those surveyed thought it was the balance in the checking account.
His thoughts on the balance sheet were interesting. The balance sheet is the business’ scorecard that measures what you have done from day one. The income statement is a picture of what you have done lately.
When working with businesses Steve indicated that what gets measured gets managed, and what gets managed gets done. How often do agricultural producers emotionally sell grain crops and livestock with no idea what their breakeven price is or how much profit there is in each enterprise?
Steve indicated that the three uses of after-tax profits are reinvestment in capital, equipment and facilities of the business; pay down of long-term debt; and paying yourself a salary. Unfortunately, in good years salary expectations increase which can be a drain on the business. From observation of the grain sector, one can see there is exuberance in living withdrawals, in some cases six figures, as a result of $3 corn.
In the next column we will explore Steve’s seven reasons why businesses fail.
Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.