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What Entrepreneurs Can Learn From Farmers About Managing Risk In Uncertain Markets
Farmers are used to living with uncertainty. In fact, it’s a daily part of life. A bad harvest can lead to little revenue and no profits on months of work. Changing prices and trade expectations can dramatically affect demand without time to adjust the supply. If farm owners want to keep going, they have to be ready to adjust on a dime and weather even the biggest storms. With these tips, you can build resilience into your business to handle the next failure or uncertainty.
Understand Your Risk Profile
Before you make any decisions, evaluate your risk levels. Risk management involves a lot of moving parts, like the money you put into the decision, how much you could gain or lose, and what stands in your way. Farmers are used to create minute risk profiles as part of dairy risk management and other evaluations. Do you rely a lot on credit to provide a steady stream of capital? Do you operate on razor-thin margins and can’t afford to drop prices? You’ll need to factor these in.
Stay on Top of Your Finances
The farming industry has to handle a lot of unpredictability that can seriously affect revenue generation, which calls for regular attention to your financial situation. If you were debating a sudden increase in material prices, such as feed for cows, you’d need to know how your cash flow works and whether you can raise your regular expenses. A detailed analysis of your assets, liabilities, cash flow, expenditures, and profit margins can help put you in a place to make informed decisions.
Balance Productivity With Efficiency
If you track your productivity and the processes you take to achieve it, you’ll probably find some inefficiencies you want to eliminate. Farmers utilize technology when possible to speed up routine tasks, so they can focus on the stuff that really requires a human touch. Maybe it’s time to automate your billing system, so you don’t forget to send out those revenue-rich invoices. Or perhaps you need to hire another employee and divide up tasks so that they actually get done, instead of letting them pile up.
Manage Your Resources
Everybody talks about efficiency these days, but you can’t let efficiency turn your business into a risky venture. Sure, spending time and money to maintain farm equipment creates downtime and requires the hiring of experts. But when the equipment breaks down because you didn’t maintain it, you’ll lose much more. Treat each resource as if you want to have it for a long time, from your business laptop to your employees. Long-term investments often yield greater rewards.
Pay Attention to Your Environment
Farmers rely on a steady environment to provide a healthy situation for crops and livestock, and you can benefit from such awareness. Invest the time to evaluate your business’s environment, from your home office to the state of the economy and your industry in particular. Pay attention to changes in trends that affect your ability to conduct business, such as new technology or a sudden increase in demand. Be prepared to pivot when those adjustments come into view, so you’re not scrambling to keep up.
Accept Some Unpredictability
Even with all the careful attention in the world, farmers still have to deal with unpredictability. Pests or viruses might decimate a crop or livestock population, like avian flu or prolonged droughts. Your risk profile should outline at least a few things you need to watch for, whether it’s technology making your job obsolete or an overdependency on trends to generate demand. Knowing what you could expect can help you build in the reserves to help you get through the next downturn.
Running a business feels hectic, and you might wonder how anybody makes it. But if farmers can thrive, despite all the uncertainty that comes from every angle, you can learn to do it too. By implementing a robust plan to mitigate your common risks, you can increase your company’s resilience and live to succeed another day.
Author bio: Dustin Baker is the Director of Education and Research at Commodity & Ingredient Hedging, which provides risk management and commodity hedging strategies that allow clients to sustain and grow their agricultural businesses despite market volatility. Baker helps market participants deepen their understanding of agricultural margin management concepts and strategies. In addition to leading educational initiatives, he regularly contributes to CIH’s publications that support risk management for agricultural producers and buyers.
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