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How Much Risk Can You Tolerate When Growing Your Business?

Dr. David Kohl
Grain, Dairy, Swine, Beef, Young, Beginning Farmers, Specialty Industries, Women in Ag
Home > Education & Events > June 2017 > How Much Risk Can You Tolerate When Growing Your Business?

Hi. I'm Dr. Dave Kohl, professor emeritus, agriculture economics, at Virginia Tech, Blacksburg, Virginia, and today's focus is on growth of the business. I had a producer ask me, "How much risk can I tolerate when growing the business?" Well, I'll give you a lawyer's answer: it depends. 

First of all, in growing the business, I think you really have to do some soul-searching on core values and growth from all the parties, and making sure that they express them in a written manner, and then see what we have in common, see what the differences are, and then negotiate them out. Again, that goal setting on growth, very, very critical. 

Second, I think you have to look at the financials. In growing your business, I look at a couple of things. First of all, I look at the term debt to EBITDA, (that’s Earnings Before Interest, Tax, Depreciation and Amortization), basically your net income plus interest and depreciation. Any time that term debt to EBITDA starts exceeding six and one, you might be getting out there on thin ice. Again, we'll go through many cycles, and again, you want to make sure that you can make the debt payments not only in the good times, but also in the downturns as well. 

Of course, our old friend working capital is very, very critical. Make sure that you don't take all your working capital and put it into long-term growth. Hold back. One of the metrics that I like to look at is about 20% of either revenue or expenses. In other words, make sure you have 20% working capital to expenses or revenue. 

Another thing that's very, very important is look at the total systems. How is that growth going to be impacting production, marketing, management, and finance? Oftentimes people will not look at the people component or the systems component, and run into difficulties. Then the other aspect: do you have the business partners coming on with the skills to be able to help you facilitate growth and take your business to the next level? 

Well, those are some of the thoughts in the Macro Clinic today. For a lot of you out here, there's going to be a lot of opportunities to grow your business over the next three or four years, but one suggestion is don't get bigness on the brain. Make sure you grow in an incremental manner.
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