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 Knowledge for the CommonWealth

Managers' Biggest Train Wrecks

Farm Business Management Update, August 2000

By David M. Kohl

In today's business world, we attempt to enumerate and analyze an industry's best management practices. Frequently left out of the process is a thorough examination of failure and how businesses revamp and implement procedures that turn a lemon into lemonade. In a recent seminar, a speaker suggested that businesses don't grow unless they make mistakes. He is right. The key is to identify the conditions or circumstances that lead to the mistakes and then not repeat them.

This past winter I asked producers, business people, and lenders to identify their biggest "train wrecks" and tell how they overcame them. The following is a summary of their top responses.

Bigness on the Brain

Some people want to be the biggest of anything. They justify the strategy as economies of scale. From a producer's standpoint purchasing land to be the biggest landowner in the community was one of the biggest mistakes identified. Close behind that was purchasing marginal land. Purchasing and financing the next-door neighbor's land by using working capital reserves can be a producer's, developer's, or lender's worst nightmare. This working capital purchase is often followed by a commodity price or economic downturn in which earnings and profits plummet. The result is refinancing of liabilities (using equity as a means of securing more financing) or, worse yet, placing the assets on the auction block at 50 cents on a dollar.

To prevent this from happening do a thorough investigation of the quality of land purchased will help prevent failure. Location, land production, and history of uses must be accounted. In the Midwest, owners who have site specific data on yields, fertilizer, and chemical applications and productivity records are receiving a 30 percent premium in the marketplace. With decreasing profit margins, the producer must make more selective purchases of pasture and recreational ground based on information.

The Control Freak

At all levels of business and management, one of the failures in growth is the inability of the person in charge to let go. In today's high tech, laptop, cell phone, want-everything-yesterday society, the micro manager attempts to take control.

Business managers and producers indicated that they inhibited growth because of their inability to delegate. Granted, many built the farm or organization on the follow-through of detail. Sometimes in growing a business circumstances or conditions prevent this control from continuing.

One producer recently shared with me her three R's in growing her family and hired employee workforce. They are Responsibility, Risk, and Reward. She indicated that clear lines of responsibility are communicated, followed by discussion and accountability for the upside and downside risk. Clear measures of reward are shared with a monitored system of individual and term goals and incentives. Periodic meetings are established to enhance communications and discuss changes that are needed to energize the workplace. She emphasized cross training to reduce boredom and cultivate the skills of a potential successor.

Growth Trap

Statistically, growth is the number one reason businesses fail. Just underestimate your capital by 25 percent in a major farm expansion or in constructing a house and see your blood pressure rise. Or have your lender resign two-thirds the way through a project and enthusiasm and excitement can be replaced with anger and resentment.

Investigate costs and build in cost overruns. You can have detailed contracts concerning materials and building cost, but people can change their minds in midstream. Murphy's Law frequently disrupts the best-laid plans. Managers need to build in 25 percent more time to complete a project. The additional time alleviates tension in the workforce and allows employees at all levels to assimilate change.

Know the Cost

My colleagues Dr. David Kenyon and Dr. Wayne Purcell are nationally recognized. They are long-time advocates that the way to a more profitable business is effective marketing. They indicated that one of the initial steps is to know your cost of production. Whether it is contract production, value added, or commodity marketing, failure to know cost per unit is the first step to failure.

To my students' dismay, on a recent field trip in Virginia and North Carolina, we found that only two of ten businesses visited knew the cost of production. In today's world of lower margins and volatile costs and prices, a sound but simple record system with monitoring devices is your first key to success.

Some of these "train wrecks" were caused by improper planning, others by ineffective execution and follow-up. Granted, Murphy's Law is out there; however, many failures could have been prevented by proactive best management practices.

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