The top 4 expansion pitfalls
Michael Reecy, Farm Credit Services of America, Sioux Falls, S.D., says there are four top pitfalls in many expansion projects. They are:
• Lack of enough working capital. Eighty percent of construction projects have cost overruns of 10%-20%. Make sure you have at least that much extra money available to finish a project.
• Inadequate management ability. When you expand an enterprise, you usually have to work more with people than cows or crops. Lining up the right people to run the day-to-day operation is the first step of a sound expansion project.
• Lack of relationships. Do you have the connections to help you manage through challenges and ensure you are operating as efficiently as possible? Are you using a nutritionist, agronomist and other experts? Do you have an attorney, a tax expert and management consultant? Do you have relationships with end users or buyers? FCS likes to see its clients have a relationship with a quality accounting firm, one that specifically does the books for a lot of similar operations in the region or in the U.S., Reecy says. They should be able to provide you with benchmark comparisons, so you and your lender can see how your operation performs compared to others. “You always want to be better than average,” Reecy says.
• Not taking a holistic view. Is the operation going to be viable 20 years down the road? Do you have good plan in place for passing the operation on to the next generation? Are you going to be able to sell the assets if something should happen that would force you to exit the business?
• Expansion projects have many common pitfalls.
• Lack of capital to cover construction cost overruns is pitfall No. 1.
• Lack of necessary relationships for success is a red flag.
This article published in the May, 2014 edition of DAKOTA FARMER.
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