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When you think of a balance sheet, are you seeing numbers only? Do you ever consider the people and relationships driving those numbers? I’m Lisa, Courtney Lloyd, and you’re listening to the Peaks and Valleys podcast where we talk about the challenges of running a seasonal business. Although our interview guests run agri-businesses, these discussions will be applicable to any seasonal business.

Today’s guest is Steve Kaminski, who over the many years as a CEO and director has mastered the art and science of balance sheet management.

Lisa: Good morning, Steve. And thank you for joining me to talk about balance sheet management.

Steve:  Thanks for having me. I appreciate it.

Lisa: Many people think about balance sheets as being a financial tool. Something that the accountants care about in a business. And do I dare say some people find them boring, but I know you think otherwise, can you elaborate?

Steve: Yeah, absolutely. They’re the most exciting part of your business as far as I’m concerned.  I’ve always viewed the balance sheet more as a story book of your business. And if you find the story of your business boring, then that’s unfortunate. I know it’s a set of numbers, but really it’s the story behind it: the people involved in your business in the past are buried in there somewhere; the people that are involved in the business currently are in that balance sheet, your customers, your lenders, your investors, they’re all in there. And all the people that you probably need to power your business forward is in that balance sheet. And what they’re going to contribute is in there. If that’s boring, then I don’t know if you’re looking at your company in the right way.

Lisa: Let’s break that down a bit. Using your analogy, let’s look at the story of the business: there’s the plot and then there’s relationships. Let’s talk about the plot first.

Steve:  The plot is strategy. It’s wonderful to have a strategy for your business to grow or to change or to increase market share or profitability. Those are all great plots, but it really comes alive when you can describe who is in that storyline and articulate what they’re going to contribute to the story.

The lender is probably an easy one. What lenders do I have? Who are they? The actual people and how are they going to contribute to the story that’s going to be the future of my business. And your investors: how are they going to cooperate with what you’re going to be doing? And what are you going to return to them? That storyline is crucial to understand because those lenders and the investors are going to give you the power you need to be successful in the future.

Then you have to deliver on making sure you have the right assets to then go do that. Inventory: how much are you going to build your inventory? How much are you going to build your fixed assets – your iron in your business, let’s say for an ag operation – those are choices that you’re making based on what they’ve said, and what they’re willing to support you on and you better be right. Otherwise, the plot is a disaster. If you are right, what a success and they want to stick with you. But that’s how I think the storyline, the plot, starts to integrate with the people involved who are going to build your business with you.

Lisa: When you are looking at your business and your balance sheet, and let’s say, you’re doing the same business for about 10 years and then you want to make a change – be it growth, product extension –how do you look at the balance sheet at that point of change?

Steve: Every business really needs to do some planning, strategic development of their business and ask, is the strategy still good? Is the strategy that you used for the last 10 years still good for the next 10? And if it is then do you have the balance sheet that allows you to get there? In the case of agriculture in particular, the volatility on the seasonality is quite extraordinary. And so for example, you may assume that in the next 10 years you’re going to have two really bad years. If you assume that to be the case because of weather for instance, then you’re prepared for it. But if you pretend it’s never going to happen again, then I think you’re going to have a problem.

Know what you are preparing for and what your balance sheet needs to be capable of doing? If you run into a problem, is it there to support you and take you through it? Or is it going to bring you down if that problem occurs? Integrate your planning and your strategy with how your balance sheet is going to support those initiatives. That’s going to be a really important part of how you do your planning for the next year, 2, 3, 5, 10, whatever that is, that you’re planning.

Lisa: Let’s take that concept and relate it to what you said earlier about the people. In an earlier conversation, because our business is agribusiness, you were talking about the lender who knows your business, and then all of a sudden you’re changing your business and maybe that lender hesitates a bit… and the importance of listening to that lender.  Tell me a bit more about what you meant.

Steve:  Well, that’s the thing. So, for example, let’s say you change your strategy or the lender changes their strategy, iIf you don’t have the conversation, then you won’t know if the lender who was supporting you is still comfortable with where you’re going and how they’re going to support you on where you’re going. That’s not a bunch of numbers. That’s two people talking about where the business is going. So that person is very important. And the clarity on what they’re going to provide you is probably the best that you’re going to get from anybody. To me, the lender is the easiest one to have a communication with because they’re going to turn their communication into a set of rules that you can live by and that they’re willing to live by. And you’re going to be governed by that set of rules.

To me, lenders are the easiest people to deal with because their rules are crystal clear. You break them, you’re going to have trouble. If you don’t, then you’re going to be fine. That person is going to tell you what they can and cannot support in your business, which then allows you to assess whether there are points of failure. Can your balance sheet help you recover or not? There are a lot of people to consider: your customers, are they going to support you? Customers are the other major group. Your customers might say, if you can’t deliver it to me in this timeline, then I don’t want you as a supplier. Well, that might require you to have much more inventory. If you need more inventory, then you have to go back to the lender and say, hey lender, I need you to support me with my customer, otherwise they’re not going to stick with me. Or if your customers are going to stick with you thick and thin, and you don’t need to deliver on time, then you can have lower inventory. That’s important to know too. You have to find the balance between what the customer needs and what the lender is willing to do.

Lisa: In the years that you’ve been working with companies and CEOs and financial professionals is there one or two… mistakes is probably too big a word…but things that happen that are common. And if you could tell folks one bit of advice, this is what you would say.

Steve: Yeah. Oh yeah. It’s the interrelationship of all those relationships.  Say a customer says, I can remain your customer and I can grow with you if you do these things. And if you just say, yes, I’m going to do those things and worry about how are you going to get them done later, then I think that’s where people really run into problems. It’s at that moment of time that you need to pause and explore your options.

If the customer says, I’m going to double my work with you if you can deliver whatever product you have in a much shorter period. At that point in time, you’re doubling the size of your business with that customer, so you want your balance sheet to reflect that situation. If I increase that asset value in my inventory, can I work with my lender to see if they’ll finance it and with my investors to see if they’re willing to take on that risk. I want everyone to be on the same page.

I think the hardest thing for me in the past was saying no to growth opportunities because my balance sheet wasn’t set up to support it and therefore it became a potential point of failure. That scenario really came to fruition in the mid 2000s when lenders started to call back their money because they got nervous about the economy. I was fortunate because I hadn’t taken on more business than I could manage. I had that downside built in which allowed me to escape relatively unscathed through that period of time.  It was my relationship with the lender that allowed me to keep the business going because I was able to manage their expectations relative to what my customers expected. I was able to iterate between my customer and the lender.

And I think that’s the biggest mistake: a lot of people make a one-sided decision. And there’s never a one-sided decision when you’re looking at your business. It’s multifaceted. There are a lot of people involved and there are a lot of key players involved.

Lisa: You’ve just given me a whole new understanding of the word balance sheet.  Typically, people think of it as balancing the numbers: the assets and the liabilities. But in fact, what you’re saying is to make sure that those relationships are balanced as well so that you can continue to have a healthy business.

Steve: That’s correct. Absolutely.

Lisa: Steve, I know you’re very busy as we start off the week, so I want to thank you for joining us. I expect we’ll have a second edition of this podcast to dig a bit deeper into certain aspects of the balance sheet.

Steve: Well, I could do 20 if you want. No problem.

Lisa: Sounds great. Thanks.

You’ve been listening to Peaks and Valleys. The podcast on seasonal business.  Peaks and Valleys is presented by Market Maker Agriculture, a long-term hold private equity company that invests in agribusinesses across North America that have seasonal cashflows. For more information about Market Maker or suggestions for a topic or guest contact: seasonal@marketmakerag.com