Many agricultural producers who have sought loans have overheard loan officers discuss that you will be evaluated on the “Five C’s of Credit.” These include capacity of repayment, character of the borrower, conditions of the credit, collateral to back the loan, and capital or net worth.  Another dimension of creditworthiness is emerging as agriculture becomes more interconnected with other segments of the domestic and global economy.  Whether you are a lifestyle agricultural producer, traditional farmer or rancher, or operate a large complex business, the sixth C, cranium, will become more important not only for the sustainability of your business but for a balanced lifestyle.

First, an important component of the Sixth C is synergy management in business arrangements. This is one’s ability to find, develop, and coordinate business partners or associates who accentuate strengths and compliment or offset weaknesses. This usually requires an owner, manager, and management team with a clear cut vision, goals, and actions with fine-tuned evaluation metrics that evolve as economic game conditions change. The synergy in business arrangements and partners must be not only structured and formalized, but also flexible and fluid to proactively capitalize on changing internal and external business conditions.

A strong component of the Sixth C is whether a manager, owner, or business has taken an adverse event “punch” and bounced back. Many times the good years are the ones that create business problems, referred to as the “curse of prosperity”. Many successful sustainable businesses will redefine and focus in periods of adversity, which makes the business model even stronger in the future.

The cranium factor requires a borrower, producer, or manager to be able to handle an unexpected “black swan” or tail risk, which is much more prevalent in a global economic environment that can change overnight than the environment of the past.  For example, wheat prices changed $2.51 per bushel in 27 days this past summer. The degree of financial leverage, shock absorbers in the form of liquidity and cash, the backup of equity, and the sensitivity test to profits and cash flow must be in place to counter an unusual event or “black swan.” This can apply to the business’ and family’s financial picture.  Are systems, strategies, and standard operating procedures in place for the various components of the business including production, risk management, marketing, operations, and exit strategies? Are these plans communicated and executed effectively through the proper channels?

Along with adversity management comes the other end of the spectrum, the aforementioned “curse of prosperity.”  During profitable economic cycles, a windfall “slug” of cash can be large, often amounting to high six and seven figures. Has the individual had experience managing these profits well? Does the profit plan include disciplined growth, added efficiency, more effective results, and an improved bottom line? Is necessary working capital and, yes, cash, preserved to capitalize on business opportunities or handle a “black swan” event? Are profits channeled into excess family living expense or exuberant consumption, sometimes called “killer toys” or side show business ventures that are outside the expertise and scope of management? Disciplined profit mangers with stellar liquidity and cash flow management abilities will be a key to wealth accumulation and sustainability in the future.

Regardless of whether you are involved with a small lifestyle operation or the most complex agribusiness, managers who have a high “cranium factor” will increasingly have a written business plan that is executed, monitored, and evolved as business conditions change. A written business plan can be a road map to keep the team players on the correct route in the business journey. Research has found that having a written business plan has led to businesses earning four times more profits than those that “shoot from the hip.” A written business plan is not an option but a requirement in a domestic and global economic environment with surprises around every corner.

Drilling deeper, the cranium factor is all about being proactive in a changing economic and business environment. The astute manager of the Sixth C will consider all perspectives, including those that both confirm and challenge beliefs and business and personal paradigms. Successful businesses include lenders and managers working side-by-side who are above average in many areas of business management without glaring weaknesses. They are strategic thinkers with reasonable emotional intelligence, which helps them work with people and seek to improve the individuals with which they come in contact.

Finally, the Sixth C is all about balance of the business, family, and lifestyle. Time management with defined priorities in each component is necessary in a high tech, 24-7 environment. A plan for both business and self-improvement is important to maintain the competitive edge as an agricultural knowledge worker, which is a vital part of the Sixth C of credit as you manage your business and lifestyle.