Managing for Good or Difficult Times?
Farm Business Management Update, June/July 2004
By Gordon Groover
Developing the "ultimate" management plan that is filed away or even framed and displayed on the office wall for all to see is a myth. The ultimate plan is not a one time endeavor that will direct the farm's activities for the next 10 years. The ultimate plan is a process of continually thinking through, fine-tuning, and reworking to address changes in the business and family environment to reach long-term business and personal missions. This type of planning trains the manager to quickly formulate strategies or plans that can help address problems or opportunities. Like athletes of equal ability, the one who trains and has a plan for how she will compete will have an edge over her competitors. Planning should be a dynamic process that evolves as individual, family, regional, national, and world events impact the family and business. The events of the last few years (recession, terrorism, war, low and/or very volatile commodity prices) may have overwhelmed some farm business mangers causing them to seek comfort and security in the known activities of production: feeding the cows or getting tractors and equipment ready for spring. This response is understandable, yet some managers see problems as signals to shift out of unprofitable or undesirable activities.
So why should we spend time planning when we cannot anticipate what the real world will dump in our laps the next day? The act of planning prepares us as individuals to understand the steps that are required to confront a problem or an opportunity. The process of planning involves three activities, the same as those for an athlete: 1) mental, 2) fiscal (yes, they too need sponsors or a source of income), and 3) physical (pencil pushing or typing on a computer). Metal training involves general and specific tasks. Managers that are flexible and can adjust to change are well read in their field and keep abreast of trends and changes in the world. To prepare and be knowledgeable of daily challenges, make time to 1) keep abreast of technological change in the your industry, e.g., dairy, beef, grains, fiber, and so forth; 2) understand changing demographics leading to changes in consumer demands for your products; 3) keep up to date on technology changes in equipment and machinery; 4) keep abreast of U.S. and world economic conditions; 5) develop a list or library of management resources to draw on when needed to address a problem or opportunity; and 6) use trustworthy individuals as a sounding board for plans, alternatives, and heads-up on new challenges. These six items will provide the broad base of knowledge and skills to understand where the farm business fits within the agricultural industry, the business climate, and world situation.
Fiscal and Physical Controlling the fiscal resources and having the physical discipline to manage the resources are the central points in planning for and making sound management decisions. The first and most important step, but maybe the least enjoyable, is the need to be skillful and knowledgeable about recordkeeping. Recordkeeping includes production records (e.g., livestock, DHI, and crop records) as well as a basic knowledge of what information is needed to create cash flow, net worth, and profit and loss statements. The combined analysis of the farm business by comparing your records to benchmark data for similar farms is the basis of fiscal management. You have used your records to document where the farm stands next you need to develop and gain knowledge and skills that will allow you to project the farm's production and financial performance and to compare alternatives. A computer, spreadsheet, and other software tools will be very helpful in "what if" comparisons to understand how your farm business will react in different situations. Managers with limited time to "run the numbers" on multiple scenarios may want to employ an outsider (e.g. extension agent or a paid consultant) with skills to do the fine-tuning of the numbers and alternatives. However, good managers will be familiar with many of the common types of analysis and know how to interpret and critique the results regardless who does the analysis.
What about managing for difficult times? Managing for difficult times is no different than managing for good times. Developing a management plan for an expansion should have multiple scenarios on what strategies to employ if prices decline, if interest rates increase, if feed input cots increase, and so on. Business managers should be planning and asking what if questions or developing strategies to address these questions all the time. The most important decisions are not made in difficult times but in the good times. I'll repeat this one - the most important decisions are not made in difficult times but in the good times. The decisions one makes in the good times set the stage for the outcome during the difficult times. In most cases, the only decisions you can make in difficult times revolve around cutting costs, selling assets, and restructuring debts anything that will improve cash flow. Thus, realizing positive cash flow after a few years of breakeven or a shortfall in cash flow is the time to make sure that all new investments reap the highest returns or benefit to the business. For example, replacing a combine because you expect to have surplus corn to harvest this fall, the dealer is offering zero percent financing, and you can expense the purchase to reduce you tax liabilities may not be a good decision. You should ask what are the alternatives to the purchase and what long-term impact will the decision have on the survivability of the farm business. In simpler terms, can you prove to your spouse or a trusted friend that the business will be better off in five years because of this new investment?
In summary, planning decisions and subsequent investment decisions made when the future is positive may turn out to be the decisions that will severely limit your alternatives in difficult times. Make sure you plan with full knowledge of all downside risks.
Listed below are resources that will prove useful to farm manager making decisions in good and difficult times.
Visit Virginia Cooperative Extension