Introduction to Farm and Ranch Business Management PDF

Introduction to Farm and Ranch Business Management DXP02701 —UN—23FEB11 INTRODUCTION DXP01794 —19—29SEP10 Farm and ranc...

Introduction to Farm and Ranch Business Management DXP02701 —UN—23FEB11 INTRODUCTION DXP01794 —19—29SEP10 Farm and ranch business management is the organization the individuals who own the business. Contemporary farm and operation of a farm business to meet the goals of and ranch businesses are increasingly more business the owners. The primary goal is usually to achieve the oriented, thus just having good production skills no longer maximization of profits; however, the successful farm is sufficient to have a successful business. manager also must consider the goals and objectives of MD48206,0001087 -19-23FEB11-1/1 1-1 090117 PN=7  Introduction to Farm and Ranch Business Management WHAT IS FARM AND RANCH BUSINESS MANAGEMENT? It is essential for farmers, ranchers, and other agribusiness people to learn that to operate is not the same as to manage. Operating on a daily basis is important for survival, but to manage the business is to thrive and grow. Operation is part of management. Management, however, includes finance, marketing, and labor management, as well as operation management. Thus farm management is DXP01793 —19—29SEP10 analyzing the farm business’s resources and alternatives within the framework of resource restrictions and personal goals. Management is more than merely making decisions. This process also includes planning, implementing, and evaluating (Fig. 1). The manager must constantly evaluate the performance of the business and make Fig. 1 — Management is planning and evaluating adjustments if and when necessary. It is a continuous process with evaluation and adjustments being performed at the same time. The functions of the farm or ranch manager can be summarized as: Planning Implementing Evaluating Every business situation is unique; however, all DXP01794 —19—29SEP10 businesses share some similar characteristics. Every business has goals, and management principles and tools allow the manager to develop and examine alternatives for attaining those goals (Fig. 2). It is the manager's responsibility to use the resources of land, labor, and capital wisely for the business to provide the largest return possible to the factors of production: Fig. 2 — Farm and Ranch Business Management provides guidelines that can be used to study the details up close land, labor, and capital. This requires that the manager use his ability to make all parts of the business fit together. By following basic management principles, the manager of an agribusiness can develop the organizational skills required to achieve this goal. MD48206,0001B44 -19-23FEB11-1/1 1-2 090117 PN=8  Introduction to Farm and Ranch Business Management THE PURPOSE OF THIS BOOK It is impossible to be competitive in our complex commodity marketplace with internationally oriented markets without the ability to collect accurate data and make correct plans. A bad management decision may mean the difference between success and failure. The farmer or rancher faces problems that were inconceivable in the past. Rapidly increasing production DXP01795 —19—29SEP10 costs, advancing machine technology, and uncertain international markets provide a continuing challenge for the modern farm and ranch business manager. There are two objectives set for this book. First, it provides students in agriculture and farm and ranch business managers with an introduction and basic understanding of modern managerial tools and practices. It also provides Fig. 3 — Farm business management principles help measure efficiency guidelines that can assist in making practical business decisions. as efficient and productive as possible. Regardless of the job, this book is designed to provide the basic Second, it is intended to be used by other agribusiness knowledge and measurement tools necessary for effective people who work with agricultural commodities, supplies, management. and services. They also must be able to apply the principles of management in order to make their business MD48206,0001B45 -19-23FEB11-1/1 DECISION-MAKING Management includes the process of making and implementing decisions and taking responsibility for those decisions. Decisions can be classified according to several characteristics: DXP01796 —UN—28SEP10 Importance — Importance of decisions is relative to the goals of the manager (such as greater returns). Those decisions that are of less importance, because of their effect on time or on profit, are allocated lesser importance in terms of a classification. Frequency — Some decisions are made over and over while others are made only once. Frequency refers to Fig. 4 — First set your goals, then measure your achievements how often the decisions are made. It becomes easier to make decisions that have a frequent repetitive nature. Imminence — Imminence refers to how soon the STRATEGIES FOR DECISION-MAKING decision needs to be made. Often there can be severe consequences to waiting too long to make a decision. A good business manager is always looking for ways to Markets can go down, cattle can get too fat, or fertilizer improve the decision-making process. This could be ways is applied too late. to improve the quality of decisions or could be ways to Revocability — Revocability refers to whether or not a reduce time needed to make decisions. Some strategies decision can be reversed and, if so, what is the cost of might include: reversing or changing the decision. Available Alternatives — Available alternatives create Reducing the number of daily decisions. choices that often must be made in the decision process. Providing for the collection of data to compare alternatives. In order to make decisions, we must know if the resources Establishing priorities from most to least important. we need are available. If they are, we must then set realistic goals and decide how we are going to measure our achievements. Continued on next page FB87413,0000082 -19-24MAR14-1/10 1-3 090117 PN=9  Introduction to Farm and Ranch Business Management PURPOSES OF SYSTEMATIC DECISION-MAKING It is important that the farmer or rancher develop a systematic decision-making process. A systematic approach to decision-making will allow the manager to: Better organize the thought processes. Achieve outcomes closely related to the goals. Be more timely in decision-making. DXP01798 —19—29SEP10 Fig. 5 — Decision-making requires a systematic approach FB87413,0000082 -19-24MAR14-2/10 The steps normally taken in making a decision include: 1. Define the problem. Example: - Own your combine versus custom harvest. 2. Gather information about alternative solutions. Examples: DXP01797 —19—29SEP10 - Ownership: fixed and variable costs of ownership, the timeliness of owning in relation to field loss and weather probabilities, availability of custom harvesters, and the potential impact of harvest time on the market price received. - Custom harvest: Collect custom harvest charges, custom harvest timeliness considering field loss and weather probabilities, and potential impact of Fig. 6 — Six steps involved in the decision-making process harvest time on the market price received. 3. Evaluate alternative solutions. should select the alternative that is determined Example: to be the best decision for that point in time and - Use budgeting tools, time value of money, financial implement that decision. statements, and other tools and techniques. 6. Evaluate and accept the consequences. 4. Make decisions consistent with goals and objectives. Example: Example: - Accepting responsibility for the decision made. - Your goal might be to maximize after-tax income If the decision to sell a product could have increased or to select the production techniques that will the value by moving the sale to a later date, accept maximize returns to land, labor, capital, and that decision. Then evaluate why that decision techniques. produced a less than desirable result for use with 5. Take action and put your decision into effect. the next sell decision. Example: - Most decisions are made under conditions of Routine tasks are often done from the force of habit. uncertainty or imperfect knowledge. For any Where significant adjustments need to be made, however, particular decision a number of possible outcomes we must go through the steps outlined above. Applying may exist, depending on factors which are beyond this process to a given situation makes it more meaningful. the control of the farmer or rancher. Managers Continued on next page FB87413,0000082 -19-24MAR14-3/10 1-4 090117 PN=10  Introduction to Farm and Ranch Business Management APPLYING THE STEPS The following case can be used to demonstrate an application of the steps involved in a systematic decision- making process. Bob Swenson indicated he had sold an average of 18,000 pounds of milk per cow annually. This compared with 20,000 pounds produced by the average dairy farmer on DXP05191 —UN—25MAR14 the farms in his area. It should be pointed out that this was one among many critically weak factors in the farm operation. This example is selected to demonstrate the process of decision-making. Assuming that Swenson's goal is to make a profit on his farm, we will apply the problem of low production of dairy cows to the decision-making process. The Fig. 7 — Production measured against averages can in- decision-making process will be followed: dicate weak factors A problem is recognized because this farm is relatively Will Bob Swenson decide to act and choose an unprofitable or less profitable in comparison to other similar farms. alternative, or will he fail to act and therefore decide to continue on his present course? One of the pieces of information we gather suggests Whatever alternative he chooses, Swenson should production per cow tends to be associated with profitability for the farm. Swenson's production is lower constantly evaluate the action as information becomes than the average. This suggests raising production per available from his farm records or from his personal cow may increase profitability. observation. Was it a “good” decision? Should he have analyzed the decision more carefully? Are there new What are some of the alternatives for raising production alternatives that should be considered? per cow? Breed artificially? Improve feeding? Cull cows? Change the milking cycle? What are the consequences of each of these alternatives? Which is most likely to successfully increase profits? FB87413,0000082 -19-24MAR14-4/10 GOALS AND OBJECTIVES As we have discussed the decision-making process we have referred to goals. What are goals and objectives? Goals are broad statements that show where you want to be after some period of time. Examples of goals might include: To make a profit on the farm every year. To increase cash grain sales by 12% per year over five DXP01800 —19—29SEP10 years. To change from stockers to cow/calf. Objectives are the steps that must be taken in order to attain goals (Fig. 8). Examples of objectives might include: To increase wheat sales by 30% next year. Fig. 8 — Goals can be achieved and supported only by To keep accurate and complete farm business and establishing objectives family living records next year. To purchase 25 cows and a bull this summer. Continued on next page FB87413,0000082 -19-24MAR14-5/10 1-5 090117 PN=11  Introduction to Farm and Ranch Business Management ADVANTAGES OF SETTINGS GOALS Advantages of setting goals include: Shows where you are going — provides a “road map” (Fig. 9). Distinguishes between goals and objectives. Makes it easier to get where you are going. Prepares you to meet the future. Allows focusing on the big picture and can focus on critical relationships. Gives purpose and direction to decisions and actions. DXP01812 —19—28SEP10 Frees you from worries and uncertainties about where you are headed. Fig. 9 — Setting goal can help indicate how far you have progressed FB87413,0000082 -19-24MAR14-6/10 DISADVANTAGES OF SETTING GOALS In the decision-making process we were told to evaluate alternatives. Just as there are advantages of setting goals, there are disadvantages. These disadvantages include: Takes time to decide on goals. DXP05192 —UN—25MAR14 It is a difficult task to come to grips with the many, and often conflicting, goals. Lack of confidence in trying to determine priorities. Appears to be a waste of time when farmers and ranchers fail to see the need for goals. Some farmers and ranchers see their major goal as surviving for another year. Other goals may be contingent Fig. 10 — Each farmer or rancher must set goals specific to their operation on survival of the farm business. Continued on next page FB87413,0000082 -19-24MAR14-7/10 1-6 090117 PN=12  Introduction to Farm and Ranch Business Management GUIDELINES FOR SETTING GOALS Obviously, individual farmers and ranchers have different goals. Those who think making money is the only goal of a farm business probably do not understand the complexity of the goal-setting process. In a Minnesota study of farmers enrolled in farm management programs, a large group ranked “increased DXP01814 —19—28SEP10 earnings” third in a long list of benefits. They named “improvement in management skills” and “better knowledge of the capabilities of yourself and your business” as more important reasons for participating in a farm management program. There are certain guidelines which are useful for setting goals. They include: Fig. 11 — Guidelines for setting goals Goals should be yours. If the farm business is a family farming operation, all the family members should EXAMPLES OF AGRIBUSINESS AND FAMILY GOALS contribute in developing goals. Goals should be written. Written goals serve as Examples of the goals a farm family might set: reminders and provide a record. Goals should be realistic and attainable. They should Owning a farm be something you can accomplish. They should also be Having a well-kept farmstead selected in terms of available resources. Controlling a larger farm business Goals should have target dates. Give yourself time Building a house limits. Recognize short-term, intermediate-term, and Improving the family's standard of living long-term goals. They may need to be modified as Having the highest milk production per cow in the state resources change or as the family is able to use the Providing education for children resources more efficiently. Being a good neighbor Goals should be compatible. Competition among goals Making a profit is normal and desirable, but may be frustrating. Watch Being a community leader out for conflicts. Farm business and family goals may Having more leisure time have to be adjusted so they can be accomplished. You can probably add to this list. Which are farm business goals, and which are family goals? Can you identify conflicts that may occur? FB87413,0000082 -19-24MAR14-8/10 TYPES OF GOALS There are three basic types of goals: Short-term goals are normally those that can be achieved in less than one year. They usually provide immediate satisfaction. Examples might include painting a building, running a soil test to plan fertilizer rates, or finishing a calf. DXP04857 —UN—24MAR14 Intermediate goals may require one to ten years for achievement. They are used as a basis for long-term goals. Examples include raising funds and putting up a barn, or buying a farm. Long-term goals usually require more than ten years to accomplish. They are needed for a sense of direction. Examples include becoming a community leader, Fig. 12 — Goals can be categorized leading a useful life, becoming a better citizen, personal development, or achieving early retirement. Continued on next page FB87413,0000082 -19-24MAR14-9/10 1-7 090117 PN=13  Introduction to Farm and Ranch Business Management DETERMINING PRIORITIES OF GOALS Several factors help determine priorities of goals. These factors include: Dollar value ($100 decisions versus $100,000 decisions) Time (are the results comparable to time spent in other activities?) Orderly sequence (do the most important first; avoid jumping from crisis to crisis) Goals do compete for time and money. Examples include DXP01816 —19—28SEP10 Spending time analyzing records versus tilling the soil or feeding the livestock; going fishing at the lake versus farm chores; adding feeding capacity or new machinery versus painting the farmstead or remodeling the kitchen. As you can see, management and the decision-making process are keys to the success or failure of the farm business. Fig. 13 — Goals compete for time and money TECHNIQUES IN REACHING GOALS There are several techniques which will prove helpful to Check for slow or nonmoving goals. (You may need to consider: Are funds available? Are the objectives you in accomplishing your goals. These techniques are: realistic and attainable? Should you consult with agricultural experts?) Have regular checkups. Review goals at least annually. Modify goals as resources change or as the farm Use saved time and effort wisely and effectively. business and family use resources more efficiently. Organize efforts on a “things to do” list. FB87413,0000082 -19-24MAR14-10/10 1-8 090117 PN=14  Introduction to Farm and Ranch Business Management ONE LAST THOUGHT If you were given $86,400 today to spend any way you wanted (no strings attached), what would you do? Would you save it for a rainy day? Would you pay off as much debt as you could? Would you invest it? Would you build a home? What if you were given $86,400 every day for the rest of your life? What would you do? What would be DXP01817 —UN—28SEP10 your priorities? Isn't it important to plan for today and the future? We each have 86,400 seconds in each day, no more, no less. What we do with these 86,400 seconds will determine what we accomplish in our lifetime. Plan now. Setting goals will help us determine where we are, where we would like to be, and how we can best get there from here. Remember that once those 86,400 seconds are gone they cannot be Fig. 14 — Here is $86,400 tax free. How will you use it? recovered or reused. They are gone forever. DXP01818 —UN—28SEP10 Fig. 15 — You have 86,400 seconds each day to "spend" productively. How should you spend them? MD48206,0001B48 -19-23FEB11-1/1 1-9 090117 PN=15  Introduction to Farm and Ranch Business Management THE CONTENTS OF THIS BOOK Marketing — The principles of supply and demand, marketing functions, and strategies for marketing. In this publication we provide you with assistance with Investment Analysis — The time value of money, developing farm business management skills. This methods of analyzing an investment, financing an includes providing you with techniques and procedures investment, risk management, and acquiring assets. used in farm business management. We will discuss: Taxes — Income tax management with emphasis on Record keeping — The importance and purposes of maximizing after-tax income. keeping records, types of record keeping systems, and Business Organization — The advantages and components of a record system. disadvantages of sole proprietorships, partnerships, Financial Analysis — Cash flow, net worth, and income corporations, and cooperatives as organizations for statements and their ratios; whole farm and enterprise doing business. analysis; and the relationship of the various analyses. Ag Law — The legal rights of farmers and ranchers and Budget Analysis — An introduction to the types and uses the laws affecting them. of budgets, how to use and analyze a partial budget, Risk Management — The practice of identifying and enterprise budget, and whole farm budget, production minimizing exposure to risk. principles, and the components of cost. Included is an International Trade — The impact of international trade analysis of a projected cash flow budget which is used on the farm or ranch business. to identify credit needs and repayment capacity. This publication recognizes that some readers do not Cost and Return Analysis — Cost and return analysis is want to study farm business management from the point the primary tool for farm and ranch managers to analyze of view of the total farm business. With this book they profitability. For a farm business to survive, there must will be able to study some of the aspects of farm and be a positive difference between returns and costs. In ranch management such as the cost of credit. On the the process of analysis, there are relationships that other hand, other readers may be ready to study farm exist between costs with other costs, returns with other business management from the point of view of the total returns, and costs with returns. Here we are defining farm organization and operation. The following chapters costs to be inputs times their price and returns to be provide information on the basic management principles outputs times their price. In this section we will consider necessary to run a complex agribusiness. Readers can input-output relationships and input-input relationships. pick and choose the topics that they are interested in We must first evaluate the physical relationships that studying. exist and then consider the prices involved. SP63763,3BAA210 -19-23JUL14-1/1 1-10 090117 PN=16