By: Danny Klinefelter
The business of agriculture is fraught with narrow margins and volatile returns. To navigate these challenges, you need to continuously improve your management practices. That is what separates industry leaders from the rest. The following are a series of behavioral and financial practices used by successful agribusiness owners.
Be honest with yourself and others
Being successful doesn’t mean you are good at everything. Success comes from capitalizing on your strengths and compensating for areas in which you are less talented. You can do this by delegating, outsourcing, or forming alliances with others who can complement your managerial strengths. Everyone needs honest feedback and to hear alternative points of view. You can get these by participating in advisory groups made up of successful peers.
You also need to communicate effectively and honestly within the business and with interested outside parties. Employees and family members need to know what you expect them to do and how to do it. They also need to know why they are doing a particular job and have regular feedback so they can improve. Finally, you need to communicate where the business is headed, the plan to get there, and what’s in it for your team. Family members should also know the CEO’s plan for succession and the estate.
Put your plans on paper
People tend to focus on the things they like and know how to do most easily and quickly. A checklist can keep the activities you prefer from crowding out tasks that are more important to improving business performance. It is difficult to achieve your long term goals if you do second things first. To avoid this problem you should set priorities, and then prioritize them in writing.
You also need to write down your business assumptions and what you are basing them on. Memory is limited and selective. If conditions change and you must alter your plans, you need to know what you were thinking originally. Do you need better or additional information the next time around? A record can help you learn from experience and develop better subsequent plans.
It is also essential, to have detailed job descriptions and standard operating procedures. It is very hard to hold people accountable for job performance if expectations are not written down and explained to them. The absence of job descriptions and standard operating procedures also leads to inconsistency in performance appraisal and makes it more difficult to train new employees—you need a clearly recorded explanation of each job and how it is to be performed.
Capitalize on beneficial relationships
Too many farmers complain, blame, or wallow in self-pity. This problem is reinforced when they communicate exclusively with people who may be suffering similar difficulties. One way to avoid this negative effect is to seek out producers that are effectively confronting business challenges. These are the people that can encourage you and help you to learn, change, and adapt.
Success also depends on recognizing and forming interdependent relationships that can benefit your enterprise. Examples include collaborative farming, jointly owning assets, or joining with others to employ technical or managerial experts. You could also become a qualified supplier in a coordinated supply chain or take advantage of pooled buying.
Take the broad view, listen, and look ahead
Put another way, you can short circuit your business by concentrating only on your own commodity and region while looking only at the near term. Consumer trends, demographic shifts, global competition, emerging technology, qualified supply chains and the likelihood of new regulations, etc., require us to take a broader view.
Focusing on leading indicators can help you avoid drowning in information and allow you to discern emerging business trends. Remember, business and market changes are usually not due to a single factor but to a convergence of forces.
We all have gaps in our knowledge, but because the world is technology driven, it is vital to acknowledge these gaps and fill them in. The best managers are intentional networkers and listen carefully to their industry’s leading decision makers. Because information is increasingly available in real time, managers need to learn which technologies are relevant to their business and adopt them or risk competitive disadvantage.
Many of these new technologies are designed to enhance yields or reduce costs. However, some are required to prove regulatory compliance, provide traceability, or to verify fidelity to contract specifications. Adopting them may require training that can be expensive—these tools must be evaluated in terms of cost and benefit. This analysis will sometimes include the cost of non-compliance or verification audits which may be even more expensive or impossible without the capabilities technology can provide.
Using technology, taking a broader view, and thinking long-term can also help you grow your operation. Farms that grow large also can fail. Growth, however, is not necessarily what gets them in trouble. The problem can occur when farmer’s management systems don’t continue to improve as they grow their operations. Farms that fail during economic downturns often are ones that grew using multiple year fixed cash rents at above–market rates. Successful operations tend to use management specialists and expand at rates commensurate with the rate of growth in their earned net worth.
Money management starts at home
Many agribusinesses are family owned and operated so there will often be family members on the payroll. For business purposes, these employees need to earn their pay or you need to gift the money to make clear it’s not for the value of their work. Overpaying can make sense from a tax standpoint, but it sends the wrong message to the rest of the team. Pay should reflect the market for the job responsibilities and performance. Overpayment is a miscategorized form of charity or a welfare subsidy. Conversely, you should avoid frustrating family members by underpaying them based on the promise that someday it will all be theirs.
There is also a tendency to raise the family’s standard of living by spending on non-productive assets and activities during boom periods. When economic downturns occur, these items and activities become unsustainable—living within your means is essential to maintaining a successful operation long term. Numerous farm data studies have found that personal spending is one of the biggest cost differences between high and low performing businesses.
Make the most of business investments
Spending on your business to avoid taxes isn’t always a bad thing. However, you must first analyze the marginal contribution of the investment versus its marginal cost over time and its impact on liquidity. You can increase the contribution of investments in machinery by utilizing it to the fullest.
Studies show that machinery and equipment cost per acre is one of the 3 major components that separate the most from the least profitable operations. You can avoid underutilization by sharing equipment with someone in another part of the country, entering into collaborative farming arrangements, or farming in different states to take advantage of seasonal differences. You can also do custom work to more fully utilize machinery capacity.
Use the financial figures that matter most
You should monitor actual versus budgeted performance throughout the year. This will help you spot areas of over and underperformance and allow you to take advantage of opportunities and address problems in a timely manner. It is better to be proactive than reactive. Developing contingency plans as you budget will also help if things don’t go as planned.
By using managerial/cost accounting you can know your true costs on individual enterprises and farms—this helps separate the winners from the losers. Knowing true cost will tell you where you need to expand, cut back, or get out. When you know the details of your operation, you can effectively redeploy dollars and assets. The most successful operators are consistently only about 5 percent better than average in all the key performance areas; but, the results add up because they are cumulative, multiplicative, and compounding.
It is unwise to use cash basis net income and changes in market value net worth to assess business performance. For identifying changes in true profitability, cash basis net income can lag accrual adjusted net income by 2 to 3 years. Changes in market value net worth, is also a lagging indicator. Again, identifying problems or capitalizing on opportunities in a timely fashion is what separates the top 5 percent and the rest of the top 25 percent—the delay associated with these two indicators in is just too great.
Cash basis net income also fails as a measure of actual profitability because there are too many ways to manage it—inventory management is a prime example. Change in earned net worth is a better way to evaluate the quality of business management.
Leverage your competition
It makes sense to benchmark yourself against your best competitors. This benchmarking should include financial as well as management practices. Evaluation should be based on comparable financial and performance data. This helps you identify your weaknesses and what to do differently to improve your enterprise’s performance. For your business to succeed and continue successfully after you are gone, you and those who take over later must learn, adapt, and continuously improve at the rate set by the leading edge the competition.
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