There are typically gaps in management between what a farmer is presently doing, what needs to be done and what could be done better.
Examining these gaps helps to focus on what management practices are needed and the related personal skill set development that is required.
Before you can assess whether or not your business advisers are working for you, it is important to determine what it is you actually want … or need … them to do.
Traditionally, farmers needed to be “all things to all aspects of managing their business.” This has changed or is changing for many farms and farm families.
Farm business advisers help to identify key management issues and work with the farmer to support the implementation of tactics and strategies designed to bring resolution to the challenges they’re facing.
While the primary responsibility rests with the farmer, purposefully using advisers adds to the effectiveness of farm businesses, their management and thus their profitability.
Traditional advisers, such as accountants, lenders and lawyers, have been used effectively by farmers, regardless of their size, for decades.
Other advisers work in areas of specialization which, while not an “everyday” occurrence for all farms, are nowadays becoming more common, such as business management consultants, human resource consultants, geneticists and agronomists, for example.
Farms today have become increasingly large and complex in terms of their investment base and ownership structure and are considered small- and medium-sized enterprises.
Farm business owners are looking for resources that can provide them with the support they need to manage their businesses. Advisers, or a team of advisers, can help to meet these needs.
Accepting that better-managed farms are more profitable, what do farmers have to do to continually advance their management? They can (and should) continually improve and advance their management competencies.
They will though, at some point, outgrow or outstrip their internal management abilities. Using external management advisers is a way to achieve this. Using advisers won’t ensure that farmers optimize the profit and management correlation, but it will increase the likelihood.
Return on investment is generally considered to be a relationship between investment (capital) and profit. But for businesses, and especially farms, the investment also includes their time, energy, ideas and commitment.
Farmers only have one absolute constraint, and that is their time. Where will they get the best return on their time investment? What is an acceptable return on investment?
These are difficult questions to consider. Advisers, because of their unbiased and objective input, can make a valuable contribution to the discussion around return on investment in a broader application.
How, then, does a business change to respond to the need to increase profitability and to respond to the increasing complexity? Figure 1 looks at how management practices are required to change as a business (farm) grows.
The following paragraphs provide a description of each of the stages. The accompanying cow herd size correlations are not an exact science; they are included to provide a context for each of the stages.
- Entrepreneur stage – At this stage (a typical 50-cow operation), there is a base financial system in place. This would include formalized record-keeping that results in an annual set of accrued financial statements.
Attention to management (management depth) is important, but the farmer typically focuses a great percentage of his time operationally, providing a significant contribution to the labour required on the farm.
As the farm increases in size, through the transition phase and into the professional management phase, there is a continual requirement to advance the financial systems so the appropriate information is available to management.
The larger 500-plus units require a significantly more advanced approach to financial management – an approach that is often best served by a team of advisers.
- Transition stage – Management depth starts to become more of an issue as farms grow through the transition stage. The farmer (owner) needs to simply spend more and more time in the office.
This is one of the more difficult changes to effect because it is contrary to what farmers like to do best, which is to work operationally in the barn. As the farm grows through to the professional management stage, there will be a need to add a formal middle management structure.
These are people with responsibility for a certain area of management and who report to the farmer (owner). In this stage, the need to engage advisers increases significantly. Farmers increasingly are forced to deal with issues without the expertise and experience to do so.
- Strategic management – During the transition stage, the need to introduce elements of strategic management begins. This can look like formalizing the external resources the farmer needs to help him with significant management decisions.
The advisers at this stage will provide the best resource to a farmer and farm family if they work in a coordinated manner. Farms at this strategic management stage of development can look to a formal advisory board as a way of accessing the management input they require.
This resource is not commonly used by farmers but is something that will become increasingly common as farms continue to increase in size and complexity.
Aligning growth and management is possible but not necessarily an easy task. It requires continual focus and willingness to adapt change. Advisers can help. There are several external advisory resources available to farmers (Figure 2).
External advisory resources associated with technical assistance are increasingly important as farms advance in their development as illustrated by the entrepreneur through to professional management phases.
Simply stated, as farms increase in size and complexity, they increasingly need to access professional advice, such as accountants and lawyers. The need to have and use these resources does not go away. Rather, it becomes increasingly important.
In the transition phase, many farm businesses begin to look for additional and complementary management resources and advisers. These resources are needed not to replace the technical and professional resources, but to augment them.
Farmers generally want and need someone or some structure to talk to about decisions (both ownership- and management-related) they are facing.
The traditional resources they have used in the past (entrepreneur phase) are no longer, by themselves, adequate. In the transition phase of their growth and development, farmers can access the resources they need through “sounding boards” … or teams of management advisers.
For farm businesses that continue to grow and develop, the time comes for them to more proactively look to advisers, and teams of advisers, to help with business management decisions. Effectively using advisers can make the road ahead a little less bumpy.
Tery Betker is a farm management consultant with Backswath Management Inc. Email Terry Betker.
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