Technology update 7

The main aim of any business should be to make a financial profit which allows the stakeholders a reasonable living and enables re-investment. A farm business should have the same aim. To be profitable, farmers must plan their business development by knowing their current level of performance and improving the weak aspects of their business to meet performance targets, that is, yield from forage, return on capital and costs of production in pence per litre

Farmers Farm, Managers Manage, To Survive Farmers Now Must Do Both

A farm strategy is an agreed course of action to achieve a certain objective. For example, strategy to produce 4,200 litres from forage would involve preparing a plan to increase the forage yield to this target. The starting point is the current forage yield and the preparation of plan for grassland management, meal feeding and herd yield to meet the target. There may be different options for achieving the target, each must be examined and the decision taken on the option best suited to the farms resources. Farms have different strategic plans depending on their current performance and their potential, as the factors restricting development on farms differ. On some the land will be limiting, on others it may be quota, labour, buildings or other management factors. The strategic plan will

The strategic plan takes a 3-5 year view of the farm development, based on an analysis of the current business and its performance. To this is added an annual plan to achieve the objective.

As with any business, a farm has inputs (fertiliser, meal, labour, land etc) and outputs (milk, beef, potatoes, cereals etc). The successful combination of these result in profit for the business. To be profitable, the business must control and measure the inputs and outputs. No accurate business decisions can be taken without the physical results, such as yield, meal feeding, fertiliser usage, stocking rate etc and financial results, such as variable and fixed costs to the level of costs per litre.

Development decisions begin with assessing if the business can afford further investment. Regardless of farm size or stock numbers, a secure future stems from a strong base. The balance sheet will show the relationship between what you owe and what you own, this is termed owner equity. If your borrowings are high with owner equity of 70% or less, it would not be advisable to borrow further. Where scope exists, depending on the owner equity, further planned investments could be made in areas where cash flow will be improved. A balance sheet should be prepared and discussed to decide the scope for capital investment.

Good cash flow is as important as good profit, profitable farms have gone out of business due to poor cash flow. Ensure that there is enough cash in the business each month to allow for all costs and living expenses. When income reduces, costs must be cut or the farm will increase its level of debt and may be forced to sell assets to generate cash for the business. Monitor your bank situation and respond to changes quickly. Do not let financial situations drift, and consult with your bank if you anticipate change.

No business can monitor performance without some measure to compare this against. Farms must have management records. These can be either physical (milk yield, meal usage, fertiliser usage, milk recording records etc) or financial (full cost records, variable cost records, milk manager etc). The better the records the better the management decisions can be due to accurate assessment of strengths and weaknesses.

It is important not just to keep records, but make full use of them. Make sure you understand these and can apply the valuable information in preparing a farm development strategy.

Farmers can and do farm very well, managers manage businesses well, to have a profitable and sustainable farm in the next century farmers will have to do both. Farmers must become business and finance focused. To do this you must:

Good management based on a strategic plan, monitored with records, ensures a successful farming future for each business.

Technical Note prepared by Diane Stevenson, Farm Development Division

ISBN 1 85527 340 3

© DANI December 1997