Production agriculture is highly competitive, and each year managers are looking to create or sustain their competitive advantage. As another year draws to a close and you reflect on your business management results and look to the future, consider the following six best practices.
Key performance indicators (KPIs) are the metrics that best measure your business’s performance. In production agriculture, the most common KPIs are the financial ratiosrecommended by the Farm Financial Standards Council (FFSC) that measure liquidity, solvency, profitability, repayment capacity, and financial efficiency.KPIs are not limited to financial measures. Your management team should carefully select those that provide meaningful and timely feedback about strategy execution and financial performance. For example, managers of livestock systems may select feed and water consumption as the key indicators of animal health. By adding animal health to a KPI dashboard, managers can monitor expected sales volumes, streamline transportation logistics, improve facility utilization, and regulate feed inventories.
Implement cost controls
Controlling production costs is the most basic component of managing a manufacturing process. Identify direct and indirect costs for each commodity to establish an important baseline for making pricing decisions. Regularly perform breakeven analyses to illustrate how changes in variable and fixed costs, as well as production volume, will affect the breakeven cost of producing each additional unit.If you have employees responsible for managing specific business activities, you may find real value in implementing a managerial accounting system. These systems provide employees with regular reports about the unit costs assigned directly or indirectly to their area of responsibility. Additionally, the owner or general manager can delegate accountability for cost center performance and swiftly identify the work in process at each production stage.
Plan for success
A strategic plan is often compiled by performing a SWOT (strengths, weaknesses, opportunities, and threats) analysis and preparing a response to anticipated situations that will create a competitive advantage. A common product of this process is formal statements of your business’s vision, mission, and core values. Furthermore, managers should adopt KPIs that measure whether current farm operations align with the strategic plan.Operational budgets are a tactical approach to planning. If the operating budget produces the desired financial KPIs, then flawless execution of the plan should be your goal. Developing operating budgets and periodically measuring budget variances will illustrate your degree of financial control.
Income tax planning offers real opportunities for agricultural producers to manage tax liabilities and anticipate cash flow requirements. If your income is high, consider using the $500,000 limit for Section 179 expensing, electing to take Commodity Credit Corporation (CCC) loans as a loan, or leveraging the farm income averaging provision. Keep in mind your counterparty risk as you use traditional strategies like prepaying expenses or deferring sales. Work with your CPA to find strategies that manage your tax liability and take advantage of current tax rates.
Analyze price risk
Many of today’s risk management advisors are focused on controlling the “crush margin,” which suggests the return after factoring in variables with the greatest price risk. For example, the crush margin for a pork producer includes the price for the finished lean hog as well as the cost of the corn and soybean meal the pig will consume. Agricultural producers can use exchange-traded futures and options contracts, over-the-counter hedging instruments, elevator/processor contracts, and government-subsidized insurance products to manage their crush margins and protect themselves from devastating effects of price volatility.Producers employing these hedging tools improve their probability of success when they artificially test their strategies and document the risk management plan. Using financial models to analyze the effect of price volatility, managers are able to quantify the potential margin requirements and the subsequent impact on business liquidity and profitability.
Are you spending too much time on the details of running a business and not enough time on the big picture? More agribusiness managers are realizing the advantages of outsourcing certain business tasks and roles, such as financial, agronomic, human resource, or risk management functions. In a cost-sensitive environment like agriculture, outsourcing offers the benefits of hiring a full-time professional without absorbing the cost of one.For example, outsourcing the controller function brings in a professional trained in accounting and finance to prepare financial statements, manage cash flows, measure production costs, prepare budgets and forecasts, and monitor KPIs. This person might also manage the bookkeeping staff and work closely with your CPA during income tax planning.
Commodity price volatility, the evolution of larger farms, and increasing competition for scarce resources make each of these best practices increasingly valuable to the agricultural producer. Farm managers who think creatively and challenge existing systems will continue to create a sustainable competitive advantage. Determining the relative value of implementing each of these strategies on your farm will guide you to a starting point.
(Source – http://www.larsonallen.com/EFFECT/Farm_Management_Strategies_and_Best_Practices_for_a_Successful_Agribusiness.aspx)