What’s on your to-do list today? If you’re like most dairy farmers, the list includes a healthy dose of tasks geared toward making milk, feeding and breeding cows, equipment repairs and the like. But don’t forget to include items that contribute to knowledge about your business and the outside factors that impact it. You still need to manage the day-to-day duties on your dairy; those items are critically important. But honing your business skills has become vitally important, as well.
Results of a research project conducted in Pennsylvania several years ago indicated that owners of profitable dairy businesses had better-quality records and spent more hours per week managing their businesses than owners of unprofitable dairy businesses. Therefore, if you are not acting as the chief executive of your business, you should be, especially given the current state of the industry.
Here’s why you need to change your management focus from tasks to knowledge.
With many farm businesses now multi-million dollar operations, and the operating risk in agriculture increasing, farmers need to spend more time on the managerial and financial sides of their business, notes Mike Boehlje, agricultural economist at Purdue University. You’ve got to be thinking about things like profitability, capital structure and debt service, size and growth, risk and financial documentation and creating value for your shareholders (who are usually family members).
Your skills and talents need to match the needs of your business. This means you need to approach the size and growth of your business from more than just a capital position, he adds. “You also have to worry about your managerial skill set,” he notes. “You have to continually focus on the right way to grow, as well as make sure the resource base is there to grow successfully.”
Strategy vs. tactics
If you plan to be a long-term player in the dairy business, you must think in terms of the organizational focus of your business, or in other words, the drivers of your daily and long-term decision-making.
All decisions are not created equally, but all must be carefully analyzed, maintains Brad Hilty, Penn State Dairy Alliance information management specialist. These are the to-do list items than stretch your management skills and get you headed on the path of a business executive.
For example, good managers know whether a decision is tactical or strategic in nature.
Strategic decisions are those that focus on doing the right things for your business to achieve long-term goals like improving profitability, improving cash flow or building a retirement fund, he explains. There are different levels of strategic decisions, but all are focused on doing the right things. Decisions of this nature include expansion plans, whether to hire a custom operator or even the implementation of a synchronized breeding program.
Tactical decisions, on the other hand, are more about doing things right than doing the right things. These are usually daily or frequent decisions, like ration changes or forage harvest timing.
Therefore, while tactical decisions are essential to your business, you also need to focus on your strategic decisions because that’s where you take your skills from tasks to knowledge.
The well-known economist and business-management expert, Peter Drucker, realized the emerging importance of knowledge in business and society decades ago. Drucker noted that “the emerging reality of the 21st century will be that those businesses which are organized around knowledge, rather than tasks, will have the opportunity to create wealth.”
There is no silver bullet, but business success is achieved through continuous improvement that keeps the best performers ahead of the pack, says Matthew Oesch, associate business consultant at Lookout Ridge Consulting.
“Our experience has shown that a key trait of excellence is the courage to confront brutal facts and change course if necessary,” he says. “Comparatively, less-than-spectacular performance often results from failing to acknowledge changing market circumstances or internal business weaknesses. The key is being a student of your industry and your business, and be willing to adjust when exposed to new information.”
Think about what drives the daily and long-term decisions of your business in that context. “Is the driver tasks or knowledge?” Hilty asks. “If it is the former, perhaps it is time to change. Knowledge is the premier input of your dair business. If you come to that realization, you just might have an opportunity to create wealth.”
3 profitability drivers
One of your main goals when assuming a business-like attitude is to make sure you’re meeting profitability objectives.
That means you need a good understanding of the three drivers of profitability:
- Margins — how much revenues exceed cost. Keep track of margin per hundredweight of milk, for example.
- Asset utilization — also known as asset turnover, this is the number or sales per dollar of assets you generate.
- Financing — determine your cost for borrowed money. Can you repay loans and other debts based on your profit margin, market volatility and interest rates?
You can be profitable according to your tax return or according to your income statement, but unless you’re generating enough income and revenue to reward yourself for the resource contributions that you are making to the business, you may not have created value, says Mike Boehlje, agricultural economist at Purdue University.
“You’ve got to get paid for your time; you’ve got to get paid for your intellectual and managerial capacity, and you’ve got to get paid for your money, as well,” he says. “And it’s only after you take those expenses into account that you have really figured out whether you have created value.”
Information management insight
So, how do you acquire the best information possible to gain the knowledge needed to move your business forward?
According to Brad Hilty, Penn State Dairy Alliance information management specialist, acquiring information involves a six-step process which includes data collection, organization, processing, integration, reporting and utilization.
Each of these steps builds upon the previous ones to advance the transformation of data to information. If the system is compromised at any level, the information obtained is useless.