It used to be that you could recover from one bad year of farming - low prices, crop failure - in a couple of years. However, in today's economy, one bad year can take a decade from which to recover. That means with today's tight margins, managers of farm businesses must stay on their toes, says David Kohl, professor of agricultural and applied economics at Virginia Tech.

Kohl shared these 10 golden rules of management with dairy producers attending a seminar in Greeley, Colo., recently.

Rule # 1. The equation for business and profit success is: P= O+C+L+M2

In this equation, Kohl defines the keys to profitable farming as:
O - Keeping overhead cost low, including equipment, facilities and family draw.
C - Exercising prudent cost control.
L - Using liquidity management for disciplined growth with capital reserves.
M2 - Doing the best job of marketing and managing that you can. A good manager/marketer must do 1,000 things 1 percent better.

Rule #2. $40,000 to $70,000 net income per family

The farm operation must be able to generate between $40,000 to $70,000 net income after depreciation per family unit. If the business can't achieve this goal, bickering among family members could break out, which is detrimental to the business.

Rule #3. Growth objectives

Failure to grow leaves the business stagnant. So, how much growth do you need in order to keep the business healthy? Kohl recommends that producers try to achieve an average of 5 percent to 7 percent growth in net farm income over a 10-year period. That level of growth should allow you to stay ahead of inflation.

Rule #4. The Corvette rule

Family living and credit card debt both affect your overhead cost. Producers need to avoid buying a new truck just because they had a good year. Instead, producers need to start thinking about family living withdrawals on a per-hundredweight basis, which will help put a better perspective on profitability.

Rule #5. 20 percent expenses/networking capital

Cash is king. Before you embark on an expansion, you should have 20 percent of those expenses in capital reserves.

Rule #6. Children need three to five years outside experience

Generally, a farm business is more profitable when a child goes to work somewhere else for three to five years before returning home to join the farm business. This is a good time to learn the labor management and networking skills they will need to guide the business into the future.

Rule #7. Management decisions within six years

If a young person comes back to the family farm business, and isn't making management decisions beyond basic production decisions, within six years you risk that person becoming an employee for life.

Rule # 8. 3,000/500 hours

Anyone who violates the 3,000/500 hour rule risks burnout. Simply put, if you work more than 300 10-hour days on the farm, and spend more than 50 10-hour days working off the farm on the school board, bank board, and so on, you will get burned out. Then, one of three things can happen: You'll decline mentally, spiritually or physically; the business will go down hill, or your family will suffer.

Rule # 9. Off-farm investment rule

Don't put all of your eggs in one basket and rely on the farm to totally fund your retirement. Instead, Kohl recommends producers invest 5 percent to 10 percent of their net farm income off farm in stocks and mutual funds. To determine how much to invest at what level of risk, use this rule of thumb: Your age - 100 = the percentage of available funds to invest in stock mutual funds. Place the rest in lower-risk investments. (If you're 40, then
40 - 100 = 60 percent.)

Rule # 10. Missions and goals

A goal is a dream with a deadline. However, if you don't write it down, the goal becomes harder to achieve. Always write down the mission statement and goals for your life and business.