When you take a trip to an unfamiliar destination, you probably enter the address into your global-positioning-system unit, download directions from a mapping Web site, or pull out your trusty road atlas. Whichever you choose, you have some way to know where you are and where you should be headed — even if you encounter some unexpected detours.
But do you have the same plan for your dairy business? If you don’t, you should.
It’s a matter of asking the right questions, says Don Hofstrand, Iowa State University extension agricultural economist and co-director of the Ag Marketing Resource Center.
Fortunately, the tools you need are within reach; they lie within you and where your operation fits in the overall business life cycle.
Here’s how to use your business’ position make decisions for you and your dairy’s future.
Determine life-cycle position
First, you need to determine where your business fits into one of three general life-cycle categories: start-up, expansion and formalization and maturity, explains Barbara Dartt, family business and management consultant with Lookout Ridge Consulting (formerly Salisbury Management Services). Dartt is based in Portage, Mich.
Use these definitions to help figure out your starting point.
•The start-up stage is generally characterized by an owner who wears many hats — leader, manager, director and worker. It features an informal organizational structure and usually consists of a single enterprise, the dairy business. Dairies can operate successfully in this stage for the entire life of the business.
•Operations in the expansion-and-formalization stage have added significant structure to the start-up stage with written processes and procedures, multiple employees and multiple enterprises or diversification. Owners move away from day-to-day production and learn to manage the organization. Accounting, information and communication systems become more complex.
•The maturity stage has an organizational structure that matches business size and supports stability. It features moderate to no growth, and is a common stage for many operations in the industry. Some businesses can turn back the clock and move back to the expansion-and-formalization stage. However, if an enthusiastic new partner joins a mature operation, it can be very difficult to switch gears. Sometimes, this can even force an operation back into the start-up stage.
One caveat: some operations may find themselves in a fourth, or ending stage. These operations are those at the end of the maturity stage and will no longer be in business once the current generation completes its run.
Each stage presents unique opportunities and challenges, says Dartt. “Know that many decisions and struggles are really just part of the business growth and maturity process and that most family-owned businesses feel these same challenges.”
For example, a dairy that expands from 200 cows to 500 cows, adding several employees and enterprise accounting, obviously fits into the expansion-and-formalization stage. The dairy can go in any number of directions from there.
Therefore, while a very helpful starting point, life-cycle stages alone don’t offer quite enough information to make decisions for the future. Dig deeper using this next set of tools.
What do you want?
Next, you must perform some self-examination. The goal is to uncover your core values. Core values are what you are trying to accomplish with your business.
Begin with a goal-setting exercise, suggests Hofstrand. Set aside a specific time and ask each family member to write down his or her goals. Then, come together as a group to find common goals, which become your family goals and then business goals.
“Business goals do not stand alone,” he says. Business goals must support your family goals.
This is not the time to talk about production goals or get into deep financial figures. The basic premise is not about the numbers; it’s about the needs and wants of the individuals involved in the dairy. That’s where you start, Hofstrand says. “The answers let you lay out the options and help determine which alternatives are viable.”
If the owners of that hypothetical 500-cow dairy decide that they need the operation to support a growing family, offer retirement options for the elder generation and provide a specific quality of life, then the business goals need to reflect those family goals. And, the business would probably stay in the expansion-and-formalization stage.
Once you’ve laid out your family and business goals, then it’s time to lay out your plan of how to reach those goals.
This horizon planning depends on the life expectancy of your business, which is based on the age of the producer (and age of the next generation, if applicable). Going back to the 500-cow example, suppose its life expectancy is 25 years. Now, the plans include what the owners envision they will need to run a competitive business during that timeframe. Chances are high that the business plan will include growth opportunities, exploring efficiencies, improved margins, and so on.
Conversely, if the business will only operate for another 10 years or so, then odds are the plan will be to use up the capital and explore retirement strategies. It would then move into the maturity and, ultimately, the ending stage.
Use these analyses to give you an idea of what investments must be made, along with labor requirements and capital improvements needed. Include your view of what the industry will look like in the future and what you need to do to be competitive in it, Hofstrand adds.
“Then, you can focus in on the opportunities, within and without the industry, that will meet the needs and goals of the family,” he says. “When you ask these questions, you open your future up to anything, as long as it meets your goals and operates within your financial constraints.”
There really are no hard-and-fast rules in this process, concludes Dartt. “It’s all about what’s right for you and your business, and using a deliberate strategy to position your business. Some businesses may stay in a single stage, while others move from stage to stage. Either is completely acceptable, as long as you have made a conscious decision to do so.”
Farm businesses are different from other businesses in that they are very closely tied to farm families and the life cycle of that family, says Don Hofstrand, Iowa State University extension agricultural economist and co-director of the Ag Marketing Resource Center.
As such, it is essential that the purpose of the farm business meet with the needs of the family. If nothing else, the process outlined on these pages should at least raise the issue, so that you have some assessment of what you want out of this business, he says.
Given the current business climate, it is imperative that you ask yourself, “do we want to go through these difficult times to emerge on the other side as a viable dairy business, or do we want to stop here,” says Hofstrand. “The answer should depend on your family goals.”
Just don’t wait to try this exercise, as you may have some difficult choices to make. The key is to always have a choice, because the alternative is not pleasant, says Brad Hilty, Penn State Dairy Alliance business and information specialist. “Procrastination is your worst enemy. It’s one way to ensure that your choices will be limited and will likely put you in a situation where you have none and someone else will make decisions for you.”
Here are some resources that can help you in your decision-making processes. The following Web sites can be accessed at: www.dairyherd.com/management.
Ag Decision Maker.
Ag Entrepreneurship: Tools for growing farm-based businesses.
Center for Farm Financial Management.
MSU Product Center for Agriculture and Natural Resources.
Penn State Dairy Alliance.
You may also want to read:
“The E-Myth” by Michael Gerber.
“Good to Great: Why Some Companies Make the Leap…and Others Don’t” by Jim Collins.
“Strategic Planning for Dummies” by Erica Olsen.
These books are available at your local library, bookstore or various electronic retailers.