I work with some of the best farming operations in the country, and I learn something from each and every one. All are different, and I've found each has its competitive strength that makes it unique. For some it's family labor, others land, and still others have management talent that's far above others in the industry.
I also see areas where most can improve. Here are some of my observations in managing the financial operations of large farming businesses.
These businesses have many people working a variety of jobs. That's effective because it allows talent to be used at the right place — doing the right things at the right time. By the way, that's far different from simply doing things right.
In many cases, the management team consists of family members who include father, sons, son-in-laws, brothers, nephews and many other combinations, including spouses who work full time in the operation. Many have talents that include production strengths; others have strong talents in marketing, managing data, keeping records and a variety of other tasks.
One job that's often overlooked, or not done at all, is tracking budget and spending levels. It's not a fun job, but someone has to do it. And the bigger the farming operation, the more important it becomes.
For example, if an anticipated expenditure is in the budget and is at or below anticipated cost, everything goes well. But that's the ideal world. Often, that's not how it works. Engines blow, transmissions go out and equipment has to be fixed or traded to get the work done.
So how is all this coordinated? In some cases, it isn't. And the one who's in charge of paying bills is only that; a bill payer who has no authority to approve spending decisions.
One spouse in Minnesota shared with me: “Everybody brings bills to me and says ‘Pay this.’ So I do, but no one reconciles it all and determines whether it's the right thing to do.” Consequently, spending is not monitored and controlled.
Someone needs to monitor all spending and say, “If it's not in the budget, you better have good justification for it or it doesn't get spent.”
This isn't fun, but it's necessary for survival. In one-person operations where the same person does it all, the process is not as critical. But now it's more common that there may be five or more key people in the family business, and spending decisions need to be managed.
We work with a successful operation in South Dakota that has what I'd call a controller — at least that's part of his job. He helps the key decision-makers sort out the issues, costs and returns.
He says he feels like a referee at times, because everyone has his or her own priorities. Their priorities are important to them, but they often need to see the big picture and how their priority fits into the whole operation. A net-present-value (NPV) analysis of an investment is completed on every major capital expenditure and compared to other priorities.
NPV is an analysis we complete for our clients on major purchasing decisions. If NPV is positive, that means you pay for the cost of the project and increase your future wealth by that amount in today's dollars. It's an evaluation process major companies use in making decisions and comparing priorities.
This South Dakota operation also develops an annual capital-spending budget and reviews it with the management team and its lender so as many surprises as possible are eliminated.
Something always comes up that isn't anticipated, but having an overall plan is very effective.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.