Over my years in Extension as a farm business management agent I have witnessed many successful and some unsuccessful Valley farming operations. Taking a page from late night talk shows I am going to give you my Top 11 management pitfalls. Except for the first, these are in no particular order but you should notice rather quickly that each pitfall is entwined with the others.
- Not knowing your Cost of Production: COP, or what it costs you to produce one unit is the lynchpin for profit. Every management decision must be weighed against how it affects your COP. Too few farmers know their cost of production and if you do not know your COP, can you truly be considered in the business of farming?
- No plan for transferring the farm to the next generation: Life happens, but without adequate planning and preparation it may not happen the way you desire. Transitioning the farm is a long-term, on-going and arduous process encompassing every segment of the farm and family. You need to start early, involve everyone, and modify as life provides changes.
- Inadequate financial recordkeeping: If you keep your financial records only for tax preparation, Uncle Sam appreciates your efforts but you have given up a management tool for determining COP and making profitable decisions. Without adequate records for making decisions your outcomes are based on guesses and wishes.
- Lack of a clearly defined business plan: Farmers are great at planning day-to-day production activities but long-term plans get lost in the every day work. Planting the crop, breeding the cow, and marketing the crop must happen, but determining how each cog relates to profitability will keep you in business for the next generation.
- Lack of Communication: Farmers tend to be uncommunicative, but family businesses have many official and unofficial partners with a stake in the business. It is important to keep these partners (spouse, children, employees, lender, equipment dealer, farm supply dealer, etc.) aware of what you are doing at least to the level of their involvement.
- Avoiding or deferring taxes: The desire to not pay taxes leads to tax decisions that may have long-term negative implications rather than decisions that manage for long-term profitability. We often forget that the tax bill will come due some time in the future.
- Lack of financial reserves: Both businesses and families lack the financial reserves necessary to make weathering tough times less difficult. This current economic downturn has changed the landscape and businesses will need to depend on these reserves in conjunction with tools provided by their lender.
- Not managing family living expenses: The family can be a black hole in sucking up money. The only way to manage that black hole is to know what it costs your family to live and then to manage your resources.
- Following your neighbor: Farming operations are different and the factors that drive your neighbor's decisions are not the same factors you deal with. Why should you follow him? I bet he did not get to be successful following his neighbor.
- Jumping on the latest/newest/hottest enterprise: The learning curve for new enterprises is steep and expensive. A lot of homework needs to be done before launching a new enterprise, and it is rare to see that homework done. Because an enterprise is successful somewhere does not mean you can make it work here, but the reverse is also true. The right idea, coupled with the right resources, markets, and management traits are essential in raising an idea from the kitchen table to a profitable enterprise.
- Not training the next generation: Farmers are good at teaching the younger generation about production but less so about financial management. This has a lot to do with a lack of communication, murky long-term plans, and an willingness to share control. If the farm is going to survive for generations, that training must occur.
Valley farmers are good at what they do but as with any business they need to constantly strive to do better. The stress of this down economy has not spared any farm and has highlighted any shortcomings in financial management. Most Valley farms will survive these times but only the most efficient will prosper.