What is “Business Management’?

Table of Contents1 Farm Business Management2 Planning Procedures3 Develop enterprise budgets4 Budgets and planning4.1 An enterprise budget4.2 A partial budget4.3 The annual budget4.4 The complete budget How do we combine land, labor and capital? Farm Business Management A production specialist might define business management as all those things that contribute […]

How do we combine land, labor and capital?

Farm Business Management

A production specialist might define business management as all those things that contribute to maximum production of crops or livestock, and considers mostly the money costs.

Business management is the discipline of coordinating all phases of farm operation through planning. Business management is concerned with income, and so is concerned with profitability. Consideration of alternative uses of the basic resources means various productive processes must be budgeted and compared. This requires a plan.

Business management being concerned with profitability makes in bigger in scope than other disciplines. The basic resources at the manager’s disposal are land, labor, capital (buildings, machinery, equipment, livestock, cash, credit) and management. All of these resources are limited and can restrict operations.

Effective business management seeks to combine basic resources in an organizational form that maximizes returns. This also includes the greatest efficiency of resources utilized. Efficiency is getting the most units of output per unit of input. Business management involves both planning and implementation.

Planning Procedures

Business managers need two plans;

  1. a short-term plan covering one year’s operation, and
  2. a longer-term plan covering a period sufficient to alter or adjust the use of basic resources.

Conventional budgeting procedures are appropriate for these tasks.

A typical planning process may explore developing a statement of goals and objectives for the business. Goals and objectives need discussion and documentation. Focus on major goals that when fulfilled contribute to lesser goals. Without specific goals there is no direction. Goals may require more income than the business is providing. The manger is then interested in developing a new plan providing more income.

Developing a plan typically involves objectively and precisely, listing available resources. It is important the basic resources of land, labor, capital, and management be accurately defined.

  • Land: number of acres, land classes and capabilities
  • Labor: paid and unpaid family and additional hired, number of hours, seasonality of hours, (custom operator is a substitute that includes labor and capital)
  • Capital: consider both investment and operations
  • Management: objectively measuring management ability is impossible.

Various standards can be used to get a rough evaluation of management implantation

  • are crops planted on time and harvested at appropriate maturity?
  • are yields equal to the county average?
  • is an annual plan developed?
  • is machinery kept in working order?
  • are field trials conducted on-farm?
  • is negotiation utilized for purchases?, and
  • are records kept and explored for guidance?

In the final analysis, the business is only as good as the manager. In developing  plan the capacity of management must be kept in mind and a plan should probably not greatly exceed the managers abilities.

Develop enterprise budgets

Enterprise budgets are key to a meaningful business plan. These budgets are the source of input and output projections and indicate the efficiency with which they can be employed. These budgets also illustrate the use and distribution of basic resources.  Well considered enterprise budgets are necessary to compare different alternative activities.

Determine the supply and total amount of needed labor resources.

  • Obtaining, training, developing and compensating adequate labor is costly. Understanding the total need and how the seasonality of the business affects hourly, daily, weekly and monthly labor is a significant task and must be undertaken to ensure a probability of achieving the desired profitability.

Determine if reorganization requires capital investment and how much.

  • Income may be increased by reorganizing the business enterprises. If additional capital is required, the manager must keep two things in mind, 1) rate of return o the desired investment, and 2) rate of depreciation of the investment. Risk is always a consideration also.

Explore practical alternatives.

  • Planning is the guide for reaching business goals. If needed income is not being had or if additional income is desired, the manger might examine the situation closely and explore alternative methods for generating income.

Are field and / or farmstead rearrangements needed?

  • While rearrangement might be desirable it may not be practical or important to the plan. Rearrangement should only be considered if there is significant return through efficiency.

If cases where major change is indicated remember that big change requires time. Put the new plan in to effect by making the change that contributes the most first. Meaningful, complete records are a requirement of effective business management through careful analysis and comparison with previous years. This exercise allows the manager to gauge business progress.

Records are essential to developing an annual plan indicating which portion of the long range plan can be put into effect this next year. The annual plan also helps select areas of the long range plan which improve income most rapidly.

Budgets and planning

Budgets are essential for making management decisions. Economic and social pressures, government regulations and oversight as well as a changing market place impact the economic viability of most businesses. Budgets are used to examine the current operation as well as explore alternatives.

There is a wide array of budgets. Types of budgets include family living, business operations as well as governmental. Nearly everyone has some knowledge of budgeting and is aware they show anticipated income and expenditures of the budgeted unit.

An enterprise budget

Enterprise budgets list the inputs needed as well as their costs. These budgets also show the projected price and amount of outputs. These costs and revenues are combined in estimating a net return to that enterprise giving the basic data required of planning. When comparing alternatives it is important to also consider risk associated with a change, sources of capital for a change, effect of change on management and how paying for the change impacts cash flow to the business.

A partial budget

Many mangers use partial budgeting without knowing it has a name. Partial budgets are used in evaluating the impact of a proposed change / adjustment allowing the manager to make an objective decision concerning this change. Partial budgets are relatively simple. First, the increases in income and decrease in expenses are listed and totaled. Then the decrease in income and increase in expenses are listed and totaled. Subtract the negative effects (the 2nd step) from the positive effects (the 1st step) and you get the estimated loss / gain from the proposed change.

Typically, if the result of the change is a negative income the change is disregarded. An exception to this is when regulation or law requires a change. In a partial budget, the consideration is only for those income and expense items within the businesses control. No external considerations are considered.

The annual budget

An annual budget is not used for evaluating change in the business. An annual budget is designed to serve as a planning guide for the next year. It is primarily an annual estimate of expenses and receipts. An annual budget with sufficient detail is an ideal source of data for a cash flow projection.

Business managers find an annual budget to be useful:

  • If estimated income is insufficient by allowing adjustments to improve income.
  • Knowing what crops will be in each field helping with the purchase of seeds and fertilizer.
  • Having  an estimate of kinds and amounts of livestock allowing as estimate of feed needs.
  • By determining needs ahead of time, negotiations are more appropriate when securing inputs and materials.
  • Equipment and storage needs can be addressed.
  • Business operations can be scheduled promoting an increase in efficiency.
  • Credit can be arranged.

An annual budget is prepared with the aid of previous year’s records. Reliable records combined with an annual operating plan allows an accurate estimation of annual income. Long-term operational profit maximization can be implemented in an orderly fashion. An annual budget also helps a manager measure progress towards specific goals. The complete budget

The complete budget

The complete budget is a comprehensive tool used to develop long-range business plans. This budget includes all aspects of the business including fixed and variable costs. Business appraisers and effective managers utilize this tool to calculate the earning capacity of the business.

The complete budget brings together all the information showing available resources, value of existing capital, fixed and variable costs. It shows crop and livestock production. Any new capital investments and net cash returns as well as the return to managers and owners is also noted in a complete budget.

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