BUSINESS MANAGEMENT

Contents

Roles and Responsibilities of the Manager

Management Records and Analysis

Roles and Responsibilities of the ManagerG A Benson, North Carolina State University, Raleigh, NC, USA

ª 2011 Elsevier Ltd. All rights reserved.

This article is a revision of the previous edition article by

G. A. Benson and T. R. Smith, Volume 1, pp 210–214, ª 2002,

Elsevier Ltd.

Introduction

This article provides an overview of business manage-ment for a commercial dairy farm. Topics discussedinclude the roles and responsibilities of a manager,namely, planning, implementing the plan effectively,and monitoring and evaluating dairy herd and farm finan-cial performance. The information presented describesrecommended practice for commercial dairy farms indeveloped countries and similar farms in developingcountries. However, the underlying principles apply todairy farms of any type, size, or geographical location.

The Role and Responsibilities of the DairyFarm Manager

Modern dairy farming is a business and the primarydecision makers of a dairy farm, the managers, havethree essential roles or responsibilities. These are devel-oping a plan for the business, implementing that planeffectively, and ‘controlling’, a term used to describemonitoring and evaluating the performance of the busi-ness. If the farm is to achieve the owners’ goals, theseresponsibilities must be discharged regardless of farm sizeor business structure and organization. Furthermore,given the continuous change that occurs in dairy farming,these are ongoing responsibilities.

Clearly, the planning, implementing, and controllingfunctions of management are interrelated. To successfullyachieve the goals of the business, there must be a soundplan that is implemented effectively, producing results

that are measured and compared to the performance

standards set in the plan. If the results are unsatisfactory,

then both the soundness of the original plan and the

effectiveness with which it is being implemented must

be evaluated and changes must be made to enhance the

performance. Therefore, managers must also be skilled at

problem solving and decision making.Managers of dairy farms typically must fulfill the above

three roles in three broadly different aspects of the farm

operation: production, marketing, and finance. Each of

these requires different skills and knowledge. Production

management is concerned with what the farm will produce,

how much it will produce, and how and where those

products will be produced. The marketing of raw milk is

regulated in many countries and marketing management

may be limited to choosing a milk buyer and managing

price risk. However, the scope of marketing activities is

much broader for farms that process their milk and sell

dairy products. Financial management refers to the overall

financial performance and health of the business, including

profitability, solvency, liquidity, and debt management.Dairy farming is a demanding occupation. The trend in

developed countries is for fewer but larger farms. In many

countries, the nonfarm population is demanding changes in

farming practices to protect or enhance the quality of the

environment. Consumers are becoming more concerned

about farming practices and how their food is produced.

These changes in social and consumer concerns have led to

restrictions being placed on some farmers and have created

new market opportunities for others. Changes in trade

policies and increased globalization have created new or

expanded markets for some and new competition for others.

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New production technology provides both new opportu-nities and new challenges. The Internet provides access tohuge amounts of information and places farmers who donot use it effectively at a disadvantage.

Managers need to have knowledge and skills in manyareas, including the various aspects of animal husbandry,crop husbandry, human resource management, nutrientmanagement, information management, record keeping andanalysis, problem solving, and decision making. Accurate andtimely information is needed to monitor the importantaspects of farm performance and for planning purposes.This information must include farm production, marketing,and financial data. High levels of interest, knowledge, andskills in animal husbandry and related areas of farm produc-tion are essential for success, but, by themselves, they are notsufficient to ensure success. To be effective, the managermust either possess the necessary knowledge and skills forplanning, implementation, and control or obtain them fromsources outside the business. Management specialization is anoption in a large herd. The operator of a small farm is oftenresponsible for all the roles and activities of a manager andmay have additional responsibilities that compete for timeand energy, such as herd management and farm work.

Planning

Planning begins with setting clear business goals and thendetermining the type of business needed to achieve thesegoals. Public stock companies focus on financial goalssuch as profitability and share value. However, mostdairy farms are family owned and operated, and each ofthe family members has personal, family, and businessgoals. Some of these goals will be financial in nature,including an income for family living, both for the presentand the future, and building family wealth and financialsecurity. However, there are likely to be many other goalsrelated to lifestyle, community service, and involvementin farm or nonfarm organizations. Any differences orconflict among these goals must be reconciled and prio-rities set before an effective business plan can be devised.Any plan to achieve the agreed-upon goals must recog-nize and incorporate certain financial realities and thedemands they place on the farm business. These includeprofit potential, cash flow feasibility, and the level offamily income desired for personal and family use.

In broad terms, the plan specifies what the farm willproduce, how much it will produce, where and howthose products will be produced and marketed, and howthe farm finances will be structured in order to achievethe desired results. The farm plan must take account ofthe economic, social, and political environment withinwhich it must operate, the available resources, and rea-sonable expectations for the financial performance of thevarious farming alternatives. The specifics of the farm

plan imply certain levels of performance or targets thatmust be achieved if the farm is to succeed.

In an existing business, planning may simply involvemaking routine decisions about farming activities day-to-day or for a period of weeks or months to ensure that thefarm operates efficiently. Similarly, making financialplans and projections for the coming year based onexpected production levels and prices in order to deter-mine expected profits and credit needs should be routine.Short-term planning of this type can also help determinethe expected financial contribution of the farming opera-tion to family living needs and as an aid in income taxplanning. This type of planning to enhance the smoothrunning of an existing farm is called tactical planning,which is borrowed from military terminology.

In contrast, from time to time all farm businesses makemajor decisions that set the course of that business foryears to come. Long-term or strategic planning may bestimulated by new opportunities, by serious problemswith an existing business, or by changes in family circum-stances. Plans may include major investment decisionssuch as starting a new dairy operation, expanding anexisting dairy operation, remodeling an existing dairyfacility, and buying land. Changes in the enterprise mix,whether by adding or reducing the number of farm activ-ities, can cause major changes in income, expenses,investments, debt load, and cash flow. Retirement plan-ning and planning for the intergenerational transfer offarm assets also imply major changes in the financialstructure and performance of the farm business.

There are several steps to effective strategic planning:(1) setting clear business goals; (2) taking an inventory offarm, financial, and human resources; (3) analyzing pastand projected performance; (4) identifying alternatives;(5) assessing the external business environment; (6) eval-uating the production, marketing, and financial feasibilityof alternative courses of action, including a risk assess-ment; (7) making a decision; (8) specifying how the planwill be implemented; and (9) specifying how farm perfor-mance will be evaluated.

Goal setting is discussed above. Farm resources arelikely to be unique to each farm situation. The planningand controlling functions of management are discussed insome detail in the article Business Management:Management Records and Analysis. The alternativesopen to a particular farm family or business will be influ-enced by the resource base and the skills and interests ofthe primary decision makers. The external businessenvironment is affected by many factors includingnational economic, trade, environment, farm, and foodpolicies and regulations. Laws governing property own-ership, business transactions, and banking contribute tothe business environment. Other factors include consu-mer preferences, the availability and prices of competingfoods, and the structure of the dairy and food industries.

Business Management | Roles and Responsibilities of the Manager 483

All of these factors have a major impact on the nature ofthe operation and profit potential of a farm business.

Establishing production, marketing, and financialfeasibility requires a lot of information. The choice ofproduction technology drives farm and financialperformance.

There is great diversity among dairy farming systems,including farm and herd size, breed of cow, and feeding,housing, and milking systems. Assessments of long-termprofitability and competitiveness include farm and finan-cial performance expectations for one farm type relativeto competing technologies when viewed from a local,national, and global perspective. It should be noted thatthere are wide variations in performance among similartypes of farms and between farms of different types andfarms located in different regions. Research data andmeasures of performance from other farms provide dataon the reasonableness of performance assumptions. Whenavailable, measures of a manager’s past performance pro-vide some information about the level of performance tobe expected under a new system. In some plans, produc-tion and marketing feasibility must be consideredsimultaneously.

Marketing decisions include what product or productsto sell, where to sell those products, and at what pricethose products should be sold. Most dairy farmers indeveloped countries sell raw milk in markets that areheavily regulated. Marketing decisions may be limitedto the choice of milk buyer. Factors to consider whenchoosing a buyer include prices paid relative to competi-tors, market security, and the financial health of the buyer.Some farmers will opt to sell to a producer cooperativeover a proprietary firm for philosophical reasons and toincrease their market and political power. Other decisionfactors include any ancillary services and products pro-vided by a milk buyer.

Dairy farmers who process their milk face additionalmarketing challenges. Market research is required toidentify a customer base and their preferences. Researchon competing firms and products helps define the oppor-tunities for various types of products, package types andsizes, and market channels. Most importantly, thisresearch helps determine the size of the potential market,competitive price levels for the various products, andwhether specific market opportunities are likely to beprofitable.

Risk is inherent in agriculture and in decision making.The sources of risk are many and varied. Adverse weatherand other natural phenomena affect production on anindividual farm, but on a global scale they affect worldproduction and farm prices. Changes in technology canrender production methods and farm assets obsolete,modify costs of production, and drive changes in farmstructure and regional shifts in production. Social atti-tudes and consumer preferences affect the market for

dairy products and influence the regulations governingproduction practices. Government policies and institu-tions affect farm prices for both milk and purchasedinputs and influence production practices. Individualsand their behavior can enhance farming operations orcreate problems for the farm and the family. Theserisks, occurring alone or in combination, can have adramatic effect on individual farm performance andviability.

Risk management involves prioritizing risk based onthe likelihood that a specific event will occur and thefinancial impact on the business if that event did occur.The highest priority is given to the risks that are morelikely and could have a greater adverse impact on thefarm. Risk management strategies can attempt to reducethe likelihood of an event, for example by diversifyingcrop activities or spreading production geographically,by building excess equipment capacity, and by carryingexcess inventory. Investing in skills, knowledge, andinformation can also be a type of risk management strat-egy. A second approach to risk management is to transferthe risk. Examples include buying insurance againstpotential loss or damage and using futures markets tomanage price risk. Risk management alternatives incurcosts and provide different levels of protection.Therefore, the costs and benefits of alternative strategiesmust be weighed.

Decision making is an essential component of plan-ning. Various tools can be used to evaluate the likelyfinancial consequences of a potential decision.Budgeting is used to evaluate profitability. Partial bud-gets look only at changes in income and costs betweenalternatives that do not fundamentally change the busi-ness. Enterprise budgets look at the revenue, costs, andnet returns associated with adding, dropping, or modify-ing significantly a specific farm enterprise. Whole farmbudgeting is used to evaluate the profitability of a pro-posed new farm operation or when major restructuring ofan existing business is being contemplated. Net presentvalue is another technique for analyzing the profitabilityof major new investments and it is particularly usefulwhen the costs and returns vary considerably from yearto year over the life of the project. Cash flow projectionsare needed in addition to any assessment of profitability.Projecting the timing and amounts of required invest-ments and expected revenue and expense is needed todetermine credit needs, debt repayment capacity, andoverall feasibility.

Sensitivity analysis is a method of assessing the riski-ness of a farm plan. It involves calculating and evaluatingthe impact of different assumptions about importantproduction levels, prices, and costs on farm financialperformance and feasibility. Other risk assessment tech-niques use the probabilities associated with differentproduction and price levels and the farmers’ risk

484 Business Management | Roles and Responsibilities of the Manager

preferences as an aid to decision making. The ‘best’decision will depend on family goals and preference,ability to bear financial risk, and attitude toward risk.

One aspect of planning concerns the legal form orstructure of the business. Several factors affect this deci-sion, including laws and regulations governing legalliability and taxation. Other aspects include the effectson the availability and cost of capital, operating efficiency,and the equitable treatment of investors.

Strategic planning requires a great deal of skill, infor-mation, and time. For these reasons, and because strategicplanning is undertaken infrequently, many dairy farmersuse outside advisers to assist them.

Implementation of the Plan

Implementing the farm and business plan effectivelymeans acquiring the necessary farm and financialresources, staffing the farm, training and supervisingthe workforce (including family members), schedulingthe work, using outside advisers and services effectively,making decisions, and solving problems as they arise.These activities consume the largest part of a farmmanager’s time.

Dairy farming requires various types of farming andfinancial resources. Farming resources include land,facilities, livestock, machinery, and equipment, whichmay be owned, rented, or leased. People are needed tooperate the farm. Financial resources include invest-ment and working capital. Several factors affectdecisions about the asset structure of the farm businessand how those assets are controlled and financed. Theseinclude the initial equity position of the primary opera-tor or investor, the returns expected from investing invarious types of farm assets, the availability and cost ofborrowed money, risk, potential tax liability, laws affect-ing various aspects of asset ownership and farmingoperations, and the specific financial performance goalsof the business.

There is a trend toward a larger farm size, and humanresource management is becoming increasingly impor-tant. Staffing a farm begins with defining the various jobresponsibilities, levels of authority and responsibility,and lines of communication. Specific job descriptionsand a compensation package must be developed foreach position. Finding qualified workers begins witheffective recruitment to develop a sufficiently largepool of candidates. Effective interviewing techniquesare needed to identify the most qualified individualand to convince that candidate that this is a desirableposition. The manager is responsible for knowing theprovisions of laws and regulations that apply to hiringand employment. As the dairy industry becomesincreasingly global in nature, managers may need

foreign language skills and a cultural awareness of andsensitivity to nonnative employees.

Employees, including family members, requiretraining to develop or improve their skills andincrease their effectiveness and productivity. For newemployees, this training should begin with an orienta-tion session on arrival at the farm. Effective traininginvolves several steps, including explaining the pur-pose of the training, a clear demonstration andexplanation of the desired procedures, and a trialperiod under supervision. Those in supervisory posi-tions have the responsibility of monitoring andevaluating employee performance, conducting correc-tive interviews, providing retraining and, whennecessary, terminating employment.

Management skills and knowledge are learned andthe manager must set aside time for personal develop-ment. This requires a broad understanding of all themanagement functions and a self-assessment of areas ofstrength and weakness. However, it is not necessarythat the manager must possess all the knowledge andskills and, increasingly, dairy farm managers rely onoutside advisers and services to help them planand operate the farm effectively. Veterinarians, nutri-tionists, engineers, extension educators, businessconsultants, and other dairy farmers can supplementthe manager’s knowledge and skills in specific areas ofherd, farm, and business management. Lawyers,accountants, and government agency personnel providespecialized services.

Controlling

Controlling means setting standards or targets forvarious important aspects of farm performance andthen measuring and comparing actual performancewith these standards. Record keeping for this purposeis discussed more fully in the article BusinessManagement: Management Records and Analysis.There are wide variations in herd and farm financialperformance, even among herds of a similar type in ageographical region. Therefore, performance measuresshould include both important production and financialaspects of the farm operation. When performance fails tomeet the standards or targets that have been set, thisshould prompt the manager to investigate the cause orcauses of the problem. The cause of a problem maylie with unanticipated changes in the farm economy,flaws in the original plan, or the effectiveness withwhich the plan is being implemented. Regardless of thecause, if outcomes are unacceptable, the manager musttake corrective action to resolve or work around theproblem.

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Problem Solving

Corrective action is called for when production or finan-cial performance does not meet expectations and thefarming operation is not achieving the business goalsset for it. There are several distinct steps to effectiveproblem solving. Sound problem solving calls for clearlyidentifying the problem and then diagnosing the rootcause or causes. The cause may be external to the busi-ness, such as bad weather or poor milk prices, in whichcase the manager must find ways to work around theresulting situation. If the cause is internal to the business,then the problem must be the result of a person whofailed to act or who acted improperly. The next step inproblem solving is to identify alternative courses ofaction that can solve the problem and prevent a recur-rence. This may be simple for routine or commonproblems, but for others it may take considerable effortand creativity. Serious problems may entail developingan entirely new farm plan. Evaluating alternatives mayrequire seeking out, assembling, and analyzing a greatdeal of information. Incomplete and incorrect informa-tion will result in poor decisions. Making a decisionshould be guided by the goals set for the business anda set of criteria or procedures that will ensure that thechosen solution is the most appropriate one for achievingthose goals.

Concluding Remarks

Dairy farms operate in an ever-changing business envir-onment, which creates new challenges, problems, andopportunities. The management cycle of planning,implementation, and control must be a continuous

process if business goals are to be achieved consistently.The knowledge and skills to be an effective managercan and must be learned and applied if a dairy farm is tothrive and prosper. Individuals wishing to learn morecan obtain assistance from many sources, includingeducators, advisers, consultants, farmers, agribusinesspeople, and published information.

See also: Business Management: Management

Records and Analysis. Labor Management on Dairy

Farms. Risk Analysis. Welfare of Animals, Political

and Management Issues.

Further Reading

Barnard CS and Nix JS (1979) Farm Planning and Control. Cambridge:Cambridge University Press.

Barry PJ, Ellinger PN, Hopkin JA, and Baker CB (2000) FinancialManagement in Agriculture, 6th edn. Danville, IL: InterstatePublishers.

Boehlje MD and Eidman VM (1984) Farm Management. New York: JohnWiley.

Giles T and Stansfield M (1990) The Farmer as Manager, 2nd edn.Wallingford: CAB International.

Kay RD, Edwards WM, and Duffy PA (2007) Farm Management, 6thedn. Singapore: McGraw-Hill Education.

Libbin JD, Catlett LB, and Jones ML (1994) Cash Flow Planning inAgriculture. Ames, IA: Iowa State University Press.

Malcolm B, Makeham JP, and Wright V (2005) The Farming Game, 2ndedn. Cambridge: Cambridge University Press.

Olson KD (2004) Farm Management: Principles and Strategies. Ames,IA: Iowa State Press.

Schwartzweller HK and Davidson AP (eds.) (2000) Dairy IndustryRestructuring, Vol. 8: Research in Rural Sociology and Development.Amsterdam: JAI/Elsevier Science.

Turner J and Taylor M (1998) Applied Farm Management, 2nd edn.Oxford: Blackwell.

United States Department of Agriculture (1989) Farm Management:How to Achieve Your Farm Business Goals, 1989 Yearbook ofAgriculture. Washington, DC: US Department of Agriculture.