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BUSINESS MANAGEMENT

Contents
Roles and Responsibilities of the Manager
Management Records and Analysis
Roles and Responsibilities of the Manager
G A Benson, North Carolina State University, Raleigh, NC, USA
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 210214, 2002,
Elsevier Ltd.
Introduction
This article provides an overview of business manage-
ment for a commercial dairy farm. Topics discussed
include 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 describes
recommended practice for commercial dairy farms in
developed countries and similar farms in developing
countries. However, the underlying principles apply to
dairy farms of any type, size, or geographical location.
The Role and Responsibilities of the Dairy
Farm Manager
Modern dairy farming is a business and the primary
decision makers of a dairy farm, the managers, have
three essential roles or responsibilities. These are devel-
oping a plan for the business, implementing that plan
effectively, and controlling, a term used to describe
monitoring and evaluating the performance of the busi-
ness. If the farm is to achieve the owners goals, these
responsibilities must be discharged regardless of farm size
or business structure and organization. Furthermore,
given the continuous change that occurs in dairy farming,
these are ongoing responsibilities.
Clearly, the planning, implementing, and controlling
functions of management are interrelated. To successfully
achieve the goals of the business, there must be a sound
plan 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 farmwill 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 newcompetition for others.
481
New production technology provides both new opportu-
nities and new challenges. The Internet provides access to
huge amounts of information and places farmers who do
not use it effectively at a disadvantage.
Managers need to have knowledge and skills in many
areas, including the various aspects of animal husbandry,
crop husbandry, human resource management, nutrient
management, information management, record keeping and
analysis, problemsolving, and decision making. Accurate and
timely information is needed to monitor the important
aspects of farm performance and for planning purposes.
This information must include farm production, marketing,
and financial data. High levels of interest, knowledge, and
skills in animal husbandry and related areas of farm produc-
tion are essential for success, but, by themselves, they are not
sufficient to ensure success. To be effective, the manager
must either possess the necessary knowledge and skills for
planning, implementation, and control or obtain them from
sources outside the business. Management specializationis an
option in a large herd. The operator of a small farm is often
responsible for all the roles and activities of a manager and
may have additional responsibilities that compete for time
and energy, such as herd management and farm work.
Planning
Planning begins with setting clear business goals and then
determining the type of business needed to achieve these
goals. Public stock companies focus on financial goals
such as profitability and share value. However, most
dairy farms are family owned and operated, and each of
the family members has personal, family, and business
goals. Some of these goals will be financial in nature,
including an income for family living, both for the present
and the future, and building family wealth and financial
security. However, there are likely to be many other goals
related to lifestyle, community service, and involvement
in farm or nonfarm organizations. Any differences or
conflict 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 the
demands they place on the farm business. These include
profit potential, cash flow feasibility, and the level of
family income desired for personal and family use.
In broad terms, the plan specifies what the farm will
produce, how much it will produce, where and how
those products will be produced and marketed, and how
the farm finances will be structured in order to achieve
the desired results. The farm plan must take account of
the economic, social, and political environment within
which it must operate, the available resources, and rea-
sonable expectations for the financial performance of the
various farming alternatives. The specifics of the farm
plan imply certain levels of performance or targets that
must be achieved if the farm is to succeed.
In an existing business, planning may simply involve
making routine decisions about farming activities day-to-
day or for a period of weeks or months to ensure that the
farm operates efficiently. Similarly, making financial
plans and projections for the coming year based on
expected 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 determine
the expected financial contribution of the farming opera-
tion to family living needs and as an aid in income tax
planning. This type of planning to enhance the smooth
running of an existing farm is called tactical planning,
which is borrowed from military terminology.
In contrast, from time to time all farm businesses make
major decisions that set the course of that business for
years to come. Long-term or strategic planning may be
stimulated by new opportunities, by serious problems
with an existing business, or by changes in family circum-
stances. Plans may include major investment decisions
such as starting a new dairy operation, expanding an
existing dairy operation, remodeling an existing dairy
facility, 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 of
farm assets also imply major changes in the financial
structure and performance of the farm business.
There are several steps to effective strategic planning:
(1) setting clear business goals; (2) taking an inventory of
farm, financial, and human resources; (3) analyzing past
and projected performance; (4) identifying alternatives;
(5) assessing the external business environment; (6) eval-
uating the production, marketing, and financial feasibility
of alternative courses of action, including a risk assess-
ment; (7) making a decision; (8) specifying how the plan
will be implemented; and (9) specifying how farm perfor-
mance will be evaluated.
Goal setting is discussed above. Farm resources are
likely to be unique to each farm situation. The planning
and controlling functions of management are discussed in
some detail in the article Business Management:
Management Records and Analysis. The alternatives
open to a particular farm family or business will be influ-
enced by the resource base and the skills and interests of
the primary decision makers. The external business
environment is affected by many factors including
national economic, trade, environment, farm, and food
policies and regulations. Laws governing property own-
ership, business transactions, and banking contribute to
the business environment. Other factors include consu-
mer preferences, the availability and prices of competing
foods, and the structure of the dairy and food industries.
482 Business Management | Roles and Responsibilities of the Manager
All of these factors have a major impact on the nature of
the operation and profit potential of a farm business.
Establishing production, marketing, and financial
feasibility requires a lot of information. The choice of
production technology drives farm and financial
performance.
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-term
profitability and competitiveness include farm and finan-
cial performance expectations for one farm type relative
to competing technologies when viewed from a local,
national, and global perspective. It should be noted that
there are wide variations in performance among similar
types of farms and between farms of different types and
farms located in different regions. Research data and
measures of performance from other farms provide data
on the reasonableness of performance assumptions. When
available, measures of a managers past performance pro-
vide some information about the level of performance to
be expected under a new system. In some plans, produc-
tion and marketing feasibility must be considered
simultaneously.
Marketing decisions include what product or products
to sell, where to sell those products, and at what price
those products should be sold. Most dairy farmers in
developed countries sell raw milk in markets that are
heavily regulated. Marketing decisions may be limited
to the choice of milk buyer. Factors to consider when
choosing 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 cooperative
over a proprietary firm for philosophical reasons and to
increase their market and political power. Other decision
factors include any ancillary services and products pro-
vided by a milk buyer.
Dairy farmers who process their milk face additional
marketing challenges. Market research is required to
identify a customer base and their preferences. Research
on competing firms and products helps define the oppor-
tunities for various types of products, package types and
sizes, and market channels. Most importantly, this
research helps determine the size of the potential market,
competitive price levels for the various products, and
whether specific market opportunities are likely to be
profitable.
Risk is inherent in agriculture and in decision making.
The sources of risk are many and varied. Adverse weather
and other natural phenomena affect production on an
individual farm, but on a global scale they affect world
production and farm prices. Changes in technology can
render production methods and farm assets obsolete,
modify costs of production, and drive changes in farm
structure and regional shifts in production. Social atti-
tudes and consumer preferences affect the market for
dairy products and influence the regulations governing
production practices. Government policies and institu-
tions affect farm prices for both milk and purchased
inputs and influence production practices. Individuals
and their behavior can enhance farming operations or
create problems for the farm and the family. These
risks, occurring alone or in combination, can have a
dramatic effect on individual farm performance and
viability.
Risk management involves prioritizing risk based on
the likelihood that a specific event will occur and the
financial impact on the business if that event did occur.
The highest priority is given to the risks that are more
likely and could have a greater adverse impact on the
farm. Risk management strategies can attempt to reduce
the likelihood of an event, for example by diversifying
crop activities or spreading production geographically,
by building excess equipment capacity, and by carrying
excess inventory. Investing in skills, knowledge, and
information can also be a type of risk management strat-
egy. A second approach to risk management is to transfer
the risk. Examples include buying insurance against
potential loss or damage and using futures markets to
manage price risk. Risk management alternatives incur
costs and provide different levels of protection.
Therefore, the costs and benefits of alternative strategies
must be weighed.
Decision making is an essential component of plan-
ning. Various tools can be used to evaluate the likely
financial consequences of a potential decision.
Budgeting is used to evaluate profitability. Partial bud-
gets look only at changes in income and costs between
alternatives that do not fundamentally change the busi-
ness. Enterprise budgets look at the revenue, costs, and
net returns associated with adding, dropping, or modify-
ing significantly a specific farm enterprise. Whole farm
budgeting is used to evaluate the profitability of a pro-
posed new farm operation or when major restructuring of
an existing business is being contemplated. Net present
value is another technique for analyzing the profitability
of major new investments and it is particularly useful
when the costs and returns vary considerably from year
to year over the life of the project. Cash flow projections
are needed in addition to any assessment of profitability.
Projecting the timing and amounts of required invest-
ments and expected revenue and expense is needed to
determine credit needs, debt repayment capacity, and
overall feasibility.
Sensitivity analysis is a method of assessing the riski-
ness of a farm plan. It involves calculating and evaluating
the impact of different assumptions about important
production levels, prices, and costs on farm financial
performance and feasibility. Other risk assessment tech-
niques use the probabilities associated with different
production and price levels and the farmers risk
Business Management | Roles and Responsibilities of the Manager 483
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 or
structure of the business. Several factors affect this deci-
sion, including laws and regulations governing legal
liability and taxation. Other aspects include the effects
on 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 strategic
planning is undertaken infrequently, many dairy farmers
use outside advisers to assist them.
Implementation of the Plan
Implementing the farm and business plan effectively
means acquiring the necessary farm and financial
resources, staffing the farm, training and supervising
the workforce (including family members), scheduling
the work, using outside advisers and services effectively,
making decisions, and solving problems as they arise.
These activities consume the largest part of a farm
managers time.
Dairy farming requires various types of farming and
financial resources. Farming resources include land,
facilities, livestock, machinery, and equipment, which
may be owned, rented, or leased. People are needed to
operate the farm. Financial resources include invest-
ment and working capital. Several factors affect
decisions about the asset structure of the farm business
and how those assets are controlled and financed. These
include the initial equity position of the primary opera-
tor or investor, the returns expected from investing in
various types of farm assets, the availability and cost of
borrowed money, risk, potential tax liability, laws affect-
ing various aspects of asset ownership and farming
operations, and the specific financial performance goals
of the business.
There is a trend toward a larger farm size, and human
resource management is becoming increasingly impor-
tant. Staffing a farm begins with defining the various job
responsibilities, levels of authority and responsibility,
and lines of communication. Specific job descriptions
and a compensation package must be developed for
each position. Finding qualified workers begins with
effective recruitment to develop a sufficiently large
pool of candidates. Effective interviewing techniques
are needed to identify the most qualified individual
and to convince that candidate that this is a desirable
position. The manager is responsible for knowing the
provisions of laws and regulations that apply to hiring
and employment. As the dairy industry becomes
increasingly global in nature, managers may need
foreign language skills and a cultural awareness of and
sensitivity to nonnative employees.
Employees, including family members, require
training to develop or improve their skills and
increase their effectiveness and productivity. For new
employees, this training should begin with an orienta-
tion session on arrival at the farm. Effective training
involves several steps, including explaining the pur-
pose of the training, a clear demonstration and
explanation of the desired procedures, and a trial
period under supervision. Those in supervisory posi-
tions have the responsibility of monitoring and
evaluating employee performance, conducting correc-
tive interviews, providing retraining and, when
necessary, terminating employment.
Management skills and knowledge are learned and
the manager must set aside time for personal develop-
ment. This requires a broad understanding of all the
management functions and a self-assessment of areas of
strength and weakness. However, it is not necessary
that the manager must possess all the knowledge and
skills and, increasingly, dairy farm managers rely on
outside advisers and services to help them plan
and operate the farm effectively. Veterinarians, nutri-
tionists, engineers, extension educators, business
consultants, and other dairy farmers can supplement
the managers knowledge and skills in specific areas of
herd, farm, and business management. Lawyers,
accountants, and government agency personnel provide
specialized services.
Controlling
Controlling means setting standards or targets for
various important aspects of farm performance and
then measuring and comparing actual performance
with these standards. Record keeping for this purpose
is discussed more fully in the article Business
Management: Management Records and Analysis.
There are wide variations in herd and farm financial
performance, even among herds of a similar type in a
geographical region. Therefore, performance measures
should include both important production and financial
aspects of the farm operation. When performance fails to
meet the standards or targets that have been set, this
should prompt the manager to investigate the cause or
causes of the problem. The cause of a problem may
lie with unanticipated changes in the farm economy,
flaws in the original plan, or the effectiveness with
which the plan is being implemented. Regardless of the
cause, if outcomes are unacceptable, the manager must
take corrective action to resolve or work around the
problem.
484 Business Management | Roles and Responsibilities of the Manager
Problem Solving
Corrective action is called for when production or finan-
cial performance does not meet expectations and the
farming operation is not achieving the business goals
set for it. There are several distinct steps to effective
problem solving. Sound problem solving calls for clearly
identifying the problem and then diagnosing the root
cause or causes. The cause may be external to the busi-
ness, such as bad weather or poor milk prices, in which
case the manager must find ways to work around the
resulting situation. If the cause is internal to the business,
then the problem must be the result of a person who
failed to act or who acted improperly. The next step in
problem solving is to identify alternative courses of
action that can solve the problem and prevent a recur-
rence. This may be simple for routine or common
problems, but for others it may take considerable effort
and creativity. Serious problems may entail developing
an entirely new farm plan. Evaluating alternatives may
require seeking out, assembling, and analyzing a great
deal of information. Incomplete and incorrect informa-
tion will result in poor decisions. Making a decision
should be guided by the goals set for the business and
a set of criteria or procedures that will ensure that the
chosen solution is the most appropriate one for achieving
those goals.
Concluding Remarks
Dairy farms operate in an ever-changing business envir-
onment, which creates new challenges, problems, and
opportunities. 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 manager
can and must be learned and applied if a dairy farm is to
thrive and prosper. Individuals wishing to learn more
can obtain assistance from many sources, including
educators, advisers, consultants, farmers, agribusiness
people, 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) Financial
Management in Agriculture, 6th edn. Danville, IL: Interstate
Publishers.
Boehlje MD and Eidman VM(1984) FarmManagement. NewYork: John
Wiley.
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, 6th
edn. Singapore: McGraw-Hill Education.
Libbin JD, Catlett LB, and Jones ML (1994) Cash Flow Planning in
Agriculture. Ames, IA: Iowa State University Press.
Malcolm B, Makeham JP, and Wright V (2005) The Farming Game, 2nd
edn. 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 Industry
Restructuring, 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 of
Agriculture. Washington, DC: US Department of Agriculture.
Business Management | Roles and Responsibilities of the Manager 485