Record keeping
The key to sound decisions is having accurate information readily available. There are a number of computer software programs available to assist in record keeping. Some packages include both paddock and animal records, as well as financial accounts. A number of these programs have the capacity to help calculate feed budgets. Increasingly, with widespread electronic identification of animals, data capture and storage can be automated.
Even without computer programs, the information you need is readily available from a variety of sources. A sound economic and performance evaluation of the current and/or alternative enterprise strategies can be conducted using your accountant’s report, the knowledge you have about your property’s physical characteristics, livestock business and trading records, and information you record in your diary such as animal performance and rainfall.
Choosing the best options
Analysing the most profitable herd structure and markets is a complex task involving many constantly changing factors that will be particular to your resource base and personal circumstances. Making these important business decisions often requires specialist skills and expertise, in which case you may wish to employ the services of a farm management consultant with appropriate knowledge and tools. This type of service is explained in the section on Enterprise modelling.
If you believe the scale of your enterprise or the significance of the change being considered does not warrant this expenditure you need to analyse the impact of changes to your enterprise using partial budgeting. Benchmarking your performance against similar enterprises, but using alternative enterprise strategies, is another way of considering the merit of other enterprise options. Also, private consultants and the staff of state departments of agriculture regularly conduct analyses of various enterprise options that may be relevant to your situation.
Enterprise modelling
Generally two types of computer programs exist: specialist programs for use by consultants and researchers, and those intended for use by producers. For either of these types of programs the time and expense involved in purchasing the required software and acquiring the detailed knowledge and skills required to use it may not be justified. A full analysis of the enterprise direction and potential large-scale business changes will rarely be carried out.
Farm management consultants use a range of computer tools from simple self- generated spreadsheets to elaborate farm enterprise simulation models. These models enable changes to be made to all of the animal, pasture and market data inputs to test any combination and provide a comparison of changes in profitability. The best examples of these models automate most of the process, reducing the chances of human error and removing the scope for subjective analyses by the operator.
Farm business simulation model
Some farm management consultants can develop and maintain a computer simulation model of your entire farm enterprise. This will incur an initial establishment cost, but once built, the model can be used to test an unlimited number of alternative enterprise strategies whenever your business circumstances warrant it. To gain the full benefit of your consultant, you should look for a service that is compatible with the tactical decision-making tools you use, such as for feed budgeting and financial management. Some consultant services provide a suite of tactical tools that tie in with the simulation model.
Managing the risks
Determine clear business goals and then continually monitor and review your progress towards them. Undertaking the analysis and planning sets a firm foundation for achieving enterprise goals.
It is possible that the structure of your herd, stock numbers, target markets and selling times do not allow the best use of the pasture grown. This means that you are not achieving the maximum potential profit within your identified personal goals and financial constraints. This can occur if the planning and analysis are not undertaken, or the results are not implemented. At the very least you need to know the consequences of not implementing the ‘best’ plan and the cost of putting any restrictions on the enterprise.
Constraints
The analysis of marginal returns does not directly take into account the costs or benefits to quality of life, but these factors are important enough to be considered in the trade-off between personal goals and maximising profit. Such unquantifiable benefits include the ability to take a holiday, the total number of hours worked each day, the timeframe in which the work needs to be undertaken, attitude to borrowing money and taking risks.
Similarly, you may want to put constraints on some forms of development because of concerns about potential environmental impacts.
In these instances it will be useful to get an assessment of the cost of these constraints, in terms of any decrease in profitability. Then you are in a better position to weigh the pros and cons and to make a more informed decision.
What to measure and when
While there are many inputs required for a strategic analysis, the primary aim is to predict profitability (return on capital). This must be assessed initially to explore the options of a range of future scenarios, such as: an unconstrained future; the current situation; and more controlled situations. Re-analyse the situation when technology, pasture species, personal or financial constraints change, or monitoring and benchmarking indicate that current enterprise strategic and tactical policies are not achieving their objectives. You may find that better information is needed about the enterprise’s physical capacity and economic performance to make more accurate predictions. This is a useful outcome as it means you will be better placed to manage and track progress if this data is collected in future.
