dairyes

Prioritizing natural talents to reorder the seating assignments on your dairy bus

JGSquires@landolakes.com (Greg Squires) — Wed, 25 Aug 2021 23:10:48 GMT

The managerial succession planning process can clearly benefit from a proactive process of optimally aligning skills, talents and passions with roles for both non-owner employees as well as owners.

Yes, this business and financial consultant is writing another article regarding human resource management. I’ve received numerous questions from clients and industry friends who are curious about why I (a numbers guy) seem to be so interested in human capital. Quite honestly, it’s because I believe this dynamic has paramount importance to the success of your businesses. Every one of the thousands of procedures and processes that must be correctly and consistently completed every day is entrusted to the hands and mind of a member of your team. As you have heard me say many times, you as owners owe it to yourselves to harvest as much fruit from these labors as possible.

Every business has any number of roles (a collection of various tasks and responsibilities) which are required to complete its essential functions. Likewise, every business has a staff of employees (including the owners) who have one or more roles for which they are responsible. For the purposes of this conversation, let’s think of an employee as being a collection of skills, talents, and passions (STP’s).

These interrelated components which contribute to successful business function can become very complicated. We sometimes realize that an employee who failed miserably at caring for and feeding baby calves could later shine after being developed into a cropping manager. This is a great example of one of the many reasons we see high employee turnover on some dairy farms. We didn’t hire a “poor” employee but instead, hired an employee (a collection of skills, talents, and passions) to fulfill a role (a collection of various tasks and responsibilities) for which they were less than ideally suited. In other words, the employee was almost set up from the beginning to under-perform because he/she did not find the role to be personally fulfilling or perhaps did not have the skills to notice when calves were just at the edge of becoming clinically ill.

Why are we discussing skills, talents, and passions?

These three personal attributes (skills - talents - passions) combine to have a compelling influence on an employee’s job success, as determined by both the employee and the employer. Talents typically refer to abilities that a person is born with, an aptitude that comes naturally. Skills are those abilities which can be acquired, learned, practiced, and developed. Passions are those activities, objects, and concepts for which we have strong liking and devotion. When a person is fortunate enough to be working in a role that matches their skills and talents, job performance and satisfaction can be optimal. If their role places them in a work environment which allows them to follow their passions, the outcomes can also be incredibly fulfilling.

I have a personal friend who works in an industry very different from agriculture. Almost every time we are together, he asks me about my work. He confessed a long time ago that he has always been fascinated and even a little envious when he listens to me describe my various clients, their businesses, and the work I do on their behalf. He sees an unfamiliar level of enthusiasm and energy in my face and expression. Unfortunately, those are emotions that he finds very foreign in relation to his work and profession.

Most of you can readily associate with the value of having passion for your chosen vocation. Most of my clients over the years have professed their fondness for being stewards of the land and animals they manage as part of their business. Those feelings are often accompanied by a statement along the lines of “and this is how I want to raise my family.” To me, these kinds of feelings and emotions are clearly indicative of following one’s passions.

This dynamic has implications for succession planning

I’ve had the opportunity to listen to a lot of family discussions regarding succession planning, including managerial succession. It is not at all uncommon for the Next-Gens to be willing to express their areas of interest, especially when asked. Sometimes the process will evolve to their being able to naturally elevate to the role or roles which be conform to their STP’s. Unfortunately, birth order is sometimes the determiner based on chronological entry into the business and the needs of the business at that particular moment. Other times it simply becomes a process of picking someone to fill a role that no one else wants. As you can see, the managerial succession planning process can clearly benefit from a proactive process of optimally aligning STP’s with roles for both non-owner employees as well as owners.

It could be time to take an inventory of talents to get everyone in their best seat on the bus

Have you ever considered asking your new employee about their job interests, personal goals and STP’s? Experience tells me this is not very common among most dairy operations. Many of you would probably be inclined to tell me that this is one of my “soft and fuzzy” recommendations. Sourcing, hiring, training, developing, and retaining capable employees has been a named top-3 management challenge on dairy farms for a couple decades and has become an even greater challenge in recent years. Since the beginning of the COVID pandemic, I’ve seen several particularly strong management teams slide towards “hiring warm bodies” out of sheer necessity. These HR dynamics only magnify the benefit of maximizing employee effectiveness and retention.

Taking an inventory of STP’s can help ensure that your team is working in areas where each member is leveraging their STP’s to the maximum benefit of the business. Imagine a sheet of paper with two columns: one on the left – a listing of the various processes, protocols, reports, tasks, etc. that are required to fully support your management system (including those that you may not be currently employing); on the right – a listing of each employee and their STP’s. I fully realize that this exercise is too robust for just one sheet of paper but I believe this concept can help brainstorm toward more efficient alignment of roles and responsibilities. This improved alignment can result in greater effectiveness of the team’s collective effort while simultaneously putting your staff and co-owners in more rewarding roles with greater personal satisfaction. Think about drawing lines from one side of the imaginary paper to the other side until eventually all the STP’s are fully employed and then look to see which roles and responsibilities are filled and if in fact, there are any unfulfilled. That’s another benefit of this exercise – it will help you identify areas of management that are not fully resourced.

Just prior to brainstorming through an exercise very similar to what I just described, a family patriarch once asked me: “I believe that none of the Next-Gens feel passionate or particularly skilled to become our next CFO – what do we do Greg, if in fact that plays out?” I asked him if there was some ancient law that says family or owners are required to fill every executive suite role in their business. If there are in fact unfulfilled roles or responsibilities, they can potentially become part of your next hires.

One word I feel best describes the power of consciously aligning STP’s with roles and responsibilities is “synergy.” I am known to speak of synergies is several different dimensions, not the least of which is synergistic relationships and the incredible power they can bring to a business. Stephen Covey (author of The 7 Habits of Highly Effective People) describes synergy as follows: “Synergy is what happens when one plus one equals ten or a hundred or even a thousand! It's the profound result when two or more respectful human beings determine to go beyond their preconceived ideas to meet a great challenge.” I am absolutely convinced that a stronger understanding of your STP inventory can create profound synergies among your team – now go see what you can create!

Time budgeting my talent: Am I adding the most value to my farm?

JGSquires@landolakes.com (Greg Squires) — Thu, 01 Jul 2021 18:56:04 GMT

Vital to the success of any farm business is that all of the tasks categorized as important to the farm but perceived as something a farmer doesn't do well eventually become part of a farmer's "Do Well" list.

Before I delve into the primary message I hope to convey in this article, let me suggest that an alternative title/question could be: Who serves as your farm’s CEO? The chosen title seems to allude to an opportunity for self-improvement while the alternate question could insinuate that something of importance might be missing from your business management function. Perhaps both questions might be relevant to your operation but the first is more inclusive – it pertains not only to the business’ owner(s) but anyone, at almost any level of management or line work. Ultimately, the owners of the business owe it to themselves to harvest as much benefit as possible from each and every employee of the business. A similar dynamic from a slightly different perspective is that the owners should attempt to harvest as much benefit as possible from each role in the business. I plan to discuss these parallel dynamics in one of my next articles.

For the purposes of this discussion, let’s focus our attention on you, the owner of a farm business. Are you adding the most value to your farm? The crazy thing about this question is that you are really the only person who can accurately (or at least honestly) provide the most relevant answer because you are the only person who knows how you are investing your time every day (24 hours), week (168 hours) or over the course of the year (8,760 hours).

Why this question is important

Let me quickly tell a story about one of your peers to help illustrate why I’m encouraging you to consider the question. I received a call a number of years ago from a farm partner who expressed concerns for herself as well as her husband and the multi-generational farm they were operating. She summarily described her perception of how they invested their time in managing the business as follows: “He milks, he feeds, he breeds cows, he plants, he harvests; I do the books. He is happy as a lark and I am too but the books aren’t so happy. I know we aren’t spending enough time in the office.” I asked her what “office time” meant to her, to which she indicated meant higher level thinking and all of the big picture and planning “stuff.” This story should sound familiar to every one of us – yes, I’m including myself because I, too find it very easy to get caught in the weeds of everyday business “stuff.” In reality, this discussion is about self-improvement and ultimately, is another component of continuous improvement which you’ve seen me write about many times previously.

How can you go about answering the question

I often speak with my clients about maintaining a skills and talents inventory of both owners and employees to optimize the efficiency of their staffs. But for this conversation, I’m going to ask that you do something a little different. Take two sheets of paper and block them both as depicted in Figure 1 below. On the first sheet, write “Tasks/Functions I Do Well” and title the second sheet “Tasks/Functions I Don’t Do Well.”

On the first sheet (Do Well), list all of the various tasks and functions you perform as an owner/manager of your farm on a regular basis, placing each item in the appropriate box (1-Important/Urgent; 2-Important/Not Urgent; 3-Not Important/Urgent; 4-Not Important/Not Urgent). Items appearing on this list should only include tasks and functions which are being performed by you in a satisfactory or above-satisfactory manner. Important tasks and functions are things that contribute directly to your long-term mission and goals. Urgency should be thought of as the sense of immediacy in which the task or responsibility must be performed (today vs. over the next month). Now take out the second sheet (Don’t Do Well) and list in the appropriate boxes relating to their importance and degree of urgency, the tasks and functions that are currently being performed in a less-than-satisfactory manner or are areas in which you specifically want to improve.

Once you have filled in the squares on both sheets, lay them side-by-side and review both with a critical eye. Think about the tasks and functions on the Do Well list; do they happen to be items that you also happen to enjoy doing? Take another minute to look at the Don’t Do Well list; do you happen to dread any of those tasks and functions? Sometimes it’s just plain human nature for the owner of a business to immerse themselves in activities that they enjoy doing and avoiding those that aren’t quite as pleasant – it’s not always a matter of skills and abilities but rather more of a matter of preference and comfort. This dynamic is what I meant earlier when I referred to “getting caught in the weeds.” On many farms, the most common functions listed in the Important/Not Urgent section of the Don’t Do Well sheet would include business planning, risk management, succession planning, directing human resource management, etc. Coincidently, these functions happen to be among the primary responsibilities of the company CEO – which is why I offered the alternative title/question: Who serves as your farm’s CEO?

In any case however, it is vitally important for the success of any business that all of the items that have been categorized as important on Don’t Do Well sheet eventually become part of the Do Well list, especially those in the Important/Not Urgent category.

How to solve the problem

We should now consider the problem of “time.” Many readers will likely express frustration with my idealistic perspective on investing more “time” and energy in the Don’t Do Well items. They would say that they don’t have any more time, that is unless they only sleep seven hours per week. This dynamic is the essence of the title of this discussion: Am I adding the most value to my farm? If there are any important tasks and functions on the “Don’t Do Well sheet, especially in the Important/Not Urgent category, then the answer most definitely is “NO.” If it can be fairly judged that you are not adding the greatest value possible to your operation, then you owe it to yourself and the business to take intentional steps to improve. Here are a few examples of steps you can take in the improvement process:

DELEGATE Delegation is without question one of the most powerful but most elusive management skills. Anyone who makes a serious effort to carve out time to maximize their management value must discipline themselves to become an effective delegator.

TRAIN Corporate America invests billions of dollars every year in education and development training at every level of management. Identify a key management skill in which you want/need greater proficiency and seek out related training opportunities. Local/regional trade associations, online providers, local career centers and universities are all potential sources for professional development training.

LEAN ON ADVISORS Start a conversation with your most trusted business consultant or advisor and ask her/him for their feedback, input and suggestions.

BUILD BETTER TIME DISCIPLINE Begin by setting aside 15 minutes per week, every week to be invested solely toward one of your identified improvement areas.

Select a time that coincides with another part of your routine (e.g. extending your morning mealtime on the day which typically has fewer other scheduled activities) to make it easier to commit to the time slot each and every week. Over time, extend the allotted time for this and other improvement functions.

There is one more dimension to this conversation that I haven’t addressed. No one person can be expert in every management function, which is the reason farm businesses have co-owners, partners, employees and advisors. Your mission and goals are more likely to be accomplished if you are vigilant in insuring that you are not only adding the most value to the business, but also the entire team. Abraham Lincoln is credited with having said “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” I encourage you to take some time to sharpen your axe.

Don't ever be satisfied; improve continually

JGSquires@landolakes.com (Greg Squires) — Tue, 07 Nov 2017 15:20:00 GMT

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” How paranoid are you willing to become?

In a recent article, I mentioned the concept of Continuous Improvement and want to expand the conversation around that management model.

I am blessed to work with dairy producers who possess a wide range of skills and abilities. Many are excellent managers whose names some of you would recognize with strong track records of success. One of the most common traits that I encounter across the spectrum of my clients’ management abilities and styles is that too many of these owners get so involved in the day-to-day grind that they are unable to maintain a constant drive to find new, innovative (or even incremental) improvements to their businesses. Only a select few have developed a culture of what I can best label as “continuous improvement mixed in with a healthy dose of radical change.”

Continuous Improvement (CI) has been described in various forms since the beginning of the Industrial Revolution. CI gained its most significant momentum in the world of automobile manufacturing in the 1950’s. W. Edwards Deming, an American engineer, statistician, professor and most notably, management consultant, is among those largely credited with CI’s immense popularity. Deming described CI as any improvement initiative that increases successes and decreases failures. Variations of CI include Lean Production, Kaizen, Six Sigma and Total Quality Management.

For the purposes of this discussion, I’d like to think of CI in very broad and general terms similar to Deming’s definition. Here are a couple examples:

Aha Moment

Several years ago, I was in the middle of a work session with a client to help develop their operating and capital expense budgets for the coming year. As part of the process, I had requested planning diets for the mature and replacement herds and was surprised to see just one diet for lactating animals. The surprise was not so much the one-group TMR, but the combination of the one-group strategy and amount of somewhat costly additives and supplements present in the diet.

When I inquired about this, the nutritionist and producer looked at one another and replied: “We just haven’t gotten around to returning to the normal multi-group strategy after the major expansion earlier this year.” When I pointed out the design elements and the fact that the expansion had been completed several months prior, they did some quick math and realized that they had let the equivalent of $500K in annual feed costs swirl down the drain.

Disruptive Innovation

Another long-ago scenario I experienced involved a relatively new client. In an early conversation, he listened intently as I described one of my favorite innovation exercises which, if adopted, would involve the farm’s team of managers, advisors and consultants. I encouraged a two-hour session complete with a formal invitation, agenda and expected follow-up.

Each member of the farm’s Innovation Team would be expected to come to the meeting prepared to outline three suggestions for change/improvement that would provide the farm with its quickest and biggest bang for the buck in improving the efficiency of production and profitability for the farm. Each person would have five minutes to provide a brief description of their three suggestions and the group would then rationalize and prioritize any suggestions that merited adoption. For each project that is adopted, a project manager is assigned to ensure timely implementation and in-depth analysis of its results.

Less than a month after I had introduced the client to the Innovation Team concept, he called to let me know that he had already partially adopted the idea. He had scheduled a one-on-one conference with his nutritionist to probe areas of opportunity in their ration design and nutritional and forage production strategies. That meeting resulted in a completely revitalized and energized consulting relationship between the farm and the nutrition consultant. It also happened to result in an annualized improvement in NFI of nearly $175 per cow – an almost staggering amount of money in total.

So how do these kinds of opportunities sometimes pass by even some of the very best dairy owners and managers? I think the answer is fairly straightforward – we too often aren’t looking for them. A particular word comes to mind when I think about CI, a perfect antonym for CI: complacency. We are all guilty of it to some degree. When our work, our business, and our relationships evolve to the place where they are very familiar and we become at ease with them, it is entirely too easy to let ourselves become complacent in them as well.

The folks who have mastered the CI process are people who I sometimes describe as being “never satisfied.” The analogy I often use to describe CI is to think of your business as a collection of rocks laying out on a table. Each rock represents a process, enterprise, cost center or perhaps an employee. These “never satisfied” owners are constantly identifying the next best rocks to turn over to find new opportunities for growth and improvement. But like all of us, they don’t have time to just constantly turn over all the rocks. They use the knowledge gleaned from the various information systems at their command to guide them to the rocks which are the next best candidates to be turned over and explored. Because of the insights generated by managerial analytics and benchmarking (internal and external) they can more easily identify the rocks that are their next hurdles to greater efficiency and profitability.

How do we implement CI?

You’ve heard me say this before but it’s really not that difficult; the only real exception may be the first step:

Commit You must commit to the concept of continuous improvement which will require time and discipline.
Build analytical insights Refine (and supplement if necessary) the tools which will give you detailed insights to the performance of your business from a multitude of dimensions – everything from cost to produce an acre-ton of milk from last year’s corn silage to what it costs you to get a cow pregnant in Q1.
Empower Build a culture among your management team, staff and outside advisors to embrace change and seek improvement. It will take time for this to evolve and won’t happen without setting and communicating clear expectations for everyone on the team.
Identify which rocks to turn over next Based on current performance compared to best-of-class, identify your first hurdles to improvement and determine a plan of action for improvement
Monitor results For each change process, make sure to carefully monitor and measure actual outcomes and evaluate efficacy.

I have seen demonstrated, by a couple very comprehensive dairy farm financial databases, that management is a hands-down greater determiner of long term profitability than size. I absolutely believe that the concept of Continuous Improvement is among the most powerful dynamics among dairy farm management styles. Andy Grove, one of the co-founders of Intel is credited with this quote: “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” How paranoid are you willing to become?

Change is Only Getting Bigger So Think Big, Lead Big

Thu, 21 Mar 2013 16:14:13 GMT

Any progress that has ever been realized throughout history is the direct result of change. While this is an indisputable fact, many people say they just don’t like change. Here is how psychologist Dr. Heidi Grant Halvorson explains...

Any progress that has ever been realized throughout history is the direct result of change. While this is an indisputable fact, many people say they just don’t like change. Here is how psychologist Dr. Heidi Grant Halvorson explains this human phe- nomenon: “It's not just that people fear change, though they undoubtedly do. It's also that they genuinely believe (often on an unconscious level) that when you've been doing something a particular way for some time, it must be a good way to do things. And the longer you've been doing it that way, the better it is.”

Does this sound familiar to you? I have observed far too many families who are locked into old ways of doing things to ever think the dairy industry is immune from stubborn resistance to change. I have also observed that the ability to embrace and lead change is a common characteristic among the most profitable dairy operations across the country. They understand that, like it or not, change is a fact of life and one of the indisputable rules of business. To them, change represents opportunity.

Consider these changes which have occurred in just the last 20 or so years:

We have approximately 100,000 fewer dairy farms (55,000 vs. 160,000) and this consolidation has been occurring for dec- ades, as 3.6 million dairy farms existed in 1950
From 1990 to 1994, the average price re- ceived for corn was $2.33 while its rolling 13-month price varied by an average of just $.49; from 2007 to 2011 those num- bers were $4.35 and $1.54 - during the same periods, the numbers for milk were $12.96/$1.95 and $17.34/$5.77
35% of U.S. milk was produced by herds with greater than 200 cows vs. 75% today
A single Smartphone that many Ameri- cans carry today has greater computation- al power than all of NASA in the early 70’s
The World Wide Web was first intro- duced to the public in 1991

Regardless of the speed or direction of change, your business will be far healthier if you lead change rather than worry over and complain about change.

A number of years ago, I had a client who was going through a great deal of delibera- tion and indecisiveness regarding a number of strategic issues in his dairy. The primary reason for not moving forward was his con- cerns over milk markets, grain markets, general economic outlook, global economic outlook, federal policy decisions, the farm bill, etc., etc., etc. Finally one day we con- cluded a visit with the following conversation:

DAIRYMAN: I think we are going to shelve the project for another year.

ME : Really... why?

DAIRYMAN: There is just too much uncer- tainty for us to be comfortable in moving forward.

ME: You don’t think the project is the right thing to do?

DAIRYMAN: No, we need to do it - I believe the numbers we ran are correct. The projections show that the project will improve our productivity and cost of production considera- bly.

ME : So what you’re saying is that you would rather let the dairy “coast” for another year while you wait until all the stars align, rather than position your business to thrive re- gardless of the changes and markets you face tomorrow?

DAIRYMAN: That’s not what I mean at all.

ME: Will all the potential changes and unknowns you’re concerned about occur regardless of what you do or don’t do?

DAIRYMAN: Probably.

ME: Then you know the old saying: ‘Lead, follow, or get the heck out of the way.’ And I think you know what the implication is for a business that gets out of the way.

Leading and implementing major changes in a business is a function (skill) in which some owners feel inadequate. Here are some thoughts on how to improve your change leadership:

Define your vision and develop business goals

The importance of having a roadmap for the future can’t be stressed enough. Defining your vision and then determining the nec- essary changes to improve your likelihood of success will serve as guiding lights for all your business planning and help you navigate difficult waters with greater confidence.

Don’t be afraid to go out on a limb

This is where so many families struggle in the process of evolving their busi- nesses. Too many people lose sight that there is often just as much risk in making even bold changes as there is in not act- ing at all. Think about what T.S. Eliot once observed: “Only those who risk going too far can possibly find out how far one can go.”

Involve your teams

Include all managers and mid- managers in planning for change. Better yet, create an envi- ronment where these folks are the ones suggesting new ideas for change and process improvement. Not only can they help identify what changes will be beneficial, but if allowed to provide input from the beginning, will take greater ownership in ironing out the kinks during implementation.

Measure results

Measurable results are absolutely critical for any change project. Without measuring results, how will you determine where implementation needs to be adjusted and fine-tuned? Without results, your teams will become frustrated and lose their passion for buy-in.

Follow your passions

Each of us is emotionally motivated by different things. We draw strength from our passions. This is why most dairy producers despise completing office work - sitting at a desk while punching the keys of a comput- er is not very stimulating to most people. Since we aren’t passionate about office work, we find reasons to fill our day and week with other tasks and responsibilities – things that are more pleasurable. Those of us who are truly following our passions in our professions find it a little bit easier to create positive results and outcomes, dig for solutions to tough situations and even find it just a little easier to put feet to the ground each morning.

While leadership and management are both very important functions in any successful business, they are succinctly dif- ferent. Warren Bennis, American scholar, organizational consultant and author who is widely regarded as the pioneer of the contemporary field of leadership, compares and con- trasts managers and leaders like this:

The manager administers; the leader innovates
The manager is a copy; the leader is an original
The manager maintains; the leader develops
The manager focuses on systems and structure; the leader focuses on people
The manager relies on control; the leader inspires trust
The manager has a short-range view; the leader has a long-range perspective
The manager asks how and when; the leader asks what and why
The manager has his or her eye always on the bot- tom line; the leader’s eye is on the horizon
The manager imitates; the leader originates
The manager accepts the status quo; the leader challenges it
The manager is the classic good soldier; the leader is his or her own person
The manager does things right; the leader does the right thing

Are you both managing and leading your business? Are you thinking big and leading big?

Why in the world would I need to develop a budget?

JGSquires@landolakes.com (Greg Squires) — Wed, 02 Jan 2013 01:18:56 GMT

Remember … the first step in fixing any problem is to first identify what is broken – do you know what is broken in your business?

I have been a proponent of annual budgeting for quite some time. When my clients first hear me advocating the development of annual budgets they usually have one of the following reactions:

1) Look at me as though I have snakes slithering out of my eyes while screaming that there is no way they could possibly benefit from trying to forecast the upcoming year’s expenses nor would they stand for any process that would constrain their on-the-fly expenditures

2) Readily adopt the process and feed off of the resulting management information

If I started this conversation with you, in which camp would you fall?

Annual budgeting is a process that is much more involved and beneficial than simply applying next year’s projected milk price onto this year’s milk production, adding 2% to this year’s expenses and calling the resulting product “next year’s budget.” Let me describe the process from my experience.

Begin with a planning discussion

Starting the budgeting process with a planning discussion involving all department managers. Recap this year’s accomplishments and challenges. Review recently-implemented management practices and determine those which have yielded positive results and those which have been reconsidered (or should be reconsidered). What profitability gaps do we want to tackle next year? Discuss new procedures and protocols that might be targeted for the coming year and their implications for operating expenses and or incomes. Are there capital investments that should be considered which would improve long-term efficiency and profitability? Is our labor and management pool properly configured? How will our incomes and expenses differ next year vs. the current year?

This conversation and the resulting answers to sometimes tough questions have several side benefits including the involvement of the entire management team in proactive strategic planning. (I encourage farms of all sizes to embrace the term “management team” because regardless of whether you have 50 cows or 50,000, there is likely more than one person involved in the overall decision-making process at your dairy.) Having the entire management team involved also improves the likelihood that everyone will take greater ownership of their area(s) of responsibility and more proactively manage with greater empowerment.

Development a monthly cash flow

The next step of the process is to lay out projected monthly incomes and expenditures for the upcoming fiscal year. Incomes should be adjusted to reflect the ebb and flow of fresh cows and heifers throughout the year. Feed expenses should be likewise adjusted for the number of animals at various stages of their production cycles as well as projected feed inventories throughout the growing season. It is important to include projected interest expenses and principal payments in your projected cash budget.

After all incomes and expenses have been projected, make estimates of projected capital expenditures for targeted capital improvements and purchases. Next account for any expected structured loan proceeds in conjunction with your capital projects. After all sources and uses of cash have been considered, calculate monthly net cash flow.

Compare budget to actual results

The final step of the process is its ultimate purpose and most important benefit. Develop a report which shows both the current month’s budget as well as your actual results. In other columns, compare year-to-date budgeted numbers with actual results. See the partial example demonstrated in Figure 1. Wherever possible the reader’s eye should be drawn toward the most important points in the report – which income or expense categories were on target (green) and which ones were on or off target by more than 10-15% (red). If possible, also point out the big-ticket items (milk income and feed, labor and replacement expenses for example). Ideally the report will paint a picture that can be quickly interpreted and used to direct management’s attention.

It is also beneficial to index revenues and expenses on a per-unit basis ($/cow/year and $/cwt.). This monthly comparison will provide owners and managers with an invaluable opportunity to greatly improve their familiarity with the business’ finances and underlying trends which will help focus management’s attention to areas most needing attention. Many dairy producers would benefit from a greater understanding of how and where cash is gained and lost in their businesses.

So the next time you hear the phrase “annual budgeting” what will your reaction be? Will you adopt the practice and learn something about your business or will you see slithering snakes? Remember … the first step in fixing any problem is to first identify what is broken – do you know what is broken in your business?

Why you must develop a passion for information

JGSquires@landolakes.com (Greg Squires) — Sun, 12 Aug 2012 00:02:19 GMT

“It isn't that they can't see the solution. It's that they can't see the problem.”

I’ve been hearing a lot of conversation recently about the profitability of milking cows. The buzzwords include three-year price cycles, three-year production cycles, market stability, market risk, risk management and a host of others. I am hopeful some of these discussions have caught your attention.

Obviously the year 2009 is a driver of many of these conversations; it was difficult for most dairy producers. Recent milk and feed markets have renewed these concerns over industry profitability. Through all the challenges and negativity which arises from such difficult economic times, I have observed one very significant thread of light: many dairy producers are managing their businesses differently than they did prior to 2009. In a free market economy, tough business cycles are great teachers because we learn (out of necessity) how to produce with fewer inputs and resources, thus becoming more efficient. The resulting efficiency helps us both as individual producers and collectively puts U.S. milk in a more competitive position to supply world markets.

So where does a passion for information fit into all of this? As producers struggle to survive and even thrive among these ongoing business cycles, I believe we are on the threshold of a new information age in the dairy industry. I’m not talking about a revolutionary new wave of available technology (although technology is advancing rapidly) but rather a suspicion that many more dairy producers are going to begin truly utilizing information systems to more effectively manage their businesses. As a whole, our industry has been relatively slow in adopting information technologies. We still don’t have a stellar track record of utilizing basic financial record systems to provide feedback on how we should modify management resources; too many producers are using financial records primarily for tax purposes and not to manage their businesses.

Here’s an analogy that depicts why information or analytics is so integral to managing a business. Picture the last time you purchased a brand new piece of equipment such as a tractor, combine or chopper. Now think about this conversation I had with a dairyman:

Dairyman: Greg, I just don’t feel like I need to pay a lot of attention to financial reports because Peg takes care of the general ledger and checkbook.

Me: I see. So what’s your take on the weekly production KPI report I suggested we assemble?

Dairyman: Most of that stuff is already in DairyComp, and all I or any of the other managers have to do is look at it. And I certainly still don’t see much point in completing the annual budgets you’ve been talking about for so long. I’ve been milking cows for 34 years and gut instinct has gotten me to where I am today.

Me (as I’m standing in the drive outside their shop, looking at a brand new Claas chopper): Have you ripped out all of the gauges and idiot lights in that new chopper yet?

Dairyman: What?

Me (with a slightly sarcastic tone to my voice): Haven’t you had enough experience operating large equipment that you no longer need the kind of feedback those gauges provide? Doesn’t your gut instinct tell you when something isn’t quite right with that big, complex machine?

Operating a business is no different than operating a large piece of complex equipment – you need feedback. Many dairy businesses are not going to be able to safely and successfully navigate today’s turbulent economic waters without that dashboard, as the margin for error is too small to detect using only gut instincts.

What kind of feedback?

There are several characteristics that make some feedback more valuable and meaningful than others, the most important of which is that they should focus on the operational and financial indicators which significantly impact profitability. Let’s call them key performance indicators or KPI’s (other common labels include report cards, scorecards and dashboards). The other characteristics include:

Concise The information needs to be very targeted and should minimize the amount of what Steve Eicker of Valley Ag Software refers to as “noise.”

Timely Production KPI’s should be monitored and reported weekly, and some even perhaps daily. Financial indicators need to be reported and reviewed at least monthly.

Demonstrate trends Remember the phrase “a picture is worth a thousand words.” Simple graphs help show not only current performance levels but also demonstrate trends – are we better or worse than last week, month or year?

Show key metrics or standards of measurement against targets and goals Managers and their staffs should always be aware of the relationship between current performance compared to goals and other standards of performance.

Each farm should choose a set of KPI’s that are central to its own unique style and priorities of management. The number of different possible KPI’s is almost endless and every segment of the business (from day-old calves to the milking parlor) represents an opportunity for monitoring and process improvement. Of course, financial KPI’s could be considered the ultimate report card and should be included among each farm’s collection and even shared among managers. It always amazes me the number of farms who do not share financial information with their department heads and managers. Do we want those folks to make decisions solely on the basis of production performance or to incorporate practices and manage for maximum profitability?

Report cards aren’t just for children. We all need feedback to direct our efforts in improving the efficiency and profitability of our businesses. Developing and utilizing report cards or KPI’s helps us identify where to best invest our “improvement” resources by identifying the performance areas which are most out of alignment. As a famous British author once wrote: “It isn't that they can't see the solution. It's that they can't see the problem.”

Successful dairy farms: What do the have in common?

Mon, 11 Jun 2012 15:24:38 GMT

Several readers of my last article emailed me with a question that I have repeatedly heard from customers and audiences for many years: Are there traits or characteristics which are common to successful dairy farms? If you were to ask 100 different industry professionals and dairy producers, you would undoubtedly see 100 different lists of attributes most closely linked to success. As Dairy Enterprise Services continues its work on dairy operations across the U.S., the following are among the most common characteristics I observe:

Intense reproductive management Many successful dairy producers place a high priority on breeding cows to maintain relatively short calving intervals. This focus is not only rationalized by higher milk production but greater internal herd growth.

Set expectations Regardless of herd size, every dairy owner relies on other sets of hands to complete the work that is necessary to operate a dairy business. One of the most common disconnects between a manager and subordinate is a basic lack of understanding of what is expected of the job, role, or task. While this trait is clearly not universal among successful farms, many of the best operators have developed a discipline of setting clear and measurable expectations of not only those people who are on their payrolls but their advisors as well.

Manage risk This trait may be one of the more arguable points on my list but almost by definition, a successful business must survive any risks that could potentially bring about its collapse. The counterpoint to this observation is that many very successful dairy producers are also among the most significant and calculated risk-takers. Risk comes in many forms including market (milk/feed/land prices), safety (liability), financial (leverage, interest rates), production (milk, disease, reproduction), and counter party (contracts). Mitigation of these risks must constantly be matched against the business’ ability to survive a worst-case scenario in one or more of these areas. While risk management is never perfect and always comes at a price, many good managers are vigilant in looking for cost-effective tools to mitigate sources of risk.

Possess an attitude of excellence While this is one of the least quantifiable qualities on my list, it certainly is one of the more pervasive. What I’m describing is a never-ending attitude of doing the right things and doing things right. I once had a customer who, when working through a SWAT analysis replied that one of the strengths of their business was “we sweat excellence.” He offered the comment not as a boast or an arrogant jibe but was simply trying to state that they treated all of their selected processes as being important. If something was important to them, they strived to do it right every time, all the time.

Take care of people Successful dairy operations are in a position of success largely because they have surrounded themselves with good people, and people who they want to retain. They are also surrounded by good neighbors to whom they in turn want to be good neighbors. Therefore, many successful dairy owners and managers are careful to be considerate and respectful of members of their staff, their communities and their industry.

Focus on milk quality and udder health This is probably one of the more universal traits found in successful operations. Managing for improved SCC and udder health is an obvious economic driver considering their combined impact on milk production, milk premiums, and operating costs. Many of these excellent operators have instilled the notion among their staffs that they are in the business of producing food for people and it is sometimes amazing how impactful this concept can be, particularly with milking crews.

Passionate about information As an industry, we still do a pretty poor job of utilizing information (financial reports, production summaries, scorecards, etc.) to make informed management decisions. However I am confident that I commonly see these tools being utilized in well managed businesses. An old saying goes something like: “You can’t manage what you don’t measure.” Actually it was Peter Drucker who said “If you can't measure it, you can't manage it.” Our missed opportunity more often isn’t that we can’t measure it…more commonly we simply don’t measure it.

Aggressively manage costs When compared to its ability to determine milk price, a dairy operation has much greater influence on its costs of production; many successful dairy operators manage costs very closely. There are two common standards of measuring costs in a dairy operation: cost per hundredweight of milk produced and cost per cow, per year. Obviously cost per hundredweight can be influenced by both raw costs as well as the volume of milk produced and I am referring to the management of raw costs. Many of these operators could be described as “tight with a buck.”

Understand the importance of growth There are two reasons why I believe this is a common factor in successful operations. First, our industry has been consolidating for decades. With consolidation, efficiency targets evolve and scale becomes an increasingly significant dynamic (not a sole determiner of success, just one factor). Second and more importantly, growth can become an important factor in a business’ ability to sustain its mission of providing a desired standard of living for its owners. As succeeding generations come into the business, there will be “more mouths to feed,” so to speak. Also, time and inflation have a way of eroding the ability of each cow to generate sufficient net income to meet its owner’s standard of living.

I certainly don’t intend this list to be either inclusive or exclusive. I realize there are additional attributes which may be associated with successful operations and I believe that a dairy that may not possess one or more of these characteristics can still be successful. I do however associate each of these skills and priorities of management with many successful dairy operations. Of course we all must be mindful of our own unique idea of what defines a “successful” dairy operation. As a business owner, it is your right and prerogative (if not obligation) to determine what success means to you and your fellow owners. Of one thing I am certain: it is of the rarest of circumstances that success is realized purely by accident. As Confucius once said, “Success depends upon previous preparation, and without such preparation there is sure to be failure.”

If It’s Not Management, What Is It?

Wed, 11 Apr 2012 15:58:25 GMT

"Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall."

During the first half of my career, I worked as a dairy nutritionist primarily in Ohio and the eastern Corn Belt and believe that experience has greatly improved my ability to consult in the business and financial side of dairy operations. I now occasionally have the opportunity to work with my former nutrition clients and am reminded of a conversation that took place many years ago.

I walked into the office of one of my prospective nutrition clients for an appointment and found him very agitated. The conversation went something like this:

DAIRYMAN: Greg, it may not be a good day for us to talk.

ME : Oh, why is that?

DAIRYMAN : My veterinarian was just here, and I’m pretty frustrated. He basically told me that everything that’s been going wrong lately is a result of my management. If I had a dollar for every time my feed guy, veterinarian or field rep told me that I’d be a very rich man.

ME: Well, if it’s not management – what is it?

I have to admit that before I offered that last comment, I looked around to make sure there wasn’t a baseball bat lying nearby. The dairyman had a very puzzled look on his face, but once I smiled, he relaxed long enough to let me explain myself. Although I’m confident he didn’t totally agree with my position when I left that appointment, he did at least understand that there was a lot of truth in the statement.

Management is commonly defined as…

the act or art of managing: the conducting or supervising of something (as a business)
judicious use of means to accomplish an end
the collective body of those who manage or direct an enterprise

…and has five primary components:

Planning
Organizing
Staffing
Directing
Controlling

My definition of management is simply a collection of decisions made (or many times, not made) by the principals of a business. I don’t think I have made a public presentation in the past four or five years without mentioning the importance of business management and leadership, if for only a few minutes, regardless of the topic on which I have been asked to present. Independent of size, location, Federal Order or co-op, differences in management are the primary drivers of dairy profitability. Let me demonstrate one of the reasons I advocate this position.

Cornell Cooperative Extension collects annual year-end financial information from approximately 90 New York dairy farms that have 300 cows or more – which comprise the data found annually in the Dairy Farm Business Summary, NY Large Herd Summary. Each year after all the financials have been received and analyzed, the packets are placed in a stack in order of size, smallest to largest. The stack is next divided into three equal piles which are grouped by herd size. Over the past 10 years or so, the first pile of farms ranged from 300 to 500 cows, the second pile from 400 to 800 cows and the last with the largest farms of 600 to 800-plus cows. Each of the three piles is then arranged in order of profitability as measured by net farm income (NFI) per cow, per year. Finally, each of the three piles is divided into five smaller piles representing the most profitable 20 percent, second-most profitable 20 percent, etc.

Exhibit 1 below, demonstrates the compiled results of this analysis averaged over a nine-year period from 2000 through 2008. I use this graphic in many of my presentations and ask the audience: What stands out to you? Almost instantly, someone will raise their hand and describe the difference in income between the most profitable 20 percent of farms and the least profitable 20 percent (or quintile) as surprising or even staggering. The spread in profitability for the smaller farms is $904, $850 for the second group and $988 for the larger farms.

Do you notice anything else? Average profitability among the three size groups is very similar. The smaller farms averaged $415 NFI per cow per year, and the second groups averaged $480 and the larger farms averaged $370. It is interesting to note that while probably not statistically significant, the larger farms actually had the lowest average NFI – it was the middle group that was the most profitable. It would seem that management, not herd size, had a greater impact on profitability. I encourage you not to get too hung up on the size of the farms in this study or that these farms are in New York versus Wisconsin or Idaho or California or any other region of the country. This dynamic would be repeated in any similar study of dairy farms regardless of location or size.

While this may a topic which generates many opinions, it is clear to me that management and leadership are significant points of distinction between and among dairy farm businesses which transcends all demographics. Leading and managing may not always be as much fun as working with your hands, and they certainly aren’t easily mastered skills, but as Stephen Covey suggests: "Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall."

Is your ladder leaning against the right wall?

Where I start planning with a dairyman on Day 1

JGSquires@landolakes.com (Greg Squires) — Fri, 24 Feb 2012 00:42:27 GMT

If I am charged with the expectation of helping someone develop a road map for their business, it’s a given that I must have a comprehensive understanding of where they’ve been, where they are now and where they want to go.

Dairy producers are always asking me to describe what I do. I am often contacted after a peer or trusted advisor has referred them. More times than not, one of the first topics they want to discuss is: “tell me what you do.” And also more times than not, my first reply will be: “I help people answer the question: What next?”

I truly enjoy helping people answer that question and have been blessed to have had so many ask for my help. Several clients however, have gotten a little frustrated when they discover how much time I ask them to invest with me to discuss what they’re doing now before we actually begin answering questions about what they should do next.

Here is a situation I had with a client several years ago. A husband/wife team approached me about helping them develop a business plan for a significant expansion of their dairy operation. They both are excellent managers, very involved in the operation and most definitely type-A personalities. After first meeting them by phone, we set an appointment for our first face-to-face meeting and work session. Before we met however, I asked them to provide a listing of all their present term and operating notes as well as the following information for each of the previous five fiscal years:

Accountant-prepared income statements and market-based balance sheets
Some type of herd production summary reports
Herd inventories including young stock
Annual shipment summaries from their milk processor or co-op

While setting up the initial appointment, I also asked them to set aside five hours on the first day to discuss their present business and personal goals, how they managed cows, how they managed people, how they used information systems to manage the business, and a somewhat short list of other topics regarding their present business model. After asking for the five-hour time commitment, there was what seemed like a stunned silence on the other end of the phone, but they accommodated my request and we prepared for our first meeting.

We met and as planned, spent the first afternoon (5½ hours) talking about them and their present operation. After the first 45 minutes, it was easy to read their body language which seemed to be screaming, “Oh my gosh, when are we going to finally get to talk about the new dairy and all the fun stuff we get to buy?” Again however, they hung in with me throughout that rough first day and it was smooth sailing from that point forward.

After many weeks and months of planning the project and securing financing, the project was completed quite successfully several months later. About a year after the new dairy was completed, I had the following conversation with the same couple during a follow-up discussion:

COUPLE : Greg, your projections were spot-on. It really helped that the numbers were all laid out and the assumptions were explained and rationalized… our banks couldn’t tear holes in any of the numbers.

ME: Thanks. It seems to me that the two of you put a great deal of time and energy into the planning which is what really made it all come together.

COUPLE: Yes, well we also have a confession to make.

ME: What’s that?

COUPLE: Do you remember that first day we met? Well, we were this close (the wife raised her hand showing a thin space between her thumb and forefinger) to asking you to leave after the second hour of questions. We couldn’t understand why that stuff was so important. But now that we have the dairy built and operating in it for the past year and reflect on how we revised the plan along the way and with feedback from the first couple sets of projections, we now understand what a mistake that would have been. The answers to all those questions are what made the plan more relevant.

I have always felt the words “relevant” and “rational” were both fundamental and foundational in sound business planning. This approach requires greater detail but results in a plan that has a greater probability of accurately predicting outcomes. Following is why this background information is so meaningful:

Financial History This category is probably the easiest to understand from a relevance perspective but the information is needed so I can gain detailed insight to the results of management over recent years. Within the context of existing facilities, site, etc., what has management been able to accomplish? An income statement provides insight to present cost centers, especially when broken down to a per-unit basis (cost/cow/year and cost/cwt.) and used to measure future financial efficiencies created from changes in physical facilities and management practices. A balance sheet sheds light not only on borrowing capacity but also demonstrates the owner’s discipline toward managing debt and debt service as well as probably being the best single measuring stick for long term profitability.

Priorities of Management It is absolutely essential for any advisor to understand their client’s management styles and preferences. I take seriously the responsibility of challenging a client toward new methods to improve efficiency, however my recommendations must still generally conform to his or her styles – we all understand what happens when one tries to put a square peg in a round hole.

People Management Since this area is on almost everyone’s list of “Management Elements I Hate the Most,” it’s pretty essential for me to know and understand my client’s abilities, strengths and weaknesses. Regardless of how well or poorly equipped my client is to manage people, a successful business plan must ensure that this management area is properly planned and appropriately resourced.

Purpose, Vision, Mission and Goals You may recall from prior articles or presentations the importance I place on these management elements. My clients expect me to help them develop a road map for the next steps of the evolution of their business. There are therefore two absolutely necessary points of information that must be identified to generate an accurate map complete with turn-by-turn directions: 1) the point from which we begin the trip (where we are now) and 2) our destination (where we want to go). Purpose, vision, mission and goals are analogous to your destination and without them, the car (business) will just be driving around in circles without any idea of what direction it should travel or where the trip will end.

If I am charged with the expectation of helping someone develop a road map for their business, it’s a given that I must have a comprehensive understanding of where they’ve been, where they are now and where they want to go. While it may be more fun to jump right into the project of the moment, you may likely be better served to remember that the answers to all those questions are what make the plan more relevant.

The greatest legacy: preparing the next generation

JGSquires@landolakes.com (Greg Squires) — Tue, 01 Nov 2011 18:20:07 GMT

"Realize that the greatest personal satisfaction you will experience as CEO of your family business will come from the legacy of its continued, multigenerational success."

Many of my clients have heard me say how fascinated I am with families who can work and operate a business together. It’s hard enough to just be family let alone with the added stress of working side by side for another 40-80 hours each week.

Families who operate businesses also often have a particular challenge in planning for managerial succession. How and when do parents, aunts/uncles and other senior generation members stop being directors, and become coaches to children and other junior generation members? In some of the more challenged situations I’ve seen over the years we are talking about three generations where the grandparents are directing business activities and obviously haven’t enabled either of the two junior generations to truly manage the business – Grandma still writes all the checks.

Several of you may have just chuckled at that last statement even though it depicts a fairly extreme example not overly representative of most farms today. But let’s see how many of you might be able to relate to this more subtle situation I experienced several years ago with a multiple-generation operation in the Midwest. I had my second on-farm visit scheduled and experienced the following exchange with the son of the principal owner immediately upon arriving at the farm (the son was the department head for all dairy operations employees):

Son: We’ve got a major problem and you’re going to have to help us figure out a solution.

Me: Tell me about it.

Son: Well, you know we’ve had several on-going issues with productivity and reproductive management over the past three to four months or so.

Me: Yes, and I’m generally aware of the corrective action steps you’ve planned and implemented.

Son: Well, Dad apparently wasn’t happy with our progress in getting our arms around this and decided to take matters into his own hands. I took a couple days away from the farm last weekend and when I got back, he had fired the Herdsman and Assistant Herdsman.

Now, take a guess at the ages of Dad and Son from this scenario – at the time of the incident, Son was in his late 30’s and Dad was in his early 60’s. Although this incident clearly is an example of how not to train and develop a successor, they actually had been doing several things right in terms of managerial succession. Son was given the opportunity to progressively provide greater leadership to the farm’s overall operating workforce and effort. What he wasn’t provided was decision rights or “control.” This incident was not a unique example of the dynamic between Dad and Son to this farm. In fact, I was hired to help them develop a more effective transition of management among the generations.

Potential Roadblocks

The first and most important question senior generation farm owners must candidly answer early in the business’ evolution is “are we committed to seeing this business succeed beyond our lifetimes?” Without an affirmative answer to this question, a fully effective generational transition will be severely hampered. Making business continuation a priority will help ensure all other business planning and actions support the transition goal. It will foster a culture of trans-generational management continuity throughout the business model.

There are several natural and very human characteristics that can be potential pitfalls along the journey of a trans-generational business including:

Personal financial insecurity This has been a major contributing factor especially among those who are of an age to have been impacted by the Great Depression. There is a deeply rooted sense of financial insecurity as people age, become less productive, and are less able to directly influence how their personal living needs will be met.

Control Some people find it very difficult or even counter-intuitive to allow an employee or child to make their own decisions and learn from their own mistakes. The most effective mode of learning for most people is experience. Senior owners must allow junior generations to scrape their noses…and often.

Directing Directing someone is different than controlling in that it is more deeply rooted out of expediency and not wanting to purposefully limit autonomy. While it is usually easier to tell someone how to perform a task with step-by-step detail, it will not help them develop their own problem-solving skills. Directing can also be similar to controlling in that it will lead to the same feelings of frustration and never allow the successor to see the bigger picture but only the immediate task at hand.

Pride Some people cannot share in the deep personal reward of success unless they are perceived by others (or see themselves) as the key decision maker. A senior generational’s sense of pride can be much more richly rewarded from the business’ long-term achievements that succeed his or her lifetime.

Emphasize failure One would fully expect a developing manager to fail, and perhaps even fail often. The opportunity in failure is to focus on the learning that resulted from the experience, not constant reminders of the failure’s occurance.

Visionary It may seem odd to list something as a pitfall that would be generally accepted as a very positive characteristic but junior generationals who must succeed extraordinary visionaries often find it difficult to emerge from his or her shadows. The visionary must be open to, and even encourage, new ideas and strategies forwarded by successors.

Steps to effective managerial transition

The steps to managerial succession planning cannot be condensed into a three-year timeline – it is a progression that begins in childhood and doesn’t end until the incumbent(s) dies. As parents, the senior generation can begin the process of teaching young children how to solve their own problems and experience the consequences of their own decisions and actions well before ever reaching the age where they are “coming into the business.” Children are also exposed to their parent’s personal and work ethic as well as their sense of responsibility therefore transference begins at an early age.

As children enter their late teens and early adulthood, the progression continues as they are trained by experience and begin to realize how various procedures and protocols impact animal, human and financial performance. As the junior generation reaches their mid-to-late twenties, they should be exposed to higher level decision making and asked to contribute to strategic discussions. By the time the successor generation enters their 30’s, they should be very involved in all levels of decision making and planning. They should also have leadership roles within the organization chart commensurate to their experience and perhaps interests. This is a foundational stage in a manager’s development as they begin to wrap their arms around the business as an organization and how the various enterprises and departments contribute to the collective financial outcome. It is also a foundational period as they are afforded the opportunities to contribute significantly to the continued vision of the family business.

Timing the final stages of the transition process is equally difficult as to when the baton should be fully handed over and the incumbents finalize their transition from managers to mentors. One accepted attribute of “the right time” is that it should be completed while both incumbent and successor are running essentially at full speed. Reaching the final stages of transition at this point will allow ample time for successors to put their mark on the business while also having the luxury of a strong and experienced coach and mentor to help provide insights to the more challenging decisions and opportunities.

The most important message I have for incumbents is this: realize that the greatest personal satisfaction you will experience as CEO of your family business will come from the legacy of its continued, multigenerational success.

Three overlooked but essential business plan elements

JGSquires@landolakes.com (Greg Squires) — Thu, 22 Sep 2011 23:25:36 GMT

How many multi-generational farms can you think of where Mom and Dad are in their 60s or 70s and still control the checkbook and general ledger?

The Cambridge Dictionary defines “business plan” as a detailed plan describing the future plans of a business. Have you heard the phrase “the devil is in the details?”

A great number of very talented advisors exists who might offer their opinions regarding important management areas to be included in a comprehensive business plan. If you survey ten such people you would probably see ten lists with different combinations and numbers of suggested categories. I advocate that the following three categories (business risk, succession and milk/feed marketing) are among the most overlooked:

Risk Two dynamics work in tandem to provide a dangerous source of business risk to dairy producers: 1) dairy farms do not tend to retain much cash on their balance sheets, and 2) extreme volatility of milk and feed prices significantly impact a dairy’s ability to generate cash over intermittent periods of time to cover their checkbooks (we’ll discuss marketing plans later). It is always prudent for a business to manage cash and available lines of credit to ensure that the operation has access to enough working capital to cover cash operating expenses. Within the context of our more recent economic climate, $500 per cow of reserve working capital (either in the form of cash or approved and immediately-available borrowing that is not part of already-planned working capital needs) is not an excessive amount to consider. In order to plan what is needed, an annual operating budget can help shed light on those projected needs. I encourage all of my clients to prepare an annual operating budget for several reasons, not the least of which is that it is a tool that will facilitate an owner’s understanding of how cash flows through their operations. The more dairy producers understand what it costs them to produce milk, the more aggressively they can manage those costs.

Succession This function is comprised of two separate and very distinctive elements: asset transfer and managerial succession. Too often neither of these elements is properly planned but managerial succession is the most often neglected. Typically when succession planning is mentioned, we tend to think about estate planning which is a part of the asset transfer process. Succession planning is much more comprehensive and proactive than simple estate planning. How many multi-generational farms can you think of where Mom and Dad are in their 60s or 70s and still control the checkbook and general ledger? Family businesses need to purposely plan how management skills and responsibilities will be most effectively transferred to subsequent generations of owners. (I look forward to sharing more detailed insights to succession planning in the next issue.)

Marketing Market volatility is becoming an almost tiresome subject however, volatility is real and destroys hundreds of dairy operations every year. Many market traders and advisers admit that over the long run, a dairy operation may likely maximize income by not hedging and simply ride the cash market and I tend to accept this possibility. However, in order to regain income previously lost in a down market the operation has to live long enough to make it to the next up market. With the extreme trading ranges we have experienced in the commodity sector over the past four to five years, living through the down market to see the next high is becoming increasingly difficult, especially in more highly leveraged businesses. If your balance sheet shows a debt-to-equity ratio of greater than 1.25-to-1, it might be wise to consider developing a consulting relationship with a market advisor and work with them weekly to check when the windows of opportunity are open to lock an appropriate milk income-over-feed margin. It is also interesting to note that several of our industry’s seasoned lenders have begun to adjust funding levels with some of their customers based on hedged milk-over-feed-cost margins.

Success in business planning requires discussion

JGSquires@landolakes.com (Greg Squires) — Thu, 11 Aug 2011 16:44:54 GMT

Long-term business planning is a management function that not many dairy producers seem to enjoy.

Long-term business planning is a management function that not many dairy producers seem to enjoy. This is a conclusion I have drawn based on the few comprehensive business plans I have seen over my many years of work in the dairy industry. Too often when I see a good plan or someone reaches out to me for help, owners really want it for their banker and not themselves. One of the more extreme examples of this dynamic is illustrated by a phone call I received from a dairyman on a Monday morning several years ago that went something like this:

DAIRYMAN: Mr. Squires, my banker tells me you are a guy who can help me put together a business plan and one of those financial projections for a project I want to do… is that right?

ME: Yes, those are among the areas in which I consult

DAIRYMAN: Great! Because I’ve got an excavator parked at the end of my driveway, and that *$% &^ banker of mine won’t give me a loan for this project until I give him a business plan. Could you get one to me by this Friday?

Do you see my point? This individual was so driven to action that he obviously had not thought to discuss

a possible expansion with his banker until a few days before the proposed groundbreaking.

Successful managers understand the value of long-term strategic planning. But the plan itself isn’t necessarily what’s so valuable to them; it is the discussions that result in the process. “The Plan,” when complete, becomes a big target that owners, employees and stakeholders can tangibly see and with which they can identify. However, the unseen discussions to develop “The Plan” clarify the core values that owners put on paper, but more importantly the ones their employees and stakeholders use as a day-to-day guiding light for long-term decision-making. These discussions must occur to position a dairy business to thrive in an increasingly competitive business environment.

Critical elements of ‘the plan’ to discuss: Purpose, vision and mission

The foundation of a truly meaningful business plan is a description of the business’s purpose, vision and mission (PVM).

What’s the difference between purpose, vision and mission? Think of purpose as the reason that the business exists, or why you are in business. Vision is a description of the key drivers of success – what drives excellence in your operation and what your core values are. Finally, mission is your call to action – your daily mandate.

Discussing these topics are some of the “fluffy” parts of the process. Many times while leading clients down

this path, I see expressions of cynicism. For some reason dairy producers have a hard time believing that something so soft and fuzzy could possibly have a profound effect on their operations. Here’s how one of my clients described his takeaway, several months after I challenged him regarding purpose, vision and mission: “I think I get it now – the vision thing, core values, all that ‘fuzzy’ stuff as you call it. You thought I was just being a smart ?*&, but I truly did not make the connection. Th is has been an interesting winter in the dairy business, and those tools have helped. We have been preparing for this since last fall, and the time I have spent explaining things to my staff has been very helpful. They understand what is at stake … they nderstand why I am more willing to contract with a neighbor for tillage work as opposed to buying the 40-foot tillage machine; they accept a reduction in the workforce for cost control but understand the need to proceed on manure storage investments and more freestalls. They enjoy our 6:45 a.m. Monday meetings to discuss the week ahead. I think you might say I have done a better job of sharing my vision for the dairy, and that makes moving forward less confusing to all of us.”

Long-term objectives and strategies

Never has there been a greater need for long-term business strategies and objectives by players in the

dairy industry. Investment capital has become an increasingly valuable commodity. Every business has limited access to cost-effective capital – even Bill Gates and Microsoft – and today lenders are more constrained in how far they can support our need for capital. Add to this dynamic the total change in the rules by which the dairy industry now must play:

Feed costs have more than doubled from a few years ago.
We now export a greater portion of our production, adding to further volatility in farm-gate milk prices.
Crop production has the potential to be significantly more profitable than in previous years.

Dairy producers need to identify and verbalize how they feel they can best accomplish their purpose,

vision and missions and commit their conversations and strategies to paper. They should make plans to determine if they want or need to:

Increase or decrease the size of their cropping operation
Grow their operations over the next 10 years to meet their family ownership needs and goals
Own and control more or less land
Build a special-needs facility
Expand/update a milking parlor
Outsource or “insource” their replacement enterprise
Or any number of other possible strategies

Annual operating, CAPEX and capital reserve budgets

Investment capital, or capital expenses, represent another important planning function. Many dairy

producers discovered in 2009 and early 2010 that although they may have continued timely debt service

payments, their accounts were placed into their banks’ “special accounts” department because cows and dairy facilities values declined and their new “paper” values put them outside of their loan covenants. Th is write-down by bank analysts, along with heavy overall leverage (high debt-to-equity ratios), left many of these operations in a position of not having access to working capital.

This all ties into the capital expenditures discussion, because most dairy operations are not going to be

able to leverage their balance sheets in the future as heavily as before the 2008 U.S. bank collapse. In turn, as capital becomes harder to acquire, producers are going to have to more carefully plan how capital is to be allocated through long-term business plans.

Comprehensive long-term financial projections

Clients who believe 12 months is too long to forecast constantly challenge me. Talking with them about

projecting financial performance over seven to 10 years is sometimes nearly impossible. However, long-term

business plans should include these financial decisions as well as succession and marketing strategies. (An article in an upcoming issue will detail the necessary risk and succession elements of a business plan.)

The advantage of long-term forecasting is that farms can talk about, record and then see how factors

like internal herd growth, expansion, capital expenditures, etc., collectively impact profitability and cash flow.

These also become great tools to help give plans more refinement when used to complete “what-if” analysis. Don’t forget to make use of projected case, best-case and worst-case scenarios to improve your contingency planning.

How to communicate the plan

This is both the final, as well as the first, step to developing an effective business plan. It is the first step in

the sense that owners talk among themselves regarding the various elements of the plan and how they want to do business together in the coming years. They should then communicate the planning process with their key employees and advisers to secure their input and insights. As the final step, the latest version of the printed business plan is communicated with those same groups of people to further engage their

support and “ownership” in helping drive the success of your business.

The process of developing a business plan is rarely described as“a lot of fun.” I encourage and even challenge dairy producers to try it just once; put your full attention and resources toward developing “The

Plan.” I am confident that a very high percentage of those who complete one will walk away feeling positive about the experience. Here’s what one of my clients told me after completing his plan: “Discussing and preparing the business plan forced us to deal with problems we may have otherwise overlooked and challenged our family to ‘think outside the box.’ We accomplished so more than crunching numbers; it challenged us to deal with problems and opportunities.” ��