Basics of farm business management that every farmer should know
I went back to my notes of FARM BUSINESS MANAGEMENT AND POLICY module from Strathmore University Business School. I came across an exam question. I had managed to score 15/20 which is not a very good score. However, I believe that the content of my response to that exam question could help someone to understand better the concept of farm business management.
QUESTION: At a recent farmers' meeting, one of the audience commented: “There is little point in planning my business as the future is so uncertain. Look at how volatile the maize price is!” How would you respond to this statement in relation to farm business planning techniques and their applicability to such farm businesses in volatile market conditions? (20 Marks
Importance of farm business management for small scale farmers
The statement from this farmer raises an important question which is: What do farmers use to make decisions; through a logical process or a gut feeling? In his statement, the farmer sounds very discouraged by the fluctuating prices of maize and decides that there is no need to plan his business. His decision not to plan is based on emotions and the bad experience in the unpredictable maize commodity market. In essence, farm business planning is a forward-thinking strategy that allows a farmer to visualize all farm operations before they happen, including the marketing of produce. If a farmer does proper planning and foresees price volatility for his maize produce, he can mitigate this uncertainty, for example by negotiating future contracts, options, or hedging which would help him secure the market in advance.
By definition, a farm plan is a program of the total farm activity of a farmer drawn up in advance. Farm plan serves as the basis of farm budgeting. Therefore, a farm plan can be prepared without a budget, but budgeting is not possible without a farm plan.
Planning is essential to any business regardless of its size. To be successful, a farm operation must know its current position and future plans. Having these plans in your thoughts is useful in the decision-making process. He needs to identify the root-cause problem, gather concrete information, and put together actions that would lead to solving the problem of market volatility, for instance, storage, processing, etc.
Techniques of farm business management
To succeed in farm planning, several simple practices and tools must always be used. They include:
1. Defining the business objectives: The farmer needs to very clear whether his farm is for profit-making, or for subsistence and self-consumption. With SMART financial objectives, it becomes inevitable for any farmer to operate his farm without proper planning using a process method and not gut feelings.
2. SWOT analysis: For a farm business, a SWOT analysis helps the farmer to analyze internal and external factors that would affect the smooth running of the business and mitigate the risks. In our case, if the farmer had done proper SWOT analysis, he would have been able to foresee the market volatilities and mitigate them accordingly.
3. Budgeting: Budgeting is a process of estimating costs and returns of a farm or an enterprise. There are two types of budgeting on a farm: 1. Complete budgeting: Complete budgeting considers all the crops, livestock, methods of production, and aspects of marketing in consolidated form and estimates costs and returns for the farm as a whole, and 2. Partial budgeting: It compares the costs and benefits of alternative management decisions faced by a farm business. It focuses only on the changes in income and expenses that would result from implementing a specific alternative. Budgeting is important because it encourages the efficient and economical use of resources and serves as a valuable basis for improvements in farm management practices.
4. Profit and loss analysis: In a business, profit and loss analysis is done using the profit and loss account also known as income statement. It provides a summary of the business’s revenue, expenses, and profit/loss over a given period. P&L statement shows a farm’s ability to generate sales, manage expenses, and create profits. To a farmer, preparing a P&L could be useful in the following ways:
- Make an informed decision: P&L gives a farmer
concrete knowledge of how his business is doing in terms of revenue and
expenses. With this in mind, he can make better financial decisions without the
- Proof of business performance: Having a P&L
statement on paper means that you have a record of how well your business has
been doing throughout its operation, which can serve as a measure of trust to
any new clients or partners who may wish to do business with you.
- Liabilities for tax: An updated P&L statement
provides the information required to pay business taxes to the government.
- P&L can also advise the farmer on the ability of
his business to repay a loan once borrowed.
5. Projection of cashflow: Cashflow projection consists of predicting the amounts of funds that flow into and out of a business. It includes all projected income and expenses. Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become broke. It is said that “cash is king” or “cash is the life-blood” of all businesses, particularly start-ups and farm enterprises. Projecting your cashflows can help your farming business in the following ways:
- Planning: When planning for future
changes or operations on the farm, you need to understand the financial impact
of those operations and changes. You need to ask yourself whether you will have
enough funds. If no, where else can you get money from? Etc. As a farmer,
preparing a cash flow projection will give you the information to answer these
questions and make decisions.
- Borrowing from the bank: A cash flow statement if
presented to the bank can increase your credit score because it demonstrates
that you have a plan to repay the loan and that you are proactive in the
control of your business finances.
- Cash management: Farming is a business
with two faces: one of heavy cash outflow (purchase of inputs) and another of
heavy cash inflow (sale of produce). A farmer needs to be aware of these
seasonal fluctuations of cash. A well-prepared cash flow statement can give the
farmer a bigger picture of cashflow behavior throughout the season.
From the statement of this farmer, we learn that most farmers fail to plan due to the lack of knowledge on the importance of business planning. Had he planned his farm; he would have escaped the wrath of maize price volatility. However, being aware of the importance of business planning alone is not enough and the farmer needs to learn the various techniques and tools of business planning which include budgeting, cash flow projection, gross margins, and net profit analysis among others. By so doing, the farmer becomes more aware of his business and his business environment.
- FARM BUSINESS MANAGEMENT NOTES. AAQ 2019