Farm business constraints: is something holding you back?
A constraint is something that limits or restricts people in some way in what they are doing, need to do or could be doing. It impacts on a person’s action or behaviours. Some are simple. You would like to buy a piece of land. The asking price is very high and as a result, you’re not sure if you can get the financing approved. In this example, the cost is a constraint.
Some are more complex. The transition of ownership and management to the next generation is not proceeding smoothly because individuals involved are having difficulty in deciding on what level of involvement they want to have in the farm moving forward. The constraint here is indecision at a personal level.
In working with farm families, I have gained a deeper appreciation for, and developed a better understanding of the importance of keeping three aspects of their businesses in alignment. The alignments referred to being business direction, financial performance, and management structure. This is nothing new as these functions have impacted on farms for decades. However, as farms become more complex and as the rate of change that impacts on farms seemingly never stops accelerating, the significance and importance of the three alignments is becoming greater all the time.
Business Direction
This alignment consideration is about strategic direction. In other words, what are the plans for the future? Farms and farm families should have something written that describes what it is they are working towards. Family members should be in agreement on what that future looks like.
Financial Performance
Every farm has an existing financial direction. The reality is that it is headed somewhere financially. For most farmers, this is a reactive function meaning that the financial position in the future – say 5 years from now – will be an outcome of what will happen over that time frame. The preferred approach is to define what is wanted or needed in terms of a future financial position. And then determining what can and needs to be done to achieve it. Think of it as creating a financial vision or financial ‘future’. Ideally it will include financial targets. There is a business adage that says that you can’t manage what you can’t measure. How does a farm family know if they tracking to where they want to be financially if they haven’t defined the goal?
Management Structure
The importance of understanding a farm’s management structure, as farms increase in size, become more complex, and transition inter-generationally, has never been greater. The basic management functions on a farm are the same but what’s involved in attending to those functions has changed and is changing.
Simply stated, what does the management structure of your farm need to look like in the future so that it is appropriately aligned with your financial and business vision? The importance of putting structure (defining roles and responsibilities) around the management functions on a farm cannot be overstated.
Logically, there should be a high degree of alignment between each of a farm’s defined future, its financial performance, and its approach to management. I find myself in discussions with farm families where there sometimes is a disconnect between their ideas of where they want their farm to be in the future and their ability to get there financially or managerially.
Having a dream and then after a time, realizing you can’t get their due to financial or management limitations … or constraints … can be discouraging. On a positive note, the constraints do not have to be impossible barriers. They do though, need to be identified and, where possible, resolved. As the importance and significance of the alignments increases, so does the relevance of more clearly being able to identify the limitations within and between the three functions.
Constraints
Constraints can be grouped into two categories. Those that are within a farm family’s control and those that are not. For example, a constraint outside a farm family’s control can be weather. Then there are the constraints that fall into the varying ‘shades of grey’ area where farmers have some control over the limitation but not total control. Grain prices would be an example. Constraints that are completely within a farm’s control are obviously easier to resolve.
There are inherent risks for farms that move forward where they do not actively take time to work through a process of establishing their priorities in each of their future plans, their financial capacity and their management strengths and weaknesses.
My main point in this article though, is to firstly, ensure that you take the time to think about how constraints can impact on your farm and family. Secondly, to identify (list) what those constraints are. And thirdly, develop plans to deal with them.
If you would like to speak to one of our consultants about this topic contact us.
