Pearson Education



Online Chapter 1

MAKING EFFECTIVE MANAGEMENT DECISIONS

Learning Objectives

( EXPLAIN THE PROFIT FORMULA

( Discuss the role of management in the livestock industry

( Discuss the human resource in the livestock industry

( Define management systems and explain the importance of the concept

Effective management of livestock operations implies that available resources are used to maximize net profit while the same resources are conserved or improved. Available resources include fixed resources (land, labor, capital, and management) and renewable biological resources (animals and plants). Effective management requires a manager who knows how to make timely decisions based on a careful assessment of management alternatives. Modern technology is providing useful tools to make more rapid and accurate management decisions.

Previous chapters have shown how biological principles determine the efficiency of animal production. However, it is important to identify other resources that, when combined with the efficiency of animal production, determine the profitability of an operation.

MANAGING FOR LOWER COSTS AND HIGHER RETURNS

MOST LIVESTOCK PRODUCERS MANAGE THEIR OPERATIONS WITH PLANS TO MAKE A PROFIT. SIMPLY STATED, THE PROFITABILITY FORMULA IS:

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The formula can be expanded to make management decisions more focused:

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Note: Costs include feed, labor, veterinary, repairs, fuel, interest, and other costs.

Obviously, profit occurs when output value exceeds input costs, and loss occurs when input costs exceed output value. Management decisions should focus on an optimum combination of output value and input costs to maximize profits while maintaining or improving resources.

The primary components of a long-term profitability formula include the following:

Costs—the primary production costs associated with livestock and poultry enterprises are feed, labor, and interest. However, many other costs, such as veterinary expense, fuel bills, and costs of repairs, should be carefully monitored.

Production (output)—output is usually measured in pounds and/or numbers sold. The outputs for the various species are shown in the enterprise budgets of the feeding and management chapters.

Price—the amount received per pound, per head, or per dozen (for eggs). Price is influenced primarily by supply and demand.

Maintaining or improving the resources—includes water, habitat, and land with the forage and crops produced from it. Maximizing short-term profits can easily deplete the land resource by overgrazing, erosion, and the like.

Each component of the profitability formula should initially be evaluated in terms of how it affects output value.

Price has a tremendous effect on output value, though individual producers have little influence over price. Producers accept the price the market offers at the time they sell their products (output). Therefore, the primary management focus for most livestock and poultry producers is reducing costs while increasing production and maintaining or improving resources.

The enterprise budget analyses in the species management contain the component parts of input costs. Managers can analyze these costs and make management decisions to reduce them. Throughout all of the chapters in the book, the biological principles affecting production are identified. Producers apply these principles in making cost-effective increases in production.

The Manager

THE MANAGER IS THE INDIVIDUAL RESPONSIBLE FOR PLANNING AND DECISION MAKING. THE MANAGEMENT PROCESS IN SIMPLE FORM IS TO PLAN, ACT, AND EVALUATE. THIS PROCESS IS DESCRIBED IN MORE DETAIL IN FIGURE ONLINE 1.1.

It is imperative that livestock and poultry producers manage their operations as businesses. Current economic pressures associated with keen competition are forcing more producers to manage their operations this way.

The manager may be an owner-operator with minimum additional labor, or the leader of a more complex organizational structure involving several other individuals or businesses (Fig. Online 1.224.2). An effective manager, whether involved in a one-person operation or a complex organizational structure, needs to (1) be profit-oriented; (2) identify objectives of the business and establish both short-term and long-range goals to achieve those objectives; (3) keep abreast of the current knowledge related to the operation; (4) know how to use time effectively; (5) attend to the physical, emotional, and financial needs of those employed in the operation; (6) incorporate incentive programs to motivate employees to perform at their full capacity each day; (7) be honest in business dealings; (8) effectively communicate responsibilities to all employees and make employees feel they are part of the operation; (9) know what needs to be done and at what time; (10) be a self-starter; (11) set priorities and allocate resources accordingly; (12) remove or alleviate high risks; and (13) set a good example for others to follow.

Financial Management

COSTS, RETURNS, AND PROFITABILITY OF A LIVESTOCK OPERATION CAN ONLY BE ASSESSED CRITICALLY WITH A MEANINGFUL SET OF RECORDS. TABLE ONLINE124.1 IDENTIFIES THE FINANCIAL RECORDS NEEDED BY MOST LIVESTOCK AND POULTRY OPERATIONS. EACH RECORD IS DESCRIBED AND ITS PURPOSE IS GIVEN. MANY PRODUCERS KEEP ONLY SUFFICIENT RECORDS TO SATISFY THE IRS (FIG. 24.3). WHILE THIS IS IMPORTANT, ADDITIONAL RECORDS ARE NECESSARY TO MAKE CRITICAL MANAGEMENT DECISIONS.

Profits can be determined by evaluating all cash costs of the operation, all inventory increases or decreases, and the value of opportunity costs. Opportunity costs represent the returns that would be forfeited if debt-free resources (such as owned land, livestock, and equipment) were used in their next best level of employment; for example, the value of pastureland if it were leased, returns if all capital represented by equipment and livestock were invested in a certificate of deposit (or similar investment), and returns if all family labor and management were utilized in other employment. By calculating this, a price can be established for living on a farm or ranch, and a goal can be established for increasing profits.

Credit and money management become crucial during periods of inflation, high interest rates, and relatively low livestock prices. Prudent use of credit can enable a livestock operation to grow more rapidly than it could through the use of reinvested earnings and savings, so long as borrowed funds return more over time than they cost. Thus, farmers and ranchers have to look to credit as a financial tool and learn to use it effectively.

INCOME TAX CONSIDERATIONS

FREQUENTLY, MANAGERS FEEL THAT THEY ARE INEFFECTIVE IF INCOME TAXES ARE OVERPAID. PAYING LITTLE OR NO INCOME TAX SHOULD NOT BE A MAJOR GOAL OF THE OPERATION.

Well-managed livestock operations pay income taxes if maximizing profitability is a goal. Therefore, it is not poor management to pay income tax but to pay more than is owed.

Tax laws are complex and constantly changing. Most cattle producers should consult a qualified tax adviser for tax reporting and longer-term tax management.

Table Online 124.1  Financial Records for Livestock and Poultry Operations

|Financial | |

|Record | |

|Cash | |

|transactions | |

|Balance | |

|sheet | |

|Income |inventory). |

|statement | |

|Cash-flow |for the next calendar year. An active cash-flow statement tracks what is actually happening and evaluates|

|statement |the accuracy of the cash-flow budget. |

|Enterprise |where additional enterprises are being considered. Components include production and marketing |

|budget |assumptions, operating receipts, direct costs, net receipts, and break-even analysis. Estimates of market|

| |weight and price can be used in assessing risk in production decisions. |

|Partial | |

|budget | |

|Income tax |Self-Employment Tax, Farm Rental Income and Expenses, Tax Withholding, Depreciation) that are also |

|forms |completed, depending on individual operations and |

| |circumstances. |

Estate and Gift-Tax Planning

MANY LIVESTOCK OPERATIONS HAVE A LARGE AMOUNT OF DEBT-FREE CAPITAL INVESTED IN LAND, LIVESTOCK, BUILDINGS, AND EQUIPMENT. ADEQUATE KNOWLEDGE AND PROPER PLANNING ARE NECESSARY FOR FARMERS AND RANCHERS TO PASS ON VIABLE ECONOMIC UNITS TO THEIR HEIRS.

In recent years, significant changes in estate-tax policy have benefited family operations. For example, under a 1997 law, the unified credit exemption was phased up to $1 million in the year 2006. Effective in 1998, family farms and ranches were able to take advantage of a family business exemption of an additional $300,000. Producers can also make $10,000 annual cash gifts to children and grandchildren without paying federal gift tax. It is recommended that the services of an attorney and a tax adviser be employed for tax and estate planning.

Livestock producers should review tax plans (estate, gift, and income) and consult with professionals who are knowledgeable about current tax laws.

People

HUMAN RESOURCE MANAGEMENT AND LEADERSHIP ARE THE MOST FREQUENTLY OVERLOOKED TOPICS ASSOCIATED WITH LIVESTOCK PRODUCTION. LIVESTOCK AND POULTRY MANAGERS OFTEN WORK WITH A VARIETY OF PEOPLE INCLUDING FAMILY, EMPLOYEES, BUSINESS PARTNERS, CLIENTS, SUPPLIERS, AND THE GENERAL PUBLIC. FAILURE TO ADEQUATELY PREPARE TO EFFECTIVELY LEAD AND INTERACT WITH OTHER PEOPLE CAN LEAD TO DISMAL FINANCIAL PERFORMANCE IN AN ENTERPRISE EVEN IF ALL OTHER ELEMENTS OF THE BUSINESS ARE WELL MANAGED.

Effective communication skills (listening, writing, and speaking) are critical to the ability of a manager to gain the best efforts of employees and associates. The need for effective communication in an enterprise cannot be overstated. Listening to understand employees and other people is an important skill that is often overlooked by managers but is well understood and practiced by leaders.

Successful managers know how to accomplish the following:

1. Determine the optimum labor needs of an enterprise.

2. Identify, hire, and retain effective employees.

3. Motivate and reward employees with both financial and nonfinancial incentives.

4. Keep staff and management focused on the mission and goals of the organization.

5. Build and enhance effective teams and partnerships.

If the enterprise is family-owned or if family members are employed, the manager must also understand the following issues specific to the family business (Fig. 24. 4).

1. Apply sound business principles rather than assuming things will work out simply because people are within the family. Involve all family members in financial decisions.

2. Evaluate other successful family operations. Determine why they are successful and how they resolve difficulties.

3. Include all family members in the written plan of responsibilities (e.g., who will make the decisions; how each family member will be paid; how vacation and other time away from the operation will be handled).

4. Hold weekly family councils for additional planning, evaluating, and problem solving. Create an environment that encourages open communication.

5. Recognize that family relationships have a higher priority than programs and profitability but that all can be compatible.

6. Have patience and tolerance with age differences in the family. Provide roles for family members and involve everyone (e.g., spouses, in-laws) in development of plans and goals.

7. Recognize that management changes can occur too fast or too slowly in how they affect family relationships and profitability of the operation.

Management Systems

MANAGEMENT SYSTEMS ANALYSIS PROVIDES A METHOD OF SYSTEMATICALLY ORGANIZING INFORMATION NEEDED TO MAKE VALID MANAGEMENT DECISIONS. IT PERMITS VARIABLES TO BE MORE CRITICALLY ASSESSED AND ANALYZED IN TERMS OF THEIR CONTRIBUTION TO THE DESIRED END POINT—USUALLY NET PROFIT. INDIVIDUALS WHO HAVE BEEN EDUCATED TO THINK BROADLY IN THE FRAMEWORK OF MANAGEMENT SYSTEMS CAN OFTEN MAKE VALID MANAGEMENT DECISIONS WITHOUT THE USE OF DATA-PROCESSING EQUIPMENT. A PENCIL, A HAND CALCULATOR, AND A WELL-TRAINED MIND ARE THE PRIMARY COMPONENTS REQUIRED FOR MAKING COMPETENT MANAGEMENT DECISIONS. WITHOUT QUESTION, HOWEVER, THE USE OF THE COMPUTER IN SYNTHESIZING VOLUMINOUS AMOUNTS OF INFORMATION ENHANCES THE MANAGEMENT SYSTEM.

Resources are different for each operation; no fixed recipe exists for successful livestock production. Each enterprise is unique as the result of such variables as different levels of forage production, varying marketing alternatives, varying energy costs, different types of animals, environmental differences, feed nutrients at various costs, and varying levels of competence in labor and management. All of these variables and their interactions pose challenges to the producer seeking to combine them into sound management decisions for a specific operation.

It is a common practice to increase or maximize production of animals by using known biological relationships. Animal production typically has been maximized without careful consideration of cost-benefit ratios and of how increased productivity relates to land, feed, and management resources. However, recognition is now being given to the need for optimization rather than maximization of animal productivity. Thus, there is an increased interest in management systems that attempt to optimize production with net profit being the primary (and possibly the only) goal involved. As a result, some valid biological relationships will not be useful or applicable because an economic analysis may prevent their inclusion in sound management decisions. For example, it is a well-known biological fact that calves born earlier in the calving season will have heavier weaning weights. Because of this relationship, some ranchers move the calving season to a period earlier in the year without a careful economic assessment. An economic evaluation for one ranch demonstrated that changing the calving season to match forage availability (in this case about 30 days to grazeable forage) increased profits significantly. Changing calving season alone was estimated to increase the ranch’s carrying capacity by 30–40% in terms of animal units. In addition, the annual cow cost was reduced by 18% per cow because of reduction in winter feed requirements.

In dairy production, there is often a difference between maximum milk production and optimum milk production if producers want to maximize profit. The extra feed and management needed to maximize milk production may cost more than the value of the added milk.

Some farmers and ranchers are limited in utilizing the computer in management systems because of the lack of software. However, more management system software continues to be made available to producers. Learning to use information technologies may also be a limiting factor. The extension service or a local college typically offers training services.

Chapter Summary

( The profitability formula:

[pic]

identifies the components for animal producers to lower their costs and increase their revenue and profits.

( Assessment of resources (human, financial, forage/feed, animals, etc.) and a decision-making process that integrates the resources is essential for the well-being of all resources.

( Integrated resource management (management systems) is critical if future profits are to be sustained and resources are to be maintained or improved.

KEY WEBSITES

AGMANAGER



• Farm Management

o Finance

o Land Leasing

o Marketing

o Business Planning

o Farm Management Guides

• Livestock and Meat

o Budgets, Production Economics and IRM

o Livestock Management

o Livestock and Hay Charts

o Market Outlook

Key Words

PROFIT FORMULA

costs

production

price

resource improvement

effective manager

cash transaction

balance sheet

income statement

cash-flow statement

enterprise budget

partial budget

income tax forms

management systems

Review Questions

1. WHAT ARE THE FOUR COMPONENTS OF THE LONG-TERM PROFITABILITY FORMULA?

2. What is critical to assessing the costs, returns, and profitability of livestock operations?

3. What are five employee objectives successful managers know how to accomplish?

Selected References

BOURDON, R. 1992. THE SYSTEMS CONCEPT OF BEEF PRODUCTION. BEEF IMPROVEMENT FEDERATION FACT SHEET.

Fetsch, R. J., and E. Paris. 1998. Beyond the Basics and Estate Transfer Planning Workshop. Colorado State University Extension Service.

Field, T. G. 2007. Beef Production and Management Decisions. Upper Saddle River, NJ: Prentice Hall.

Harl, N. E. 1997. Estate Planning. Iowa State University Extension Service. PM-993.

Libbin, J. D., and L. B. Catlett. 1987. Farm and Ranch Financial Records. New York: Macmillan.

Luft, L. D. Sources of credit and cost of credit. In Great Plains Beef Cattle Handbook, GPE-4351 and 4352.

Maddux, J. 1981. The man in management. Proceedings: The Range Beef Cow, a Symposium on Production, VII. Rapid City, SD, December.

NCA-IRM-SPA™. 2002. Workbook for the Cow-Calf Enterprise. College Station, TX: Texas A&M University.

FIGURE Online124.1  Major component parts of the planning process.

FIGURE Online 124.2  Organizational structure of a large commercial feeding operation.

FIGURE 24.3  INTERNAL REVENUE SERVICE FORM (SCHEDULE F) SHOWING INCOME AND EXPENSE ITEMS FOR WHICH DOCUMENTED RECORDS MUST BE KEPT. SOURCE: DEPARTMENT OF THE TREASURY.

FIGURE 24.4  A family-owned business often involves a significant number of people. Effective communication is critical to the success of the business.

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