From the Experts

Invest in all aspects of farm capital

By Dairy News

There are a number of future choices open to farming businesses.

In short those choices are: retire, die, sell (in any order); hand over the farm to one child with the others unhappy; hand over to one child with all happy; build a multi-generational business; and build and sell a going concern.

Whichever path you take it will be useful to have an understanding of the three sources of capital in your business.

These are:

■ Human capital.

■ Physical capital.

■ Financial capital.

In a farm business, the human capital includes the farmer and the farm family. It is paramount to ensure they have adequate food, clothing and education. Perhaps getting them to start their own business or bringing them into the family business is important.

One of the most common factors for a farm business faltering or failing is that the employment relationships are unclear. A lack of clarity can lead to communication breakdowns and the souring of intergenerational relationships.

From a human perspective, in addition to family members and other direct employees, the contractors and professionals (like accountants and lawyers) who are used by the company also need to be included as part of the team.

The physical capital includes the land, plant and equipment, animals and, in some cases, water for irrigation.

Management of each of the areas of physical capital requires appropriate knowledge and a level of skill. The demands on the skill level are increasing as animals become genetically superior, machinery becomes technically more sophisticated and the management of pastures, grazing and water becomes more critical.

The financial capital includes the investment the farm family has in the business, the carry-on funds that are required throughout the year and any borrowing for farm expansion.

As a family you may be a patient investor, but the bank will not be patient if you cannot meet your commitments. Often those commitments go beyond paying the interest on time. The relationship with the bank will be of upmost importance if you want to borrow to expand.

In any business other than a farming business each of those areas of management — human, financial and physical — would have a senior officer in charge. In a farming business it is usual for all of the roles to be undertaken by one person in the farming couple.

Within any business, including a family farming business, the roles and responsibilities of the board, the chief executive officer, the operations manager and operators, need to be clear. The board has the responsibility to look at the long-term direction of the business, the CEO to look at the bottom line and the operations managers to actually do the work.

In a dairy business, individuals will often fill a number of roles. It is therefore important for an individual to know which hat they are wearing at any given time.

No matter which hat is worn, it is important that leadership, management and operational tasks are all directed towards the long-term goals.

• By Mike Stephens, is a consultant with Meridian Agriculture and works with farming families in developing business strategies to enable growth and succession.