1-Assess the current position
Determine the enterprise strategy and herd structure most likely to maximise profit
When preparing a business plan, undertaking a comprehensive review of all aspects of your farm business helps you to:
- understand the resources and capabilities available.
- identify the gaps in resources, capabilities, infrastructure or capital that need filling.
- learn from past decisions - the good and the bad.
Key components of your business that you should review and evaluate include:
- farm resources, skill base, management systems and enterprise mix
- farm financial and production performance
- natural resource management
- marketing plan
- staff management
- risk management
- development and implementation schedule
Guidelines to analysing the current situation
The first step in assessing your current position is to gather the appropriate information and data. This should include financial and physical information about the business, as well as key profit, social and environmental drivers.
Once the information has been gathered, it needs to be interpreted so you can establish benchmarks appropriate to your enterprise and set goals and objectives.
When analysing the current position of your enterprise, you will need to draw upon the following types of information:
- farm business performance
- cost of production
- feed supply and feed demand
Analyse farm business performance
A farm business performance analysis evaluates the business, how it is performing against other similar enterprises and helps identify areas for improvement. This should include both physical and financial aspects of the business. Ideally, data should be collected over at least three years to identify trends and account for abnormal items that may obscure true performance, such as drought.
For full analysis, the key information that must be collected includes;
- physical farm characteristics
- farm livestock inventory and trading accounts, including beef production
- labour use, supplementary feeding inventory and fertiliser inputs
- financial data from annual accounts, profit and loss statement and statement of annual cash flow
- balance sheet including all assets and liabilities, depreciation schedules and capital expenditure
Tool 1.1 outlines the data required for a farm business performance analysis. Many formats have been developed for completing this assessment and many farm consultants and service providers offer farm benchmarking and business analysis services to assist with this analysis.
Calculate cost of production
Cost of production (CoP) is a key factor affecting the profitability of beef-producing businesses. Cost of Production, measured in cents per kilogram liveweight, provides an indication of the outlay required to produce each kilogram of beef.
Calculating your beef herd’s cost of production is an important step in assessing your herd’s performance and efficiency of beef production. The cost of production is a useful benchmark that integrates many other benchmarks.
The MLA Cost of Production Calculator is a ‘do-it-yourself’ tool that standardises this performance indicator, allowing you to easily compare your enterprise with others across the southern beef industry (Tool 1.2) and, importantly, to compare your own performance from year to year.
A quick comparison of your cost of production will indicate whether you have scope for improvement, or are already performing reasonably well. Cost of production is simple to calculate. It is not complicated by how you have financed the business, how much of it you own or how you acquire your land, and it only deals with one enterprise at a time. Generally, beef herds with a low CoP are more efficient at producing beef and have a lower financial risk when beef prices are low.
By industry standards, the cost of production scale indicators are tabled below:
|CoP ($/kg liveweight)||Performance rating|
|< $0.80/kg||Performing well|
|$1.10–1.50/kg||Significant room for improvement|
|> $1.50/kg||Future may be at risk|
Knowing your cost of production is just the first step. Once you have a rough idea of how your enterprise is performing, measure the performance of your business in more detail and for all enterprises.
Understand feed supply and demand
Understanding the feed supply and feed demand curve of your beef enterprise, (ie matching demand with feed supply) is an important strategy to maximise profit. MLA has developed a Feed Demand Calculator that can help you analyse the relationship between the feed demand and feed supply for your business. For example, the Feed Demand Calculator can be used to assist you in setting time of calving to fit pasture growth or running trade animals in times of feed surplus (see Tool 1.3).
The MLA Rainfall to Pasture Growth Outlook Tool (Tool 1.4) can help you understand how your pasture grows throughout the year and how it can vary between the years. This web-based tool uses long term rainfall records for over 3,000 sites across southern Australia. The tool will help you decide how to manage your herd structure, so that feed demand - influenced by management strategies such as time of joining and weaning, time of sale and livestock trading - best matches pasture growth and variability.
Interpret farm business analysis
Once you have collected data and analysed the business, interpretation of the information is required.
For a start, cash flow budgets are important to identify how much cash surplus is available to fund debt repayments, tax, personal expenditure and capital investment, both on and off farm. Analysis of the business' balance sheet provides information on the owner's net worth and trend over time. The profit and loss statement is valuable for benchmarking the business, both between enterprises on farm and comparison with other enterprises and businesses.
Tool 1.5 outlines a process that can be used to identify economic problems.
Industry benchmarks are readily available to provide a point of reference to indicate how your beef business is performing compared to others in the industry. These benchmarks allow you to:
- quickly check your business health.
- identify opportunities for further improvement in your business (comparing your benchmarks to others).
- monitor progress of your business over time (comparing your benchmarks between years).
Check against industry benchmarks
Benchmarking can be indirect, where beef producers calculate their own performance indicators and compare them against published industry benchmarks, or direct, where individual producers contribute their farm information into a service that generates the benchmarks for more direct comparison with other producers.
To determine which benchmarks will be relevant to your business, we suggest you start with some of the primary benchmarks in Tool 1.6. At the whole-farm or business level, these will tell you how healthy your business is and, at the enterprise level, they will identify those areas of the business where you have the greatest opportunity for improvement.
Complete a SWOT analysis
Another useful tool to assist you in analysing and interpreting the information you have gathered on your enterprise is a SWOT (strengths, weaknesses, opportunities and threats) analysis (see Tool 1.11). SWOT is a simple framework into which you can clearly organise thoughts and analyse your position. It will enable you to gain a more strategic understanding of the current situation.
The purpose of a SWOT is to analyse an enterprise’s internal strengths and weaknesses in light of the external opportunities and threats. A SWOT can be completed for the whole beef production enterprise reviwing the five-year outlook of a beef enterprise, or for selected parts of the enterprise (eg assessing a breeding or finishing program).
A SWOT analysis can be done by an individual but is more powerful if more than one person is involved because different people will see the enterprise in different ways. The output enables you to:
- know the value of the enterprise as the basis for forward planning.
- determine whether goals and objectives are being met and if there are gaps.
- know the impact of proposed changes to the enterprise strategy.
- justify further investment of resources (time and money).
A key purpose of a SWOT is to assist you in identifying 'critical success factors' that will enable you to:
- build on your strengths
- eliminate or minimise your weaknesses
- exploit opportunities
- develop strategies to deal with threats
These factors become a key component in formulating your business plan.
Manage the risks
All business decisions involve potential (opportunity) and risks (threats). The SWOT analysis is an ideal starting point to quantify the risks as the basis of developing a risk management plan. Seasonal and price risks are the most obvious for beef enterprises. Less obvious - but just as important - are human resource, environmental and economic risks.
The degree to which any risk is a threat to a business will vary considerably according to location, production system, financial position, farm size and so on. The risk that external factors pose to the business is a combination of the probability of the event, the size of the loss that will be incurred and the longer-term implications for the business should it happen. These things change with time and must be constantly reviewed.
It is useful when making significant business decisions to carefully assess the potential and risks.
It is critical that each business completes its own risk assessment and quantifies the relative importance of the risks. A farm business risk assessment template (Tool 1.7) helps identify the 12 most common areas of risk. The tool asks questions you should answer when considering these risks. Do not limit yourself to the questions asked in this template; it is a guide to get you started.
Strategies to manage risk include ensuring you have:
- a low cost structure, including a low cost of beef production, so your business can withstand periods of low commodity prices. This is why a low cost of production is so important. This means the business is more profitable for more weeks over time.
- a diversified income stream to buffer periods of low prices in one particular enterprise. The downside of this strategy is that it may complicate your business and increase costs. An alternative to diversification includes developing off-farm income sources.
- reserves, both financial (such as farm management deposits) and fodder reserves to withstand periods of drought, low prices or change in the business ( Tool 1.8 provides a checklist for drought preparedness).
- insurance against risks, which may include fire, or financial tools to manage interest rate or commodity price variation.
- managements systems to manage production risk. Well designed management systems fit your pasture growth curve, are flexible to manage good and bad seasons and incorporate a management calendar that allows you to track key reproduction, stock growth and husbandry events.
- adequate equity to manage down turns in commodity prices while still taking advantage of opportunities to pursue business growth.
An acceptable balance between the business ‘potential’ against the ‘risk’ is required and this will vary between individual managers and family situations. If you consciously consider potential against risk each time a business decision is made then the outcome from the decision is more likely to be successful.
A useful process to gauge the risks is to prepare 'worse case', 'best guess' and 'good case' scenarios. This takes more time but, with computer software, these analyses can be run as one. Such analyses are invaluable, not only to see what the best guess might be, but also the upside and downside risks.
What to measure and when
Collating this information in the initial business planning process will provide valuable insights, but ongoing review of these data points is crucial to ensure you keep check on the on-going health of your business.
This on-going analysis of the position of the business can be drawn from:
- regular (eg: weekly, monthly, quarterly) business meetings to review and update all stakeholders involved in the enterprise. It is important to take formal meeting notes during these meetings to encourage thought behind what people say and to verify what was said in the future.
- annual use of the SWOT analysis to review the current and future position of the enterprise.
- monthly review of cash flow budget and updates of the profit and loss statement.
- annual review of profit and loss statement and balance sheet.
- annual benchmarking review and comparative analysis, assessment of cost of production (CoP) to evaluate performance and make tactical and operational change.
- annual risk assessment to help prioritise the operating risks in your farm business.
Use of these methods will form the basis for developing the strategic direction and build an understanding of the levels of planning (strategic, tactical and operational) and the benefits of thorough planning.
- MLA's EDGEnetwork offers practice learning opportunities to help producers gain knowledge and develop skills necessary to improve their livestock enterprises. For further information visit http://www.mla.com.au/edgenetwork or email firstname.lastname@example.org
- The Department of Primary Industries, Victoria's Livestock Farm Monitor Project provides an annual report on farm performance that can assist in benchmarking. Available at http://www.dpi.vic.gov.au
- find private consulting groups who can provide benchmarking information specific to your region and enterprise by seraching for 'farm benchmarking' on a web search engine (eg Google Search).