Rural Economics

Farm Management

1st Semester 2003

FARM MANAGEMENT AND ITS ROLE IN AGRICULTURE Basics of Management Management in general has varied definitions. In a broader sense Management is viewed as those activities relating to the organisation and operation of a firm for the attainment of specific ends. It directs resources use after interpreting the goals of those controlling the firm. The most common features of the most management definitions are: organisation of resources and decision-making process. Management Responsibilities include: Operational What to produce How much to produce When to produce How to produce Operational Method of production Timing of jobs Selecting techniques Choosing of staff

Why do some managers/farmers make money then others? Why do some farm business grow and expand, while others struggle to maintain their size? Why the Difference? Usually this is due to the Management. Observation and analysis often had the same conclusion. The differences due to management can be shown in three main areas; 1. Production differences includes choice of agricultural commodities to be produced and how they are produced. 2. Marketing differences (includes) When, where, and how of purchasing inputs and selling commodities (prices differences) 3. Financing covers not only borrowing money and related questions of when, where and how much, but also the entire area of how to acquire the resources necessary to produce agricultural commodities. The risks have to be considered in all the three areas i.e. how a farm manager adapt to and handle the risks can have a major impact on profit. Good or bad luck cannot explain all the differences observed in the profitability of farms even among those, which have about the same amount of land and capital available. In every association or system, management is the key ingredient. The manager makes or breaks the business. In agriculture, management takes a different dimension especially with uses of many technological innovations, and mechanisation.

If the management is so important, than we must ask some questions such as: FARMANAG.DOC/TS/2003 1

Rural Economics

Farm Management

1st Semester 2003

What exactly is a management? What managers do? What are the differences between management and labour? What knowledge and skills are needed to become a better management? Why the difference among profits made by managers? THE SCOPE OF THE MANAGER OR FARM MANAGEMENT ACTIVITIES Once the management decision is made, it has to be translated into activities, or most likely, a series of activities. In agricultural and forestry business management, such farm management activities may be grouped into technical, commercial, financial, and accounting categories. (Refer table 4.1) a) Technical Activities These are comprised of all physical production activities. That is include responsibility for all production know how, seeing that productions accomplished on time, and adapting production processes to changing economic and technical conditions. b) Commercial Activities These include all buying and selling activities of the farm/business. This are involves procurement of inputs in the quantities and combinations necessary for efficient production, plus orderly storage, handling, marketing of commodities produced. It also includes the task of market forecasting and contracting for services of others. c) Financial Activities These are comprised of all activities related to the procurement of and use of financial or money capital. That is acquisition and use of capital, presumably in an optimal manner. This requires forecasting future investment needs and arranging for their financing. Such capital is normally used for the purchase of physical assets and running the farm/business. d) Accounting These activities involve the establishment and maintenance of farm/business records, including records of buying and selling, etc. Include physical, human, business, and tax records. This area may involve setting standards for certain enterprises or segments of the business.

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Rural Economics

Farm Management

1st Semester 2003

Table 1 Classification of Agricultural and Forestry Business Activities.

Classification of Activities Technical Description/Nature of Activities Examples of Actual Decisions Made and Implemented. . What to produce: enterprise choice and combination . How much to produce: Amount to produce of each crop . How to produce: Amounts of inputs to use on each crop. How to combine them, how to co-ordinate their production. Capability-fertility Tillage practices - conservation Regulations -constraints Capital requirements Availability of services Labour implications Purchase of inputs (source, terms, quality, quantity, financing, etc.) Sale of produce (form of produce; time to sell; place to sell; type of market - open market, contract, etc. Inputs and Outputs Purpose of funds/ quantity and terms Source of financing Lender position Equity position and liquidity position Repayment plan Depreciation of assets Expansion / contraction Changing technology Records of output of produce Records of use of resources Records of sales and purchases Records of borrowing and repayments Cash flow forecasting Income and other taxes, wages and depreciation

Production of goods and services

Using land

Determining level of mechanization Commercial Acquiring inputs

Marketing products Forecasting costs and prices. Financial Acquiring funds Using funds

Forecasting future needs

Accounting

Keeping production records

Recording commercial and financial transactions Tax reporting

Definition of Farm Management Management is a widely used term but which is subject to many individual definitions. Of the many Farm Management definitions if we take one: "Farm Management is the decision making process whereby limited resources are allocated to a FARMANAG.DOC/TS/2003 3

Rural Economics

Farm Management

1st Semester 2003

number or production alternatives to organise and operate the business in such a way as to attain some objectives." Some of the definitions given by eminent farm Management authorities are: 1) Farm Management is that branch of agricultural economics, which deals with the business principles, and practices of farming with an object of obtaining the maximum possible return from the farm as a unit under a sound-farming programme. 2) "Farm Management" is the study of the business principle in farming. It may be defined as the science of organisation and the management for continuous profit" - Warren 3) "It is the science which considers the organization and operation of the farm from the point of view of efficiency and continuous profit"- (Effersen). 4) "Farm Management as the sub-division of economics which considers the allocation of limited resources within the individual farm is a science of choice and decision making, and thus is a field requiring studied judgement" - Heady and Jenson.

Farm management has become complex due to; Frequent price changes in agri-commodities New Technology - Development of new seed varieties, new fertiliser. - New breeds of cattle - New chemicals for pests and weed control - New animal health product and feed activities.

Changes like machinery, irrigation equipment, computers, govt. Policies. These are some of changing environment affecting the manager, and as a result the production is affected. Some managers respond it correctly, some incorrectly to the technology, price and other economic factors. Role of Farm Management: The main role of farm management is to help in realisation of the maximum not profit from the various enterprises on a farm. A typical farm is a combination of two or more enterprises and the chief aim of the farm manager would be to get the whole unit give the maximum total returns. It is not the return from anyone enterprise that determine the financial success of a farm, but it is the total return from all enterprises that counts its success or failure. A proper understanding of farm management principle helps in selection combination and execution of enterprises, which are consistent to a sound agricultural policy. The management study is undertaken: 1) To study the input-output relationship in agriculture and determine the relative efficiency of various factor combination. 2) To determine the most the profitable crop production and livestock raising methods. 3) To study the cost per hectare and per quintal or per kg. 4) To evaluate the farm resource and land use. 5) To study the comparative economics of different enterprises. 6) To determine the relation of size of farm to land utilisation, cropping pattern, capital investment and labour employment. 7) To study the impact of technical changes on farm business. 8) To find out ways and means for increasing the efficiency of arm business through better FARMANAG.DOC/TS/2003 4

Rural Economics

Farm Management

1st Semester 2003

input -output relationship and proper allocation of resources among different uses. Farm Management and its role for rural urban relationship. Farm Management has an important role in establishing a favourable economic relationship between the rural and urban population. The level of management reached in crop farming, dairy farming, poultry farming, etc. determines the standards of living not only of rural population but also of city dwellers. Poor farm management practices are clearly reflected in the low productivity of land and livestock on one hand and backwardness o the rural community on the other. The standard of living of the urban population is adversely affected by inefficient farming as the city dwellers particularly of low-income group pay higher prices for the prime necessaries. Agro-based industries also suffer because of low quality of farm produce raised at high cost; where as efficient farm management aims at better combination amongst land, labour, and capital and source relatively higher output at a lower cost. The prosperity of urban population leads to an increase in the demand for such farm products as milk and milk products, vegetable, egg, fruits and high quality food grains with the result that the type of farming is influenced in the direction of specialisation which may be localised or extensive. Farm business analysis shows that there is shift from extensive to intensive farming near the cities with the result that the cost per unit tend to decline because of the following reasons; a) The overhead cost is spread over more units. b) The method of cultivation is more scientific. c) Farm labour and equipment are utilized more efficiently. It will thus be seen that farm management practices influences the level of living of both rural and urban population. Rural prosperity is reflected in urban progress, whereas rural poverty and misery are the two sides of an inefficient farm management. Elements in a Decision 1. Decision maker The Manager or the farmer himself on our Bhutanese farm. 2. Goals or objectives The production objectives set by the farmer/manager, which contributes to the fulfilment of longterm goals. 3. Conditions faced - environment The decision-making environment within which all managers of any business have to make decisions. However, decisions are on a farm is made on somewhat complex or unique environment with many limitations placed by different risk creating factors. The most important is the limitation placed on a farmer's (Manager's) decision on the farm is "biological" and "physical" laws of nature. On the farm something cannot be changed by decisions, for example, Nothing can be done to shorten the gestation period of livestock 5

FARMANAG.DOC/TS/2003

Rural Economics

Farm Management

1st Semester 2003

Physical limit on the amount of feed livestock can consume in a day Time of a particular crop to grow and mature, however, choice of variety can have some effect.

Farmer (Manager) on a farm therefore has to be aware of these limitations placed by the biological and physical laws of nature. Weather, insects, diseases and variable prices are some examples of factors placing the farmer (manager) in a position of making decisions in an environment of risk and uncertainty. 4. Measuring stick of Efficiency The performance of managers' can be measured by improvement or achievement of technical efficiency and economic efficiency. Three general views on management, most commonly shared by the professional include such as: Management = Job Management = Resource Management = Process Job - The concept of management as a job derives from the idea of being paid for performing the tasks of running a business. For example, a hired Hotel Manager, who has little ownership of the business are employed to perform certain functions. These functions generally include planning, organising, controlling, motivating, staffing and communicating, but may include others. Resource - The concept of management as a resource relates to an increasing awareness that the human factor is important in agricultural businesses. It is not uncommon to see two individuals with very similar land and other resources show very different results after very the same period of time. The key factor often noted is the difference in management, what has been called "intangible part of production expressed in the lives of persons." The quality of management to a large extent determines the profitability of a business. Process - The concept of management as a procedure (problem solving steps) relates to the scientific method of problem solving. It involves the following steps: 2) 3) 4) 5) 6) Clearly define the problem Gather objective facts and arrange them in relevant order Evaluate and analyse the data Draw conclusions or make decisions based upon the analysis Take appropriate action.

The other factors remaining equal the differences in management may result differences in production. Since the modern agriculture management involves a whole complex of interacting forces and activities, it may be useful to expand the steps given above. The steps are: FARMANAG.DOC/TS/2003 6

Rural Economics 1. 2. 3. 4. 5. 6. 7. 1.

Farm Management

1st Semester 2003

Formulation of goals and objectives of the farm Recognition and definition of problems or opportunities Gathering and organization of facts and relevant data/ information Identify and analyse alternative solutions or courses of action Selection of the best alternative or course of action based on the sound criteria Implementation. Acting on the decision Acceptance of responsibility for the decision regardless of the outcome Evaluation of the outcome of the decision

The decision making process can be grouped under the basic management functions such as: (1). Planning, (2). Implementation and (3). Control (Monitoring). Figure 1. Panning as the most basic management function relates to deciding on a course of action, procedure and policy. 1) Goal Formulation

It would make little sense to start out on a trip without a pretty firm idea of where you are going. The establishment of goals and objectives is very important, as they give purpose and direction to decisions and actions. They must be defined to so as to serve as a measure of success or failure On the farm the recognition of conflicting goals is particularly relevant for family farms. It is often difficult to distinguish between farm and family goals. Further, choosing a particular farm goal may preclude the choice of a family goal or vice versa. Some of the suggestions in setting up goals are; Goals give purpose and to decisions and actions. They must be defined so as to serve as a measure of success or failure. Some suggestions for goal setting are; 1. 2. 3. 4. Choose practical goals (set realistic and attainable goals) Have some specific goals (well specified goals) Have a hierarchy of goals (Goals have different weights) Recognize the multiple and shifting nature of goals (goals may need to be altered over time due to economic conditions, changing family conditions or state of knowledge). 5. Recognize the time dimensions of goals (time requirement differ from goal to goal) The Farmer/Manager faces a lot of problems such as what to produce, how to produce, how much to produce, etc. A manager should be continuously on the alert to identify problems of any type as quickly as possible and define them concisely. Good problem identification will minimise time it takes to complete the remainder of the decision making steps. 2. Recognition and definition of problems or opportunities

On the farm it is important for a farmer or manager to be able to recognize and define conditions or problems. Some of the factors associated with the competence in opportunity/problem recognition are; Experience (farming experience) Level of education (exposure to ideas and approaches to problem solving) Motivation by accomplishing a goal Willingness to take risks. FARMANAG.DOC/TS/2003 7

Rural Economics

Farm Management

1st Semester 2003

Its considered that a clear definition of problem is equal to achieving half the solution. The problems and/or opportunities in most agriculture business are practically limitless. Wise managers select problems which, when solved, promise a high payoff in terms of a goal of the business. Distinguishing between major and minor problems, although seemingly obvious, is often a problem for managers. 3. Collection of data and information

The identification of problem should be followed by gathering of facts, data, information and also observations pertaining to the problem. The sources for data:- from own farm records; the local extension office; bulletins and pamphlets from the research stations; dealers; newspapers and magazines and neighbours. Data can be thought of as an unorganised collection of facts and numbers from various sources. In this form data may be of very little use. To be useful, it must be organised, sorted and analysed. Information can be thought of as the final product obtained from analysing data in such a way that useful conclusions and results are obtained. Gathering data and facts can be never-ending task. Care should be taken that the manager doesn't spend so much time gathering and sorting data that he makes no decisions to implement. 4) Identifying and Analysing Alternatives

Once the relevant information is available, the manager should list the alternatives, which are potential solutions to the problem. Each alternative should then be analysed in logical manner to ensure the accuracy and prevent something from being overlooked. Sometimes good judgement and practical experience may have to substitute for unavailable or costly information. Analysis means looking at two or more potential solutions in a systematic fashion. It compels the problem solver to prepare a logical approach, using the relevant data, for suggesting or forecasting a probable result from an alternative course of action. The logical analysis must include the important technical or economic relationships. It can then serve as a test of the feasibility of the alternative in meeting some specified end or goal. Figure 1. Management Flow Chart

FARMANAG.DOC/TS/2003

PLANNING Draw Up Potential Solutions

Rural Economics

Farm Management IMPLEMENTATION Select Plan & Put Into Operation CONTROL Analyze and evaluate progress of plan over time

1st Semester 2003

YES

Are planning objectives achieved

Does the NO remedy lie YES within the A logical analysis has the benefit of the replication. It is possible to retrace or reconstruct the analytical procedure. farmer's control It is reasonable to assume that systematic analysis, based upon good data, is more reliable than hunch or intuition simply because it forces the problem solver to get down all the relevant facts. The chances of overlooking something important are minimized. 5) Making a Decision (Selecting the best alternative)

After all pros and cons of each alternative are weighed, a decision is made. To make decision is to select a course of action. It requires coming to a conclusion, although that conclusion may be either (1) to do something, i.e. launch a new activity, (2) to do nothing, or (3) to go back and reformulate the problem, gather more information, or do further analysis. Normally, we expect that the alternative showing the greatest possible expected profit be chosen. However, this decision is influenced by such factors as uncertainty about the future, the need for subsistence food, the need for ready cash income, and so forth. Decision-making is a creative event when many factors are brought together for action. Since it generally involves the future, it also involves uncertainty. 6. Implementation (Putting decision into action).

Once the planning is completed, the best alternative must be chosen and action taken to place the plan into operation. A decision without implementation is like going into a candy store without money. To implement a decision means to put that decision into operation. On the farm the decision may be to try a new variety of crop, but however the new variety needs to be ordered and planted if the decision is going to take effect. Selecting the best alternative does give the desired results unless the decision is correctly and promptly implemented. Implementation inevitably involves the acquisition and organisation of resources (labour, machinery, land, livestock, forest trees, and annual operating inputs) to FARMANAG.DOC/TS/2003 9

Rural Economics

Farm Management

1st Semester 2003

produce the desired goods and services. Of course, doing nothing is an alternative and potential solution to a problem. However, the manager should also make sure that doing nothing is the correct decision. Very often doing nothing results form not allocating enough time to the decision-making process or from laziness, or from a reluctance or failure to make a decision. 7. Acceptance of Responsibility

Most actions can give multiple outcomes; depending on the events and conditions that actually occur once a decision is implemented. Despite careful analysis, most decisions must be put in motion before a manger can find out exactly what will happen. The responsibility for decisions and their results ultimately has to rest with some person or group. The management has to bear the brunt of any decision, and even if an unfavourable or unprofitable outcome is the result of a subordinates actions. 8. Control and Evaluation

The control function involves the observation of the results of implementation to see if the specific objectives are being met. Many things cause a plan to "go off its track". Deviations between actual and expected achievements should be identified as soon as possible. Then steps should be taken to ensure that desired results do not move outside an acceptable range. Control requires a system of record keeping, making regular checks on the plan, and monitoring progress and results against established goals. Information from control should be used as feedback into planning in order to make corrections to the existing plan or improve future plans. This feedback sets up a continuous cycle of planning, implementation, monitoring, and recording of progress. This is followed by a re-evaluation of the plan and the implementation procedures using the new information obtained through the control function. Managerial Success The ability to define a problem, evaluate it, and make an informed decision is a characteristic shared by top managers. Some of the major traits of successful mangers are identified as; 1. Have motivation, or drive (have a lot of ambition and often do not wait long for a perfect plan). 2. Set goals for themselves, as well as for the business they direct (are motivated with a purpose and have goals for themselves) 3. Stress their strengths (knows their strong points, as such they define their strengths and build on them) 4. Put emphasis on improving productivity (the option of improving their performance is never closed) 5. Concentrate on one key area at a time (a manger deals in a multitude of different problems and opportunities, but devotes more time and effort on a particular issue) 6. Are willing to take calculated risks (as a manager have to take some well-thought out risks) 7. Keep in touch with buyers and suppliers (a successful manager must keep in contact with the key people that affect his business).

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