Memorize these three basic business concepts before making your next equipment purchase.
Think of him as the Dale Carnegie of farming. Danny Klinefelter, finance and management guru at Texas A&M University, teaches farmers how to be CEOs of their own business. Each year he hosts a week-long workshop called The Executive Program for Agricultural Producers (TEPAP), a management Mecca for farmers who want to brush up on advanced agribusiness skills.
We asked Klinefelter if he could take some of the business concepts he teaches in class and apply them to the business of purchasing products on the farm. Here are his top three take-homes.
1. Group buying
Buying in groups, also called joint ventures or alliances, is a business concept that continues to gain traction in farming, Klinefelter says. “It’s where several farmers in same area have gone together to purchase a bigger piece of equipment, more land or new technologies,” he says. It also can be used to obtain less tangible things, such as specialized management skills. “Together we can afford to hire a higher skill set than what we could hire individually, and by buying or selling things together we can gain economies of scale,” Klinefelter explains.
Purchases can be made under separate operating LLCs within the same business to take advantage of tax savings, liability protection or access to capital. Forming an operating LLC is a lot cleaner, too, when doing managerial accounting. Separating out assets from liabilities lets you determine what activities are making money.
“If I own land, I want to show a land cost that is equal to, not under, its rental value” he explains. “The same is true for equipment. If I own equipment, I want to see a cost that is less than what I would pay to rent it. The numbers will tell you whether you are spending too much on certain inputs.”
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2. Peer advisory groups
Another business concept that can be used to make smart purchases is peer advisory groups. The group consists of typically eight to 12 non-competing farmers who are good at what they do, created for the purpose of sharing their expertise.
“It’s like creating your own board,” Klinefelter says. “But it isn’t as formal. There is no fiduciary liability. And instead of having a governing authority, you appoint a facilitator to direct the discussion.”
“Technology” advisory groups, in particular, are becoming popular as a way for farmers to learn about new technology. Members get together to talk about the technologies they have bought or are considering buying.
“As farms get bigger and more sophisticated, no one is an expert on everything,” he says. “If one person learns about a technology and then passes on that knowledge to the group, you accelerate the learning curve.”
Members are hand selected based on aptitudes, interests and mutual trust. The value is getting different points of view, Klinefelter says. “Am I the only one having this problem? Or is there a different way I could approach it?”
3. Process management.
Process management is a third business concept that can be used in farming. Each product or process is evaluated based on its ability to streamline an operation, increase production, improve quality or save time. It is the same concept used in industrial engineering, although referenced under different names such as total quality management, Six Sigma, lean manufacturing, or balanced score carding.
Process management begins with “process mapping,” or defining what the business does and who is responsible for what. Once a process is outlined, you can look for ways to make it more efficient. It also can be used to determine when it makes sense to invest in a new product or technology.
Process management isn’t just a one-time thing, Klinefelter says. Procedures must be continually updated as circumstances change and as new technologies become available that could eliminate steps, reduce time, or improve quality. “Otherwise, the system can become like a labor union or government bureaucracy, where you become bound by your standard operating procedures.”