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Business Planning --

Monitoring and Controlling the Business*

At this point in the planning process, the owners have a plan that appears to be feasible as well as resilient to certain constraints. This step is an opportunity to develop or refine the process of monitoring and controlling the business.

What is Monitor and Control?

Monitor and control is a process of measuring performance and taking corrective action to assure that the business is on track to meet its goals. The owners are looking to fulfill their long-term goals, but realize that there are immediate goals/objectives which need to be met first if the long-term goals are to be fulfilled.

Example . If the owners have specified a certain level of equity as one of their long-term goals, an intermediate goal could be generating a level of income each year that would increase the farm's equity after paying expenses. However, one aspect of assuring that the farm generates the necessary level of income each year is to use the appropriate level of seed, fertilizer, and other inputs in planting the crops. Thus, monitoring spring planting has a direct connection to fulfilling the owners' long-term goal.

Monitoring and control is the practice of looking for indications of how the business is progressing in the short-term and how the current progress will impact long-term performance . It is a process of looking for symptoms rather than waiting for a shortcoming to become a problem. Monitoring also involves searching for opportunities.

Why Monitor and Control the Business?

The purpose of developing a monitoring and control process is to take advantage of opportunities to improve a situation; that is, to make changes when alternatives are available, and to avoid crisis management. In farming, a goal of monitoring and controlling could be: being prepared to make necessary changes during the production season, rather than between production seasons.

How is a Business Monitored and Controlled?

A business is monitored by measuring the most important factors and determining whether changes should be made. Thus, monitoring can be described as a process that involves a series of activities. These activities include

• identifying important factors,
• specifying a standard or range of satisfactory performance,
• knowing who, when, and how information about the farm's performance will be collected and recorded,

• specifying the type of comparisons that will be made, and

• developing some possible responses if performance is outside the range.

Even though the activities of monitoring a business may be identical among firms, the uniqueness of each business compels the owners to devise a monitoring and control procedure to fit the needs of their farm. For example, the factors that one farm owner monitors may not be the same factors that a neighbor tracks. Likewise, the range of acceptable performance will vary among businesses. The key to successfully controlling a business is the owners' ability to identify and monitor factors appropriate for their farm.

Identifying the Factors to Monitor

A basic rule is to monitor those aspects of the business that are most critical in fulfilling the owners' long term goals. Examples of important factors for farm businesses include production practices (input, output, and timing), financial management, and marketing strategies. The constraints and risks identified in the previous step will probably top the owners' list of factors to monitor because they can have the greatest impact on the farm's bottom line (profit, cash flow, and goals).

Boehlje and Eidman** suggest that farmers should (1) identify the important stages of each enterprise, and (2) list the key inputs and outputs of each stage. For example, in preparing the enterprise budgets (step 5 or 6), the owners specified the types and quantities of inputs they anticipate using and the outputs they will be producing. During this step, owners may want to review those budgets to identify which factors, if they vary from the projections, would have the most substantial impact on the long-term progress of the business. Is it the price of fuel, germination rate, cost of repairs, or other factors that are most important and that need to be monitored?

Often, farm managers indicate that timely completion of tasks is an important consideration for a successful business. This would suggest that the monitoring process should specify a timeline for completing critical tasks.

Every farm manager should identify the factors that are most important in reaching their long-term goals. It might be level of production, price of commodities, cost of inputs, rate of interest on loans, or amount spent on family living. Other operators may find that their tillage practices, the amount of feed used, or the calving rate have the greatest impact on their farm's bottom line. Other examples of factors to monitor could include rate of gain, level of weed infestation, number of hours it takes to complete a task, conception rate, disease control, the financing of major purchases, or marketing strategies.

In selecting which factors to monitor, the owners will want to guard against too many or few factors. There is no reason to monitor something that has no significant impact on whether the business reaches its goals. On the other hand, inadequate monitoring may result in potential problems being overlooked.

Specifying a Range of Satisfactory Performance

A performance standard or benchmark is an objective or intermediate goal that, when fulfilled, assures the business is on track to fulfill the owners' long-term goals. These benchmarks serve as criteria against which current performance can be compared to determine whether changes are needed. Properly prepared benchmarks also should offer a challenge, as well as a focal point for the resources and efforts of the farm business.

Rather than specifying one value as a benchmark, Boehlje and Eidman recommend specifying a range of satisfactory performance. By specifying a range, the owners are indicating the extent to which variation can be tolerated. For example, would a 10% increase in the price of fuel warrant a change in how the fields are tilled; or what is the minimum germination rate that can be tolerated?

The measure of satisfactory performance will vary among farms; the owners select the measures that are appropriate for their operation. They can rely on their own experiences ( historical performance based on their written records and memory) as an indicator of a standard. Alternatively, they owners can rely on published statistics ( peer performance ), but often these are averages for farms under a variety of circumstances. These measures may not be relevant for any specific farm. The standard also could reflect the owners' expectations for their farm; these are especially necessary if the farm is departing from past practices or trends. The enterprises budgets and pro forma financial statements prepared in earlier steps (e.g., steps 5, 6, or 7) reflect many of the owner's expectations and should be reviewed as part of this step.

Using a standard that reflects historical performance allows the owners to assess the long-term trends of the business. A standard that is based on performance of peer businesses reveal whether the farm's performance is comparable to that of similar farms. In the case of below-average performance, they owners may learn from the other farmers how they could improve their business.

A standard that reflects expected performance reveals where the owners believe their business needs to be in order to reach long-term goals. The expectations also could reveal what the owners believe is the farm's potential. If expectations are not being met, the owners may inquiry why it is falling short and what can be done about it. Again, a standard based on expectations should reflect the projections prepared in earlier steps.

Who Should Monitor?

Establishing a monitoring system is of no value unless it is implemented. Monitoring is a task that needs to be done (the same as operating equipment or caring for livestock); and like any other task, if it needs to be accomplished, it should to be assigned to someone.

Each farm operation may have a different approach to assigning responsibility for monitoring performance. In some businesses, one person may be given the entire task (an overseer). In other businesses, the primarily laborer may be responsible for monitoring performance (the tractor driver is expected to monitor how well the field work is being done). In yet other farms, all workers may share the responsibility by monitoring the tasks of others. This approach may offer an advantage by involving several individuals who may have ideas for improving the operation. But again, the owners need to make this decision.

If the task of monitoring is assigned to someone other than the individuals who developed the monitoring process, these individuals will need to have the process explained to them. In some cases, documenting the planned monitoring process will help with the explanation, as well as serve as a guide if the manager is not available when a question arises.

When Should Monitoring Occur?

An effective monitoring system provides information to the decision makers in a timely manner. To be timely, the information needs to be available when it can still be used. Rather than waiting until the end of the year when it will likely be too late to make many changes for this year, a better approach is to monitor performance when changes are still possible; when the decision makers can still make a difference.

The specific time for measuring/observing performance needs to reflect the task being monitored. Boehlje and Eidman suggest that farmers specify the time when each input or output is to be monitored.

Example : monitor the cost of planting the crop as the inputs are being purchased and review total planting costs as soon as planting is completed.

Tracking market prices and considering market alternatives throughout the year is another example of when to monitor. By tracking this information, a farmer is prepared to take advantage of opportunities as they arise.

How is Performance Measured (what will be the measuring device)?

The procedure for measuring performance of the business can vary; it could be subjective such as generally looking the field, or it could be objective, wherein quantities are counted, measured, or weighed. For example, if the depth of cultivation is critical to the task, will the operator be expected to observe from the tractor, or will someone use a ruler to measure the implement's performance.

For each factor that will be monitored, a sensor or detector should be identified. This might involve measuring the amount of milk produced, weighing the livestock, or measuring the amount of fuel used. The sensor or measuring devise will have to reflect the specific task being monitored. Some recent developments in computer technology are offering farmers opportunities to monitor their operations at unprecedented levels of precision.

Maintaining a Record of Observed Performance

The control system can include a system for maintaining a record of current performance. Other steps discuss the need for the business owners to know their "recipe" for producing their commodities and to understand the relationship between the type and quantity of inputs and the resulting output. Keeping track of inputs and outputs as part of the monitoring process also may serve as a means of collecting the detailed information necessary to analyze the business' enterprises.

Modern technology (especially the computer and electronic communications) is offering lower-cost methods to collect and use data than what was available even a few years ago. As suggested in a preceding step, even with the lower cost, the data collected should only be the information that will be used in the future. If there is no future use for the data, there is little or no reason to gather it. Again, understanding the types of information needed to make future decisions (such as production and financial information) is necessary to properly record current performance.

A properly designed management information systems (MIS) will help monitor the implementation of the farm business plan. The MIS that the owners will use depends on their needs, interests, skills, and availability of information. Clearly, farm recordkeeping systems increasingly need to track financial transactions, as well as production practices and results.

Making Comparisons

The next activity is to compare the observed performance to the standards (range of satisfactory performance). Often the comparison may be quantitative.

Example : immediately after planting is completed, update the records to determine whether planting costs align with expectations; or counting the number of plants and weeds in an area within the field.

In other situations, the comparison may be more subjective.

As part of making the comparisons, the decision makers may also want to review how and why performance differs from expectations.

Example . Why are the planting costs different than expected? What costs were greater than expected and which were lower than expected? Why were the costs higher or lower (e.g., used different quantity of input than expected or market price of input was different than expected)? What can be done about the higher-than-expected costs? What opportunities are available because of the lower-than-expected costs?

Responses

Often, whatever is causing performance to be outside the expected range will influence the response of the decision maker; and therefore, developing a detailed response ahead of time may not be worthwhile (since the owners do not know for certain what may occur in the future). However, some contingency planning is possible and recommended (as addressed in the preceding step). Having alternatives identified will speed the process of responding to a problem or an opportunity.

There are primarily two types of response: concurrent and feedback. A concurrent response focuses on immediately resolving a problem, such as, a farmer taking steps to alter the outcome of the current production cycle/season. Applying additional herbicide to the growing crop because the weed infestation is unsatisfactory is an example of a concurrent response. Another example is applying additional fertilizer mid-season after having an opportunity to observe the stand and available moisture. A third example would be to delay an equipment purchase (and rely on rented equipment or a custom operator instead) when financial records reveal that there is inadequate cash to complete the planned purchase at this time.

Feedback response focuses on improvements in the future and involves using information about the current production process as a basis for modifications during the next production cycle. For example, recognizing that the weed infestation is unsatisfactory, the farmer decides to plant a crop in that field next year which is compatible with the herbicide needed to control the weed. Other examples of feedback responses are vaccinating livestock to prevent diseases, or teat-dipping dairy cows after milking.

Feedback response often takes the form of "well, next time let's do ________, rather than how we did it this year." But these ideas are effective only if they are recalled and implemented. Writing those ideas down so they can be reviewed next year may be an important part of effectively implementing a feedback response.

Planning a response is not limited to only those situations where performance is unsatisfactory. Being prepared to take advantage of an unexpected opportunity also is part of monitoring the business -- are the owners ready to market if the price suddenly rises; do the owners know their costs and breakeven price; are they ready to initiate a new enterprise. Monitoring the business is a way of preparing to respond to opportunities.

Likewise, even if the performance of the farm is satisfactory, the owners may want to ask whether the business be operated more efficiently in the future. The appendix to step 6 suggests analytical procedures for determining whether an alternative would increase the firm's profit.

Review and Revise the Monitoring Process

Like the entire business, the monitoring process will need to be revised over time. Changes in the farm business or new information may require modifications in how performance is measured and adjustments are implemented.

Posing several questions may help determine whether the current monitoring system is adequate.

• Were problems addressed on time? If no, the monitoring system may not be provide timely or accurate information about performance, or responses were not adequately prepared ahead of time.
• Were there any surprises at the end of the year when the financial statements are prepared, such as production costs being different than what the owners thought was occurring? If yes, the monitoring system may need to be revised.
• Are the benchmarks/standards still reasonable?

The controls needed for the farm business can be identified ahead of time, but as the plan is being implemented, the owners may find that additional variables need to be monitored.

Worksheet

The attached worksheet suggests a method to help develop a plan to monitor the business' performance. The first area is for planning; that is,

• identifying the factors to monitor,
• indicating the range of satisfactory performance,
• recording who, when, and how performance will be monitored, and
• specifying what actions may be taken if performance is unsatisfactory.

The second area can be used during the production cycle. It offers space to

• record observed performance,

• indicate the decision maker's reaction as to whether performance is satisfactory,
• record the decision maker's thoughts as to why performance differs from expectations,
• describe what response was taken, and
• note the results of having taken the response.

With this information, the business owners should be better prepared to plan the operation of the farm for the next production cycle.

Conclusion

This step involves preparing to monitor the implementation of the short-term functional plans and the long-term business plan. Based on performance, the owners may want to revise the long term plan (next step), change implementation of the functional plan (as described in this step), or revise the functional plan (as addressed in step 5, step 6 and step 7).

Long-term success is accomplished through a series of short-term successes. To assure that the business is on-track, current activities need to be monitored. A process of monitoring and controlling a business involves specifying

• the factors to be monitored,
• the desired level of performance,
• who will monitor performance,
• when will performance be monitored,
• a process for recording observations,
• how performance will be measured and compared to expectations, and the responses to the comparisons.

* Prepared by David M. Saxowsky, Dr. Cole R. Gustafson, Dr. Laurence M. Crane, and Joe C. Samson, agricultural economists, Department of Agricultural Economics, North Dakota State University. August 1995.

Last Updated May 30, 2007

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

E-Mail:sswandal@ndsuext.nodak.edu
Published by Agricusiness and Applied Economics
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