<?cplVersion 6.5.2.005?<?PearsonxmlValidateVersion 9.3.59?<chapter id="ch24" prefix="CHAPTER" label="24"<inst>Online Chapter 1</inst>
<title id="ch24.title">Making Effective Management Decisions</title>
<section id="ch24fm" role="fm"<title id="ch24fm.title"/<objectiveset id="ch24os01"<title id="ch24os01.title">Learning Objectives</title>
<objective id="ch24os01ob01"<itemizedlist mark="bull" spacing="normal"<listitem<para<inst> </inst>Explain the profit formula</para</listitem>
<listitem<para<inst></inst>Discuss the role of management in the livestock industry</para</listitem>
<listitem<para<inst></inst>Discuss the human resource in the livestock industry</para</listitem>
<listitem<para<inst></inst>Define management systems and explain the importance of the concept</para</listitem</itemizedlist</objective</objectiveset</section>
<section id="ch24bm" role="bm"<title id="ch24bm.title"/<para>Effective management of livestock operations implies that available resources are used to maximize net profit while the same resources are conserved or improved. Available resources include fixed resources (land, labor, capital, and management) and renewable biological resources (animals and plants). Effective management requires a manager who knows how to make timely decisions based on a careful assessment of management alternatives. Modern technology is providing useful tools to make more rapid and accurate management decisions.</para>
<para>Previous chapters have shown how biological principles determine the efficiency of animal production. However, it is important to identify other resources that, when combined with the efficiency of animal production, determine the profitability of an operation.</para<section id="ch24lev1sec01">
<title id="ch24lev1sec01.title">Managing for Lower Costs and Higher Returns<inst</inst</title>
<para>Most livestock producers manage their operations with plans to make a profit. Simply stated, the <keyterm id="ch24term01" role="strong" preference="0">profitability formula</keyterm> is:
</para>
<para>The formula can be expanded to make management decisions more focused:</para>
$$$<informalequation<mediaobject float="0"<textobject role="displayequation"</textobject</mediaobject</informalequation>
<para<emphasis>Note:</emphasis> Costs include feed, labor, veterinary, repairs, fuel, interest, and other costs.</para>
<para>Obviously, profit occurs when output value exceeds input costs, and loss occurs when input costs exceed output value. Management decisions should focus on an optimum combination of output value and input costs to maximize profits while maintaining or improving resources.</para>
<para>The primary components of a long-term profitability formula include the following:</para>
<itemizedlist mark="none" spacing="normal"<listitem<para<keyterm id="ch24term02" role="strong" preference="0"<emphasis>Costs</emphasis</keyterm>—the primary production costs associated with livestock and poultry enterprises are feed, labor, and interest. However, many other costs, such as veterinary expense, fuel bills, and costs of repairs, should be carefully monitored.</para</listitem>
<listitem<para<keyterm id="ch24term03" role="strong" preference="0"<emphasis>Production (output)</emphasis</keyterm>—output is usually measured in pounds and/or numbers sold. The outputs for the various species are shown in the enterprise budgets of the feeding and management chapters.</para</listitem>
<listitem<para<keyterm id="ch24term04" role="strong" preference="0"<emphasis>Price</emphasis</keyterm>—the amount received per pound, per head, or per dozen (for eggs). Price is influenced primarily by supply and demand.</para</listitem>
<listitem<para<keyterm id="ch24term05" role="strong" preference="0"<emphasis>Maintaining or improving the resources</emphasis</keyterm>—includes water, habitat, and land with the forage and crops produced from it. Maximizing short-term profits can easily deplete the land resource by overgrazing, erosion, and the like.</para</listitem</itemizedlist>
<para>Each component of the profitability formula should initially be evaluated in terms of how it affects output value.</para>
<para>Price has a tremendous effect on output value, though individual producers have little influence over price. Producers accept the price the market offers at the time they sell their products (output). Therefore, the primary management focus for most livestock and poultry producers is reducing costs while increasing production and maintaining or improving resources.</para>
<para>The enterprise budget analyses in the species management contain the component parts of input costs. Managers can analyze these costs and make management decisions to reduce them. Throughout all of the chapters in the book, the biological principles affecting production are identified. Producers apply these principles in making cost-effective increases in production.</para</section<section id="ch24lev1sec02">
<title id="ch24lev1sec02.title">The Manager<inst</inst</title>
<para>The manager is the individual responsible for planning and decision making. The management process in simple form is to plan, act, and evaluate. This process is described in more detail in <link linkend="fg24_00100" preference="1">Figure <xref linkend="fg24_00100" label="24.1"<inst>Online 1.1</inst</xref</link>.</para>
<para>It is imperative that livestock and poultry producers manage their operations as businesses. Current economic pressures associated with keen competition are forcing more producers to manage their operations this way.</para>
<para>The manager may be an owner-operator with minimum additional labor, or the leader of a more complex organizational structure involving several other individuals or businesses (<link linkend="fg24_00200" preference="1">Fig. <xref linkend="fg24_00200" label="24.2"<inst>Online 1.224.2</inst</xref</link>). An <keyterm id="ch24term06" role="strong" preference="0">effective manager</keyterm>, whether involved in a one-person operation or a complex organizational structure, needs to (1) be profit-oriented; (2) identify objectives of the business and establish both short-term and long-range goals to achieve those objectives; (3) keep abreast of the current knowledge related to the operation; (4) know how to use time effectively; (5) attend to the physical, emotional, and financial needs of those employed in the operation; (6) incorporate incentive programs to motivate employees to perform at their full capacity each day; (7) be honest in business dealings; (8) effectively communicate responsibilities to all employees and make employees feel they are part of the operation; (9) know what needs to be done and at what time; (10) be a self-starter; (11) set priorities and allocate resources accordingly; (12) remove or alleviate high risks; and (13) set a good example for others to follow.</para</section<section id="ch24lev1sec03">
<title id="ch24lev1sec03.title">Financial Management<inst</inst</title>
<para>Costs, returns, and profitability of a livestock operation can only be assessed critically with a meaningful set of records. <link linkend="ch24table01" preference="1">Table <xref linkend="ch24table01" label="24.1"<inst>Online124.1</inst</xref</link> identifies the financial records needed by most livestock and poultry operations. Each record is described and its purpose is given. Many producers keep only sufficient records to satisfy the IRS (<link linkend="fg24_00300" preference="1"Fig.<xref linkend="fg24_00300" label="24.3"<inst24.3</inst</xref</link>). While this is important, additional records are necessary to make critical management decisions.</para>
<para>Profits can be determined by evaluating all cash costs of the operation, all inventory increases or decreases, and the value of opportunity costs. Opportunity costs represent the returns that would be forfeited if debt-free resources (such as owned land, livestock, and equipment) were used in their next best level of employment; for example, the value of pastureland if it were leased, returns if all capital represented by equipment and livestock were invested in a certificate of deposit (or similar investment), and returns if all family labor and management were utilized in other employment. By calculating this, a price can be established for living on a farm or ranch, and a goal can be established for increasing profits.</para>
<para>Credit and money management become crucial during periods of inflation, high interest rates, and relatively low livestock prices. Prudent use of credit can enable a livestock operation to grow more rapidly than it could through the use of reinvested earnings and savings, so long as borrowed funds return more over time than they cost. Thus, farmers and ranchers have to look to credit as a financial tool and learn to use it effectively.</para</section<section id="ch24lev1sec04">
<title id="ch24lev1sec04.title">Income Tax Considerations<inst</inst</title>
<para>Frequently, managers feel that they are ineffective if income taxes are overpaid. Paying little or no income tax should not be a major goal of the operation.</para>
<para>Well-managed livestock operations pay income taxes if maximizing profitability is a goal. Therefore, it is not poor management to pay income tax but to pay more than is owed.</para>
<para>Tax laws are complex and constantly changing. Most cattle producers should consult a qualified tax adviser for tax reporting and longer-term tax management.</para</section<section id="ch24lev1sec05">
<table id="ch24table01" label="24.1" float="1" frame="topbot" prefix="Table"<title<inst>TableOnline 124.1</inst</title<caption<para>Financial Records for Livestock and Poultry Operations</para</caption<tgroup cols="2" colsep="0" rowsep="0" align="left"<colspec colnum="1" colname="c1" align="left" colwidth="50"/<colspec colnum="2" colname="c2" align="left" colwidth="50"/>
<thead<row rowsep="1"<entry align="center" valign="bottom"<para>Financial Record</para</entry> / <entry align="center" valign="bottom"<para>Description and Purpose</para</entry</row</thead><tbody<row<entry valign="top"<para<keyterm id="ch24term07" role="strong" preference="0">Cash transactions</keyterm</para</entry> / <entry valign="top"<para>Recording of all cash receipts and expenditures is the simplest yet most time-consuming of all financial tasks. This provides most of the information needed for filing income tax returns and in making loan applications.</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term08" role="strong" preference="0">Balance sheet</keyterm</para</entry> / <entry valign="top"<para>Provides a financial picture of the operation at one point in time—usually on the lastday of the year. It reflects the net worth of the operation. Net worth = assets (what is owned) – liabilities (what is owed).</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term09" role="strong" preference="0">Income statement</keyterm</para</entry> / <entry valign="top"<para>A moving financial picture that describes most of the changes in net worth from one balance sheet to the next. Net income is calculated by subtracting the expenditures (cash, decrease in inventory, and depreciation) from income (cash receipts and increases in inventory).</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term10" role="strong" preference="0">Cash-flow statement</keyterm</para</entry> / <entry valign="top"<para>Shows cash generated and cash needed on a periodic basis (usually monthly) throughout the year. It assesses times when money must be borrowed and times when money is available for additional purchases or investment, or to retire existing debts. A cash-flow budget can be used to plan for the next calendar year. An active cash-flow statement tracks what is actually happening and evaluates the accuracy of the cash-flow budget.</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term11" role="strong" preference="0">Enterprise budget</keyterm</para</entry> / <entry valign="top"<para>Identifies costs and returns associated with a specific product or enterprise. It can aid in making financial decisions by identifying specific problem areas where management changes can be made. Enterprise budgets are also useful where operations include more than one enterprise or where additional enterprises are being considered. Components include production and marketing assumptions, operating receipts, direct costs, net receipts, and break-even analysis. Estimates of market weight and price can be used in assessing risk in production decisions.</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term12" role="strong" preference="0">Partial budget</keyterm</para</entry> / <entry valign="top"<para>Involves only those income and expense items that would change when implementing a proposed management decision.</para</entry</row>
<row<entry valign="top"<para<keyterm id="ch24term13" role="strong" preference="0">Income tax forms</keyterm</para</entry> / <entry valign="top"<para>Form 1040 Schedule F is the primary income tax form for sole proprietors and individual partners in a partnership. Producers who have completed Schedule F have basically completed an income statement. There are numerous other forms and 1040 schedules (e.g., Asset Sales, Asset Purchases, Self-Employment Tax, Farm Rental Income and Expenses, Tax Withholding, Depreciation) that are also completed, depending on individual operations and circumstances.</para</entry</row</tbody</tgroup</table>
<title id="ch24lev1sec05.title">Estate and Gift-Tax Planning<inst</inst</title>
<para>Many livestock operations have a large amount of debt-free capital invested in land, livestock, buildings, and equipment. Adequate knowledge and proper planning are necessary for farmers and ranchers to pass on viable economic units to their heirs.</para>
<para>In recent years, significant changes in estate-tax policy have benefited family operations. For example, under a 1997 law, the unified credit exemption was phased up to $1 million in the year 2006. Effective in 1998, family farms and ranches were able to take advantage of a family business exemption of an additional $300,000. Producers can also make $10,000 annual cash gifts to children and grandchildren without paying federal gift tax. It is recommended that the services of an attorney and a tax adviser be employed for tax and estate planning.</para>
<para>Livestock producers should review tax plans (estate, gift, and income) and consult with professionals who are knowledgeable about current tax laws.</para</section<section id="ch24lev1sec06">
<title id="ch24lev1sec06.title">People<inst</inst</title>
<para>Human resource management and leadership are the most frequently overlooked topics associated with livestock production. Livestock and poultry managers often work with a variety of people including family, employees, business partners, clients, suppliers, and the general public. Failure to adequately prepare to effectively lead and interact with other people can lead to dismal financial performance in an enterprise even if all other elements of the business are well managed.</para>
<para>Effective communication skills (listening, writing, and speaking) are critical to the ability of a manager to gain the best efforts of employees and associates. The need for effective communication in an enterprise cannot be overstated. Listening to understand employees and other people is an important skill that is often overlooked by managers but is well understood and practiced by leaders.</para>
<para>Successful managers know how to accomplish the following:</para>
<orderedlist numeration="arabic" inheritnum="ignore" continuation="restarts"<listitem<para<inst>1. </inst>Determine the optimum labor needs of an enterprise.</para</listitem>
<listitem<para<inst>2.</inst>Identify, hire, and retain effective employees.</para</listitem>
<listitem<para<inst>3.</inst>Motivate and reward employees with both financial and nonfinancial incentives.</para</listitem>
<listitem<para<inst>4.</inst>Keep staff and management focused on the mission and goals of the organization.</para</listitem>
<listitem<para<inst>5.</inst>Build and enhance effective teams and partnerships.</para</listitem</orderedlist>
<para>If the enterprise is family-owned or if family members are employed, the manager must also understand the following issues specific to the family business (<link linkend="fg24_00400" preference="1">Fig. <xref linkend="fg24_00400" label="24.4"<inst24. 4/inst</xref</link>).</para>
<orderedlist numeration="arabic" inheritnum="ignore" continuation="restarts"<listitem<para<inst>1. </inst>Apply sound business principles rather than assuming things will work out simply because people are within the family. Involve all family members in financial decisions.</para</listitem>
<listitem<para<inst>2.</inst>Evaluate other successful family operations. Determine why they are successful and how they resolve difficulties.</para</listitem>
<listitem<para<inst>3.</inst>Include all family members in the written plan of responsibilities (e.g., who will make the decisions; how each family member will be paid; how vacation and other time away from the operation will be handled).</para</listitem>
<listitem<para<inst>4.</inst>Hold weekly family councils for additional planning, evaluating, and problem solving. Create an environment that encourages open communication.</para</listitem>
<listitem<para<inst>5.</inst>Recognize that family relationships have a higher priority than programs and profitability but that all can be compatible.</para</listitem>
<listitem<para<inst>6.</inst>Have patience and tolerance with age differences in the family. Provide roles for family members and involve everyone (e.g., spouses, in-laws) in development of plans and goals.</para</listitem>
<listitem<para<inst>7.</inst>Recognize that management changes can occur too fast or too slowly in how they affect family relationships and profitability of the operation.</para</listitem</orderedlist</section<section id="ch24lev1sec07">
<title id="ch24lev1sec07.title">Management Systems<inst</inst</title>
<para<keyterm id="ch24term14" role="strong" preference="0">Management systems</keyterm> analysis provides a method of systematically organizing information needed to make valid management decisions. It permits variables to be more critically assessed and analyzed in terms of their contribution to the desired end point—usually net profit. Individuals who have been educated to think broadly in the framework of management systems can often make valid management decisions without the use of data-processing equipment. A pencil, a hand calculator, and a well-trained mind are the primary components required for making competent management decisions. Without question, however, the use of the computer in synthesizing voluminous amounts of information enhances the management system.</para>