How Do I Stay on Track?

Monitoring and Control Requires: Identifying factors critical to success Measuring performance Defining standards of expected performance Comparing actual and expected performance Assessing need for and type of adjustment

Monitoring and Control Process Does Performance Match Standards? Determine What to Measure Establish Standards Measure Performance Continue Monitoring Yes Devise Strategy Determine Critical Success Factors No Operations Problem? Take Corrective Action Yes Internal? Financial? Customers? Innovation and Learning? No

Identifying Critical Success Factors The few key areas or activities where things must go well if vision is to be achieved Should focus on answering: – How do owners see us? (Financial perspective) – How do customers see us? (Customer perspective) – What must we excel at?(Internal perspective) – Can we continue to improve and create value? (Innovation and learning perspective)

Determining What to Measure What information is needed to determine how stakeholders see us? If the information is gathered, how will it affect the decision-making process? – Preliminary controls – Concurrent controls – Feedback controls When should the measures be taken to be useful?

Controls Should... Involve only the minimum amount of information needed to give a reliable picture of events. Monitor only meaningful activities and results, regardless of measurement difficulty. Be timely. Be long-term and short-term. Pinpoint exceptions (trigger action). Be used to reward rather than punish.

Example Measures Financial – Operating Profit Margin, Asset Turnover Ratio, Return on Equity, Return on Assets, etc. Customer – Quality, delivery, # of complaints, etc. Internal – Planting and harvesting timing, weed control, employee satisfaction, etc. Innovation and Learning – # of seminars attended, R&D investment (evaluation of new products, processes, etc.), etc.

Defining Standards of Performance Benchmarking – Looking for those businesses that are the best at doing something and learning how they do it so that we might emulate their methods

Benchmarking: How? Identify the area or process to be examined. – Should be an activity that has potential for competitive advantage Find behavioral and/or output measures of the are or process to obtain measurements. Select an accessible set of competitors and best-in-class companies to benchmark. – Performing similar activities – Not necessarily in agriculture

Benchmarking Principles Be sure to understand and appreciate the differences between business environment and cultures. Understand how the aspect that is being studied fits with the other elements of the firm.

Monitoring and Taking Action Are we meeting the standard? – If yes, continue to monitor or move to next level. – If no, is the performance gap due to extenuating circumstances? Wait and measure again, but be careful! – If no, is the performance gap due to operational breakdowns? Take corrective measures to fix the problem. – If no, is the performance gap due to changes in the firm’s external or internal environment? Assess strategic position and prepare new strategy

Using Dupont Analysis in Monitoring and Control

Operating Performance Gross Revenue Fixed Costs Variable Costs Net Income -- = Total Assets Gross Revenue Turnover Ratio = ÷ ROA x Interest Expense Net Income Gross Revenue Operating Profit Margin +÷= Total AssetsEquity Financial Structure = Financial Structure ÷ ROE Interest Assets - x DuPont Analysis

Worksheet 4: MBC Farms Financial Data 1. Gross Revenue $1,796, Fixed Costs 385, Variable Costs 1,280, Net Income 130, Total Farm Assets 4,655, Owner's Equity 3,534, Interest Expense 98,716

Worksheet 4: MBC Farms MBC Farms Benchm ark Operating Profit Margin 12.8%13.5% Asset Turnover Ratio 38.6%43.0% Return on Assets 4.9%5.8% Interest Cost of Assets Financial Structure 1.32 Return on Equity 3.7%5.7%

Decisions and Rates of Return Asset Turnover Needs Improvement Look for ways to increase the revenues from existing assets. Re-evaluate:  Thruput  Crop Mix/Product Mix  Marketing Program  Yields  Resource Use  Custom Work Enterprise Look for non-performing assets to cull. Reevaluate: Leasing vs Owning Custom vs. Owning Sharing Assets Acceptable Operating Profit Margin Acceptable Needs Improvement Look at Cost Controls. Look for ways to decrease expenses without reducing revenues. Reevaluate: Production costs Rents Capital Spending Plans Purchasing Practices Family Needs Business Organization Financing Costs Employment Inventory Management Outsourcing Records Control Procedures Management Priorities If both asset Turnover and Operating margin are acceptable, Increase size

Linking Ideas & Actions Action Steps – Behavior Controls Policies, rules, and SOP’s to get an idea implemented – Output Controls Using objectives and performance targets to achieve an idea Resources – People – Financial – Equipment – Information

Linking Ideas & Actions Responsible Individual Performance Monitor Time Table Corrective Adjustments

Exercise Work on the action plan table. Try to identify critical actions/controls. – Include both behavioral and output actions. – Make sure to identify the resources need to accomplish the action. – Make someone be responsible for the action. – Determine how you will measure achievement. – Think of the responsible person’s authority to take corrective action.

Strategic Business Planning for Commercial Producers