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Are you on track? Confirm your core business objectives and risk boundaries

  • 6.5 min read

Congratulations!

You have your strategic approach decided. Now comes the fun part - determining what needs to happen next (your objectives) and your relative risk level (tolerance and stress tests). Then, engage with your team on the order of operations to achieve your first, second and third goals and beyond. This is when to figure out what you need to learn, understand where there are information gaps and define what the key milestones are to help you realize if you’re on the right track.

Key concepts

Do not forget about your hierarchy of priorities, but let’s focus on additional tools to help you gain traction on your objectives. First, understanding your risk tolerance is vital to fully appreciate and respect your “safe zones” and how much risk you/your family/your business partners are willing to accept and are comfortable with.

As you now move directly into figuring out how you will achieve your goals, it’s important to be SMART about them.

SMART objectives are:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-Based

These five boundary lines help you at all stages of business from the immediate future (such as next week) to years in advance because the terminology used applies at every maturity stage of the business. By asking these five simple questions of a given objective, you can quickly discern how attainable it is.

SMART objectives and goals should continue to be reviewed as you see fit or if your short-, medium- or long-term outlook significantly changes.

Let’s suggest a financial neophyte wants to learn more about dollars and cents because they believe their farm is not as efficient as it could be. A short-term goal is to read a 16-page eBook they download from the internet. A medium-term goal is to apply the concepts to their own farming business. A long-term goal is changing their farm finances to be more efficient and cost-effective.

Consider this method or another one that makes the most sense for your farm business’ vision and mission, as it will help benefit not only yourself and those working with and for you to have clarity around objectives and goals.

Farm example: Jim and Suneeta are getting busy with hop production and have various goals to achieve. A short-term goal is to procure starter hops from an established farm. Next, their medium-term goal would be to produce between 100-110% of average yields for this specific variety. Those goals are followed by their long-term goal of producing enough hops annually that they do not have to continually source externally, saving costs.

Enterprise Risk Management

More than just financial risk, the concept of Enterprise Risk Management (ERM) is a plan-based business strategy that aims to identify, assess and prepare for any dangers, hazards and other potentials for disaster — both physical and figurative — that may interfere with an organization’s operations and objectives. It’s important to realize where and how you need to mitigate risk in your operation. You learned this in your SWOT, but ERM is another tool to augment deeper layers within your analysis, specifically the Weaknesses and Threats.

In agriculture and agri-food systems, ERM may become a critical tool since there are many risks beyond the average farm manager’s control, notably the markets and weather.

ERM differs from traditional risk management in that it has an enhanced focus on systems thinking where a manager considers how all parts of a decision of their company interrelate. While a traditional model may focus on more pessimistic circumstances, ERM prioritizes opportunities and positives. The ERM model is also predicated on a proactive and continuous model, far less fractured and reactive than traditional risk management.

Within ERM, there are three primary focuses: risk exposure, risk tolerance and risk mitigation practices.

Key practices

No matter what your goals may be, it is vital to stay focused. Whether your pursuits are short-, medium- or long-term in nature, utilizing the key concepts discussed above will be a big help in farm success and sustainability.

Focus is key with a successful operation, but that does not mean you cannot dream and have goals of a broader nature. As we learned in Integrate, Create, Prioritize, they may not materialize, but they do serve a purpose to help us continually think of ways to improve.

The ERM process, along with a Sensitivity Analysis (SA), helps frame exactly what can and cannot affect a given farm business. An SA is described as a “what if” simulation where financials are at the forefront of the conversation. In some ways, it’s no different than a mortgage stress test. Your farm business may be affected by one or more variables, which an SA can quickly log and display for you. At that point, you can determine what your proper response should be given the situation.

Farm example: We met our hop farmers Jim and Suneeta in Article 3. For them, the SA comes into play as they determine the viability and marketability of their hops. When the COVID-19 pandemic shuttered sit-down dining at restaurants and bars, less alcohol was being consumed through one primary avenue. Completing an SA helps them to determine the potential impact the shutdown could have on their business projections, especially if alcohol production overall is scaled back. While this is out of their control, it allows them to adjust their expectations and plan accordingly.

Farm example: Similarly, Li and Katie have the opportunity in front of them with the family farm transition and her two uncles. While the idea of buying out the uncles makes sense on paper, it is a delicate play. The two of them conduct an SA and realize that while opportunity abounds, rising interest rates or cash rents could quickly turn plans upside down. Other factors that must be considered would be competition from area farmers buying land and what that may do to their predicted economy of scale.

An additional key practice is that of a benchmarking index or indices. Part of your SWOT analysis may include you gaining clarity on where you are at right now (Article 6).

Unique farm enterprise considerations

In farming, different issues occur (BSE, trade issues, COVID-19) that are not planned or controllable; however, not everything should be viewed as a roadblock to success. In any situation, there are opportunities and well-managed farms with clear and well-informed strategic plans often capitalize.

It is both natural and expected that you might have to adjust your objectives within your initially established time frame. In certain cases, your time frame may be extended, and you may still achieve your objectives as planned.

Once goals are completed — whether on an initial or a revised timeline — you will be able to strategize again for plans and assess whether improved planning or a different strategic approach may have been of greater advantage to your business.

Above all, remember to stay committed to your long-term vision and mission principles, even in the face of adversity, unplanned setbacks or even emergencies. Changing one or more purposes due to a setback may become a problem that will come back to haunt you. Understand the issue at hand, revise your plan and work off the new trajectory to continue to best achieve the goals you worked so hard to set out for yourself and your farm business.