The Farm Business Plan

Vern Pierce and Joe Parcell

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The Farm Business Plan is a written document that directs business decision making and is based on pre-established goals for that business.

Who Should Develop the Farm Plan?

The operator/manager of the agricultural business should lead the initial planning. In some cases, this process could involve a hired manager, but for most farms, the operator/manager and other family members should be involved in the planning. In farm planning, the process is as important as the final product. Getting the whole management team involved is critical. Farm planning with typically close-knit farm families cannot be done in isolation from other family members, particularly when goals are set for the business the profit from which affects their lifestyle. In such operations, business and family considerations are often so interwoven that it becomes impossible to try to separate the two.

Goal Directed Management

A written goal states in clearly understandable language what an individual or family wants to achieve. Through goals, each person, family or business unit sets its direction for the future. You are more likely to achieve things you want if you identify what you are trying to accomplish, specify how you're going to accomplish it and set a target date to complete it. Goals are not final and unchanging. Goals change with circumstances. Over time, they may need to be reevaluated and updated. Setting goals provides focus and direction for management; attaining high-priority goals takes precedence in management decisions. Goals also serve as a reference point so that you can monitor how well you are doing. Goals can help motivate. They can also help you make a decision in the face of uncertainty because you can weigh alternatives in a decision as to how each helps you move toward your goals. Finally, goals can serve as a rallying point for the family or farm management team.

The goal-directed manager recognizes that each person on a farm or ranch has a set of goals. He or she also recognizes that although some goals may be widely shared, person-to-person differences are likely. Family members are generally more willing to support and work on achieving goals if they are involved in identifying and setting them.

How do farmers go about determining what crops to grow or animals to raise on their farms? The best way to make those decisions is to analyze the alternatives systematically. This is one of the first steps in the procedure called farm planning. The planning checklist that follows will provide you with the steps to follow and questions to answer in developing your written farm plan.

Farm Planning Checklist

Step 1. Define the farm's mission.
The mission statement defines the purposes of the farm and gives a detailed answer to the question, "What business or businesses are we in?" Defining the farm's mission forces you to carefully identify the products, enterprises and/or services the farm provides. It is the foundation used to establish the activities of the farm. The mission statement answers these questions:

Step 2. Establish objectives/goals.
Those should translate the mission into concrete terms. They should be quantifiable and straightforward statements such as the following: "Increase sales by 100 percent over the next five years", "Reduce labor costs by 25 percent in the next three years", "Increase production per acre by 30 percent in the next five years", "Provide health insurance coverage and Social Security coverage for two family employees next year".

Goals should be chosen in such a way that they contribute to attainment of the mission identified in Step 1. Each goal has several characteristics: It should be SMART (Specific, Measurable, Attainable, Realistic, and Timed). This allows you to check progress toward your goals and make decisions that complement the mission. After you draft your goals see if they meet these criteria.

Step 3. Assess the external environment.
Every agricultural firm faces uncertainties, threats and opportunities that are beyond its control. Market forces may cause prices to plunge, either in the long-run or short-run. Large crops, declining consumer demand, a strong dollar, high interest rates, changing government policies and regulation of labor and pesticides are external threats that can cut profits or make business more difficult. New market opportunities are created by demographic changes, changing consumer lifestyles, population growth in selected regions and technological breakthroughs. It is important in this step that the operator/manager understand the economic, social and technological forces that will affect the farm. With this information, you can form educated guesses about what will happen to product prices, interest rates, the rate of inflation, labor markets and input prices over the next three to five years. A good understanding of how your local government views farming is very useful.

Step 4. Assess the farm's strengths and weaknesses. The quality and quantity of resources within the control of the operator/manager is the first part of this assessment.

  • What are the abilities and limitations of the operator/manager?
  • What skills and abilities do the employees have?
  • How modern and efficient is the technology?
  • How large is the resource base?
  • What are the soils on the farm?
  • What is the cash position of the farm?

    It is important that these resources be compared against those of similar operations. Many farmers have an unrealistic view of their own resources and operation because they do not compare themselves to others in the same business. The process of providing candid answers to these questions forces the operator/manager to recognize that every firm is constrained in some way internally by its physical resources as well as human skills and abilities. This is a good time to talk with your banker or local extension office.

    Step 5. Develop and evaluate alternative strategies.
    This is the point at which the farm manager develops the alternative plans that describe the methods for attaining goals. Evaluation of each strategy is made according to its ability to move toward the success of one or more goals.

    What types of strategies can operator/managers in price-taking firms use to get a profit advantage if certain resources are fixed or other constraints are present? Here are some ideas:

  • Become more efficient. Increase profits by: reducing input use, holding product and price (quality) constant and/or using more, or higher quality, inputs, increasing revenue more than costs.

  • Seek out alternative enterprises.

  • Exploit quality differences. Obtain price premiums for quality that offset the extra costs to produce higher quality commodities. Evaluate value-added markets.

  • Integrate horizontally. Farm more units, or add enterprises, enlarge enterprises to gain more complete use of existing unused resources and/or acquire additional resources. Spread fixed costs over more units of output.

  • Integrate vertically. Obtain more profit by moving higher or lower into the marketing and distribution channels add storage or packing facilities, trucks to haul products to direct market; acquire resources to produce inputs that formerly were purchased.

  • Reduce risks through diversification, insurance, hedging or other methods.

    There is no single method for evaluating alternatives. Try some combination of the following:

    1. Budgeting each alternative (both profitability and cash flow) with enterprise budgets and whole farm budgets.

    2. Break-even analysis.

    3. Projections of income, cash flow and balance sheet statements.

    4. Computerized decision aids are often available from extension offices.

    Farm planning should not be viewed as a formidable task resulting in detailed day to day plans. It should be written, but a few pages will suffice. The process should include all the key players participating in the farm management discussion. It is essential that everyone involved in managing the farm understand where the farm is going, how it plans to get there, and what potential problems or opportunities might lie ahead.

    The Farm Business Plan and Its Supporting Data

    The financial aspects of the farm business plan must accommodate control of finances, satisfy legal and tax requirements and provide a basis for evaluating the farm's prospects, including management, budgeting and planning. To meet these needs, your accounting and record keeping system should be part of the farm plan and should include current and five year projections using:

    1. Balance Sheet: a physical listing of assets, with their valuation and liabilities against them. Asset value less liability provides the net worth. The balance sheet statement describes your financial condition at a point in time.

    2. An income and expense statement. This is sometimes called a profit and loss statement.

    3. A cash flow budget, which combines the receipts and operating expenses, interest and principal payments, new loans and cash payments. It indicates the net cash flow of the business exclusive of pay for your labor and management and the family's unpaid work. Lenders look quickly for the cash flow; it suggests whether or not the monthly payment(s) on the prospective loan can be made.

    4. Production and statistical records to show how the outputs (production) relate to the inputs (costs). They are the basis for future planning and budgeting.

    5. Enterprise accounts and records to show how individual enterprises contribute cash flow and profit to the business. A very close look at each enterprise can surprise you. If it surprises your banker, you're in trouble.

    6. Farm business analysis, This combines financial and production records to spotlight the potential high and low points of the business, and provide more data for planning.

    As part of the planning process, you may complete several sets of financial information and financial statements under various scenarios. The final plan will include the scenarios you believe will occur. Your business plan will be nearly complete when you have this information. If you are just starting out, historical sources, such as the performance of the farm under past management, will be important, along with your best researched estimates.

    The rest of the business plan is narrative, telling others (including yourself) about your business or business change ideas. Include just the facts, not a term paper:

  • Description of your farm business. type, location, product and timetable for implementation, mission, goals, etc.
  • Analysis of your market, with its potential, trends and pricing practice.
  • Description of your marketing strategy, if applicable. How you will sell, how you will service, market and at what cost.
  • Management plan, showing your history, the organizational chart and assigned duties of all farm workers, including family members.
  • All available tax information.
  • Evidence of risk analysis, showing that you have evaluated the potential for lower prices or higher input costs.

    If you can't succeed in your operation by consciously writing down your goals, then making decisions for your farm and family which measurably move toward accomplishing those goals, then there is no way to succeed.

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