Farm Business Planning Dr. Laurence M. Crane

Farm Business Planning

Dr. Laurence M. Crane

www.ag-risk.org

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Farm Business Planning

Business planning is a formalized thought process wherein farmers assess their current situation, specify their goals, identify and implement alternatives for reaching their goals, and monitor their progress.

The emphasis is on the long-term goals farmers and their

family set for themselves and their business.

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Farm Business Planning is…

A mechanism to adjust to changes while working towards defined goals.

Anticipates that the farm operation will be altered or modified as necessary to accomplish the farmers' goals.

A framework for organizing and directing shorter term planning efforts.

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Farm Business Planning is…

A process that is repeated at regular intervals or more often, if the need arises.

A process often involving considerable detail and data about the business and the industry.

A framework for organizing and directing shorter term planning efforts.

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Farm Business Planning is NOT…

A set of self-imposed instructions that cannot be altered in the future.

A replacement for other planning efforts, such as yearly production and marketing plans or capital budgeting to evaluate a specific investment decision.

An exercise to be completed once and then forgotten.

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Benefits of Farm Business Planning

Helps you to remain focused.

Helps you make better, more informed decisions.

Thoroughly understand the business so that, at any time, you can determine how a current decision will impact the long term progress of the business.

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Encourages you to carefully think about:– alternatives for the current farm business activities, – risks inherent in available opportunities, and,

– contingency plans to follow if an obstacle or opportunity

arises while implementing the selected alternatives.

Sets specific standards of performance so you can, in a timely manner, change when the business is no longer on the expected or desired path.

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Helps you understand the relationship between the farm and the family who depends on income from the operation to meet all or part of its living expenses.

Facilitates discussions among yourselves, your families, and others (lenders, landlords, business associates, etc.).

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Farm Business Planning Process

Developing a farm business plan is a multi-step process to answer several key questions.

The process can be summarized as follows:– Assess the Current Situation– Determine Where You Want to Be– Identify, Select, and Test Alternatives– Monitor Implementation

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Assess the Current Situation

1. What is the current status of my farm business?

2. What are my interests and skills?

3. What are my expectations about the future?

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Determine Where You Want to Be

4. What do I want to accomplish?

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Identify, Select, and Test Alternatives

5. Will the current farm be feasible in the future?

6. What alternatives are feasible for the future?

7. What steps are needed to implement the feasible alternative?

8. What might prevent me from implementing the plan?

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Monitor Implementation

9. How do I monitor progress over time?

10.How should I prepare to document, share, and revise my plan?

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3. Projected Operating

Environment

6. Alternatives8. Constraints

1. Business Inventory

2. Self-Assessmentof Skills and Interests

4. Personal & Business

Goals

5. CurrentFarm

Projections

9. Monitoring & Control

10. Documenting,Sharing, Revising

7. Transition Plans

Decision Criteria:• Profitability• Cash Flow/ Feasibility

• Goal Fulfillment• Equity Growth

• Interests and Skills

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Inventory of assets Productive capacity of assets Resource shortages and surpluses Enterprise analysis Ownership and compensation issues Benchmark analysis Risk bearing capacity and risk profile Complete and current financial statements

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Inventory the human resources of the farm– What am I currently doing?– What do I want to do?– What am I qualified to do?– What skills should I Improve?– Opportunity cost of my labor– Willingness to assume risk– The ideal job description

Appraisal of health and reliability of HR assets

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General economic conditions Market forces impacting farm businesses Local economic conditions Consumer preferences and trends Governmental policies and regulations Challenges and opportunities Information—credible sources and synthesis

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Determine Where You Want to Be


Characteristics of meaningful goals: – specific – measurable – challenging (but realistic) – time specific – addresses key result areas– written

Business and personal goals Reconciling and revising goals

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5. Will the current farm be feasible in the future?

Enterprise analysis Time frame and planning horizon Whole farm analysis—look at each function

(production, marketing, financial, capital budgeting, labor, risk, estate transfer, tax, etc.)

Resource supply and demand Financial feasibility and pro forma budgets Decision criteria and benchmarks

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6. What alternatives are feasible for the future?

What is the problem that needs to be resolved by the alternative

– which goal is not being met—what is the short-fall

Modifying existing vs introducing new enterprise Criteria for making decision Reliability of data Risk evaluation and protection Impact on other activities (whole farm impact)

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Identify, Select, and Test Alternatives7. What steps are needed to implement the feasible

alternative?

Prepare a transitional plan specifying:– what, why, and when needs to be changed– resources needed to accomplish the change– risks associated with making the change– test the feasibility of proposed change and its timing– profit, cash flow, resource availability and needs, etc.– prepare the 16 financial measures

Will the changes accomplish what we intended?

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Identify, Select, and Test Alternatives8. What might prevent me from implementing the

plan?

Use contingency plans to manage constraints What are the likely constraints? What is the probability that the constraint will

occur? How would the most probable constraints

impact the business? What courses of action are available and

prudent?

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Monitor Implementation

9. How do I monitor progress over time?

Identify important stages of each enterprise to monitor List key inputs & outputs of each stage to be monitored Specify the time when each input or output is to be

monitored Identify a sensor for each item, Specify a range in which the performance is satisfactory Devise a plan or corrective action Revise the system as needed

Boehlje and Eidman (1984)

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Monitor Implementation 10. How should I prepare to document, share,

and revise my plan?

Document in detail all aspects of your farm business (create an “owner’s manual”)

Document in a form and fashion that is easy for you to access, understand, and revise

Selectively share summary information from your plan on an as-needed basis

Keep your documentation as current as feasible and update regularly

Review your plan annually at a minimum

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HomeworkAssess the Current Situation


List all physical assets of the farm business– Accounting (book) value– Economic (market) value– Determine productive capacity– Describe unique characteristics

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List the skills of all farm participants List the interests of all farm participants What are the opportunity costs of being a

participant in the farm business

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General economic conditions (current & future) Market and price outlook

– Output– Input

Local economic conditions Identify credible information sources Identify what you need to know (but don’t know)

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HomeworkDetermine Where You Want to Be


Determine and write your goals– Business goals– Personal goals

For all involved in the business Reconcile the differences

Documents

Farm Business Planning Dr. Laurence M. Crane