Risk Assessed Business Planning for Small Poultry

Producers

Marion Simon, Ph. D.

Kentucky State University

College of Agriculture, Food Science and Sustainable Systems

Role of Business Planning

• Everyone should be involved with the planning!!!

• Business Planning is about:– Finding– Describing, and– Refining …

the farm’s competitive advantage

Involve All Family Members

• Each person’s likes & dislikes

• Each person’s time and effort to the farming operation

• Each person’s favorite enterprise or thing to do

• Each person’s risk tolerance

• All have a vote

Seven Parts to Business Planning

1. Identify the Goals (What to accomplish)

2. Inventory Resources

3. Assess the business and its environment

4. Analyze the business performance (past)

5. Decide on actions (What to do)

6. Implement strategies (How to do it)

7. Evaluate the plan (Is it working)

Goals should be SMART

• Specific – the goal has a specific thing to do that can be defined: In 2013 production year, start by producing and direct marketing 500 broilers

• Measurable – the goal can be measured and proven

• Attainable – the goal is realistic, the farm business can reach the goal: 2013: produce 500 broilers

• Rewarding and moves the farm towards where you want it to be

• Timely, there is a time limit to reach each goal

Create a Farm Resource Inventory

• To have a summary of the farm’s collateral for loans

• To identify problems with the condition of the farm’s assets

• To evaluate options for growth or change

• To identify under-utilized resources

• Compute depreciation• To determine the

health of the farm• Document the farm’s

resources in case of fire, theft, or storm damage

1. Physical and Natural Resources

• A map of the farm with pasture, barns, ponds,…

• Soil surveys, NRCS soil map, UK soil tests

• Wildlife – including dogs, coyotes

• Rainfall and weather• Fair Market value of

farm

2. Human/Personnel Resources

• Farmer, family, full or part-time employees, custom hire, friends

• Names, assigned duties, wages, emergency information, back-ups

• I-9 form, tax, SS, and insurance information

3. Equipment Resources

• Size, age, condition, model of equipment

• Owned, rented or borrowed

• Fair market value of each piece of equipment and its depreciated value

4. Animal and Forage Resources

• Inventory of livestock, guard animals, other animals

• Breeds, health records, growth records

• Number of acres, forage yield records

• Types of forages in each pasture

5. Financial Resources: Only the Farm’s accounts, if possible

• Cash, bank accounts, savings accounts, amount owed the farm…

• Debts: lender, amount owed, interest rate, time remaining

• Operating loans you expect to have every year

• Other credit: feed store tab

Section 3: S.W.O.T. Analysis

• Internal Strengths: What the farm does well

• Internal Weaknesses: What the farm does not do well

• External Opportunities: Potential favorable conditions for the farm operation

• External Threats: Potential unfavorable conditions for the farm operation

The S.W.O.T. Analysis

• Provides a complete summary of the farm• Immediately allows you to see where you

can take action to improve your weak areas, capitalize on your strengths and opportunities, and defend against threats

• Lets you ask questions and look for answers

• Lets you plan how to counter potential problems?

S.W.O.T. Analysis: Strengths

• What the Farm Does Well?

• What do others see as your strengths?

• What are major sources of the farm’s income? Vegetables, poultry (broilers)

• What is the major focus of the farm? Direct marketed products

• Why do your customers buy from your farm? They view my products as healthy

• What differentiates your farm? My website

• What is the farm’s greatest asset? forages

S.W.O.T. Analysis: Weaknesses

• What does the farm not do well? Keep good records

• What do others see as the farm’s weaknesses? Need better records, our birds were slow growing

• What resources does the farm need? Consistent water supply

• What should the farm avoid? Credit card debts

• What are the farm’s least profitable enterprises? Green beans

• Will the farm be able to withstand price decreases or cycles?

S.W.O.T. Analysis: Opportunities

• What technologies are available? Improved forages, fencing, mobile processing unit

• What market trends are observed? holidays

• Can you get a competitive edge over the farm’s competitors? Adding pastured poultry to add to my direct market line

• What government programs are available? NRCS, Phase 1 cost-share programs

• What markets are available? Farmers markets and roadside stands

• What social patterns or population profiles are changing? Customers are increasing to farmers markets

S.W.O.T. Analysis: Threats

• Has there been significant changes to the industry in which the farm operates?

• Have the margins been squeezed? Escalating feed and fuel prices

• What obstacles does the farm face? Lack of local rural water lines, rural roads, local creek annually floods, weather

• Do you anticipate new competitors locally, state, regionally, or internationally that can affect your business?

Use S.W.O.T. for Planning

• Examine the weaknesses, opportunities, and threats facing the operation

• Draw up plans to take advantage of the opportunities, counter the threats, and improve the weaknesses

• Pay close attention to the strengths that can help you achieve your plans

• Use the goals and objectives of your operation in choosing your strategies

Cash Flow Statements, By Enterprise and Total Farm

1.Details cash inflows coming into the farm (sales, custom work);

2.Details cash outflows going out of the farm (paid bills);

3.Notes months with cash surpluses or cash deficits; and

4.Reconciles the beginning cash balance with the ending cash balance.

Enterprise Budgets are Spending Guidelines

• Evaluate feasibility of a new enterprise

• Provide spending limit guidelines

• Identify areas for cutting costs

• Identify breakeven price for sales (poultry, vegetables)

• Indicate risk exposure

Enterprise Budget parts:

• Production/Sales Revenue: broilers• Variable costs/operating inputs:• Seed, fertilizer, chemical costs• Feed, supplies• Fixed Costs:• Machinery & Equipment – interest, taxes, insurance,

depreciation• Land – interest, taxes• Returns: To Operating Costs, To Total Costs

Income Statement

• Income Statement (Profit and Loss Statement) provides the farmer with a measure of net income or loss for a year.

• It tells how much money was earned and how much was spent to earn it.

The Balance Sheet

A balance sheet is a yearly snapshot that tells what is owned and owed.

1. It outlines the assets (what is owned).

2. It summarizes the liabilities (what is owed).

3. It establishes equity (what is owned free and clear once the debts are paid).

Balance Sheet: Assets

1. Current assets: can be turned into cash quickly: i.e., checking account, feed inventories

2. Non-current assets (intermediate and long term assets): those used for production and cannot be readily sold: i.e., machinery, buildings, real estate.

Balance Sheet: Liabilities

1. Current liabilities: debts that must be paid within twelve months: feed bill

2. Non-current liabilities are debts that do not come fully due within the next twelve months: land payments, mortgages

Once the total assets and liabilities have been detailed, the Farm’s net equity can be determined

Net equity (what you own) = total assets minus total liabilities

Financial Statements

• Financial analysis of an agricultural business must focus on both its present position (called financial position), the results of operations, and past financial decisions (called financial performance).

• Financial position refers to the total resources controlled by a business and the total claims against those resources at a single point in time.

• Financial performance refers to the results of the farm business’s production and financial decisions over one or more periods of time.

Financial Measures

The next step is to calculate financial measures & ratios.

1. Liquidity

2. Solvency

3. Profitability

4. Financial efficiency

5. Repayment capacity.

Liquidity: Current Ratio and Working Capital Ratio

Current Ratio=Total current assets ÷ Total current farm liabilities

• Can the farm cover its liabilities if sold?

Working capital measures the amount of funds and inventory items remaining after the sale of all current assets and the payment of all current liabilities

• Working Capital = Current farm assets – Current farm liabilities

Solvency Measures

Solvency is the farm business’s ability to repay all debts if all the assets were sold.

• Solvent: If the value of the total farm assets is more than the value of the total farm liabilities.

• Insolvent: If the sale of all the farm assets would not generate enough money to pay off all liabilities.

Solvency Ratios

• The equity-to-asset ratio– measures the proportion of total farm assets owned

or financed by the owner’s equity capital.

• The debt-to-asset ratio– measures the proportion of total farm assets owed to

creditors.

• The debt-to-equity ratio– measures the proportion of funds invested by the

creditors versus the farm owners.

Profitability Measures

Profitability: the financial performance of the operation (1 yr.) resulting from decisions made regarding the use of land, labor, capital and management

1. ROA: Rate of return on farm assets (income generated by assets)

2. ROE: Rate of return on farm equity

Farm Efficiency Measures

Operating expense ratio = how gross farm revenues are expended on farm operating inputs, excluding depreciation and interest

• Asset turnover ratio = how efficiently farm assets are being used to generate gross revenue

• Depreciation expense ratio = proportion of gross farm revenue that is represented by depreciation

• Interest expense ratio = the proportion of gross farm revenues needed to cover the interest

• Net farm income from operations ratio measures net farm income as a proportion of gross revenues