Farm Business Planning

1
Farm Business Planning
Dr. Laurence M. Crane www.ag-risk.org
2
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.

3
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.

4
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.

5
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.

6
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.

7
Benefits of Farm Business Planning

• 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.

8
Benefits of Farm Business Planning

• 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.).

9
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

10
(No Transcript)
11
(No Transcript)
12
Farm Business Planning Process

• 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?

13
Farm Business Planning Process

• Determine Where You Want to Be
• 4. What do I want to accomplish?

14
(No Transcript)
15
Farm Business Planning Process

• 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?

16
Farm Business Planning Process

• Monitor Implementation
• 9. How do I monitor progress over time?
• 10. How should I prepare to document, share, and
  revise my plan?

17
3. Projected Operating Environment
1. Business Inventory
2. Self-Assessment of Skills and Interests
10. Documenting,Sharing, Revising
4. Personal Business Goals
Decision Criteria Profitability Cash Flow/
Feasibility Goal Fulfillment Equity Growth
Interests and Skills
9. Monitoring Control
5. Current Farm Projections
8. Constraints
7. Transition Plans
6. Alternatives
18
(No Transcript)
19
Assess the Current Situation1. What is the
current status of my farm business?

• 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

20
Assess the Current Situation2. What are my
interests and skills?

• 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

21
Assess the Current Situation3. What are my
expectations about the future?

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

22
Determine Where You Want to Be4. What do I want
to accomplish?

• Characteristics of meaningful goals
• specific
• measurable
• challenging (but realistic)
• time specific
• addresses key result areas
• written
• Business and personal goals
• Reconciling and revising goals

23
Identify, Select, and Test Alternatives5. Will
the current farm be feasible in the future?

• Enterprise analysis
• Time frame and planning horizon
• Whole farm analysislook 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

24
Identify, Select, and Test Alternatives6. What
alternatives are feasible for the future?

• What is the problem that needs to be resolved by
  the alternative
• which goal is not being metwhat 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)

25
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?

26
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?

27
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)

28
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 owners 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

29
HomeworkAssess the Current Situation1. What is
the current status of my farm business?

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

30
HomeworkAssess the Current Situation2. What are
my interests and skills?

• 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

31
HomeworkAssess the Current Situation3. What are
my expectations about the future?

• 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 dont know)

32
HomeworkDetermine Where You Want to Be4. What
do I want to accomplish?

• Determine and write your goals
• Business goals
• Personal goals
• For all involved in the business
• Reconcile the differences