Advanced Business Planning

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Advanced Business Planning

• Jeffrey Hyde
• The Pennsylvania State University

Penn State is committed to affirmative action and
the diversity of its workforce
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Business Planning Skills Tools

• Information Gathering
• Record keeping
• Research
• Information Processing
• Enterprise cash flow budgets
• Financial statements and ratios

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Without Records
Planning Process
Take Action
Integrate Changes
???
Mission Situation Objectives Goals Strategies
Tactics
XXX
Explain Deviation
Get Results
XXX
XXX
Measure Record Results
Compare Actual vs. Plan
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Record Keeping

• Production records
• Production data
• Sales data (revenues)
• Cost data (expenses)

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Record Keeping

• Investment records
• Purchase and sale of long-lived assets
• Depreciation

• Records should include
• Purchase date price
• Annual depreciation
• Book market value
• Sale date price
• Gain or loss on sale

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Record Keeping

• Financing records
• Money borrowed (new investments, working capital,
  accounts payable)
• Interest paid
• Principal paid

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Necessary Research

• Industry analysis
• Market analysis
• Competitive analysis
• SWOT analysis

• Who are the industry players?
• Input suppliers
• Growers
• Processors
• Wholesalers
• Retailers
• What are the industry trends?

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Necessary Research

• Industry analysis
• Market analysis
• Competitive analysis
• SWOT analysis

Who and where are your customers? What do they
need? What is their purchasing behavior? How
can you reach them?
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Necessary Research

• Industry analysis
• Market analysis
• Competitive analysis
• SWOT analysis

Who are your competitors? What are they
like? What products do they have? How have they
grown?
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Necessary Research

• Industry analysis
• Market analysis
• Competitive analysis
• SWOT analysis

Strengths and Weaknesses are internal to the
business Opportunities and Threats are external
to the business SWOT should be easy after
performing the other analyses
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Research Methods

• Hire a consultant

1. Review your records and provide summary reports
2. Develop a market analysis
3. Develop a competitive analysis
4. Develop an industry analysis

Consultants are expensive, but may be worth it
especially if they know your industry
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Research Methods

• Find publicly available data

1. US Census
2. Consumption data
3. Websites (competitors, associations, suppliers,
   customers

Searching for specific data may become
frustrating, particularly if youre not an
Internet whiz. However, doing this once will
prepare you to easily update your plan over time.
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Research Methods

• Buy data and reports

There may be third parties who have collected
market or industry data. The data may be for
sale in raw form or as a report. These dont
tend to be available for small, specific
industries like local cheese-making.
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Research Methods

• Publications/Media

1. Television
2. Radio
3. Newspapers (Wall Street Journal)
4. Trade magazines
5. Extension publications and newsletters

These may help you learn about the economic
environment, your competitors, the industry, and
your markets.
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Research Methods

• Personal interaction

• Talk with friends, family, neighbors,
• Visit your competitors and buy stuff talk with
  owners
• Talk with customers
• Watch what people do or buy
• Talk with industry leaders
• Attend conferences and workshops

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Enterprise Budgets

• What is an enterprise?
• Also called a cost center or profit center,
  an enterprise is a user-defined production and
  sales unit.

• Enterprise Examples
• Cheese
• Cheddar cheese
• Sharp cheddar cheese
• Milk production
• Crops
• Hay
• Corn silage

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Enterprise Budgets

• Three major sections to the budget
• Revenues
• Variable expenses (aka direct expenses)
• Fixed expenses (aka indirect expenses, overhead)

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Cash Flow Budgets

• Budgets help you see if the enterprise is
  profitable
• You need to know when cash flows occur.
• For most ventures, youll have lots of cash out
  before you get any cash in.

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Cash Flow Budgets

• Develop a monthly cash flow budget similar in
  form to the enterprise budget
• For each month, indicate which categories have
  cash in or cash out.
• Where cash out exceeds cash in, must have a plan
  to manage shortfall.

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Income Statement Balance Sheet

• You will need three years of historical financial
  statements and three years of pro forma
  statements
• Work closely with an accountant to develop these.

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Financial Ratios

• Ratios are used to summarize your financial
  situation
• Lets look at three
• Return on assets
• Current ratio
• Debt-to-asset ratio

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Return on Assets

• Rate of return on the farms average total
  investment on assets
• An ROA of 5 means that every dollar invested in
  business assets generated a return of five cents.

ROA (net income interest expense value of
operator labor and management) / average total
farm assets

• Compare ROA to your profit goals.
• Compare to returns elsewhere (stock market, bank
  account)

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Current Ratio

• Measures ability to pay current debt with current
  assets - Liquidity
• A CR greater than one means the value of current
  assets is greater than the value of current debt
  -gt You are liquid

Current Ratio (value of current assets) /
(value of current liabilities)

• Current assets are those that can be converted to
  cash or used up within one year
• Current liabilities are payable within one year
• Shoot for a number significantly greater than one

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Debt-to-Asset Ratio

• Measures the percentage of total assets owned by
  creditors
• A DA ratio of 0.4 means that creditors own 40 of
  the assets of your business.

DA Ratio (value of total debt) / (value of
total assets)

• Many lenders like to see a strong equity
  commitment
• Shoot for DA lt 0.5

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Business Planning Skills Tools

• Information Gathering
• Record keeping
• Research
• Information Processing
• Enterprise cash flow budgets
• Financial statements and ratios

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Business Planning Skills Tools

• Well-honed record keeping, research, and
  analytical skills make the business planning
  process less cumbersome.

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Resources

• Accountant
• Attorney
• Extension educator
• Small Business Development Center
• Lender
• Business consultants
• FAMILY!

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Conclusion

• Planning is fundamental to success
• Planning is continual
• Lenders and granting agencies increasingly
  requiring written plans
• Access help where you can

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Advanced Business Planning
Thank You!! Questions??

• Jeffrey Hyde
• The Pennsylvania State University

Penn State is committed to affirmative action and
the diversity of its workforce