Farm Business Planning Dr. Laurence M. Crane

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

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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?

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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 6. Alternatives 8. Constraints 1. Business Inventory 2. Self-Assessment of Skills and Interests 4. Personal & Business Goals 5. Current Farm 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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19 Assess the Current Situation 1. 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 Situation 2. 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 Situation 3. 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 Information—credible sources and synthesis

22 Determine Where You Want to Be 4. 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 Alternatives 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

24 Identify, Select, and Test Alternatives 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)

25 Identify, Select, and Test Alternatives 7. 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 Alternatives 8. 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 “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

29 Homework Assess the Current Situation 1. 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 Homework Assess the Current Situation 2. 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 Homework Assess the Current Situation 3. 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 don’t know)

32 Homework Determine Where You Want to Be 4. What do I want to accomplish? Determine and write your goals – Business goals – Personal goals For all involved in the business Reconcile the differences