Advanced Business Planning Jeffrey Hyde The Pennsylvania State University Penn State is committed to affirmative action and the diversity of its workforce

Business Planning Skills & Tools Information Gathering  Record keeping  Research Information Processing  Enterprise & cash flow budgets  Financial statements and ratios

Without Records… Planning Process Take Action Get Results Measure & Record ResultsCompare Actual vs. Plan Explain Deviation Integrate Changes Mission Situation Objectives & Goals Strategies & Tactics

Record Keeping Production records  Production data  Sales data (revenues)  Cost data (expenses)

Record Keeping Investment records  Purchase and sale of long-lived assets  Depreciation Records should include 1.Purchase date & price 2.Annual depreciation 3.Book & market value 4.Sale date & price 5.Gain or loss on sale

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

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?

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?

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?

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

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

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 you’re not an Internet whiz. However, doing this once will prepare you to easily update your plan over time.

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 don’t tend to be available for small, specific industries like local cheese-making.

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.

Research Methods Personal interaction 1.Talk with friends, family, neighbors, … 2.Visit your competitors and buy stuff; talk with owners 3.Talk with customers 4.Watch what people do or buy 5.Talk with industry leaders 6.Attend conferences and workshops

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 1.Cheese 2.Cheddar cheese 3.Sharp cheddar cheese 4.Milk production 5.Crops 6.Hay 7.Corn silage

Enterprise Budgets Three major sections to the budget  Revenues  Variable expenses (aka; direct expenses)  Fixed expenses (aka; indirect expenses, overhead)

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

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.

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.

Financial Ratios Ratios are used to summarize your financial situation Let’s look at three… 1. Return on assets 2. Current ratio 3. Debt-to-asset ratio

Return on Assets Rate of return on the farm’s 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…)

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 -> 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

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 < 0.5

Business Planning Skills & Tools Information Gathering  Record keeping  Research Information Processing  Enterprise & cash flow budgets  Financial statements and ratios

Business Planning Skills & Tools Well-honed record keeping, research, and analytical skills make the business planning process less cumbersome.

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

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

Advanced Business Planning Jeffrey Hyde The Pennsylvania State University Penn State is committed to affirmative action and the diversity of its workforce