III. Business Planning
Farm Business Planning
- Shannon Dill, Extension Educator, University of Maryland Extension-Talbot County
Planning is essential to any business, no matter how large or small its inventory, payroll, and bank account. To be successful, farm operators must know their current position and future plans. Thinking about your plans is not enough! Taking time to formulate ideas, evaluate your business, devise a strategy, and anticipate possible problems will help your business be successful. Write it down.
Executive Summary - a one page summary of the business including pieces of each section below. It goes first in the plan but should be written when all of the other parts are complete.
Mission and Goals - a clear mission to why the business exists and a listing of short term and long term goals of the business.
Background Information - a summary of your history and farm history and how the business was created.
Farm Strategy - this is a process to make decisions on what your enterprise is and how you will reach your customer.
Marketing Strategy and Plan - the marketing plan will detail your product mix and how you will get that product in the hands of the consumer.
Enterprise Budgeting - this is a listing of the expected income and expenses per enterprise.
Financial Plan - provides a detailed listing of the balance sheet (assets and liabilities), cash flow (income and expenses) and income statement (income, depreciation, inventory and expenses).
Management Plan - includes details of how the work will get done and responsibilities within the business.
Implementation Strategy - creates a plan on how the business will start and operate.
Exit Strategy - this is a strategy that can be used if the business is not performing as expected.
Resource Inventory - a detailed listing for equipment and resources used by the farm.
Appendix - a place to attach contracts, lease agreements and other documents that may support the business plan.
For details and examples on writing a business plan check out the Farm Business Plan Workbook and Case Studies.
Financial Planning Considerations for Beginning Farmers
- Shannon Dill, Extension Educator, University of Maryland Extension-Talbot County
Setting Financial Goals
When considering all of the expenses related to agriculture and farming the first step is to consider what your farm financial goals are. Are you planning to farm part time or full time? Will it supplement the family income or will it be the main source of income? By creating financial goals beginning farms can plan for the future and income can contribute to the household, farm and debt expenses.
A good place to start is to create a household budget. What income and expenses do you have on a monthly and yearly basis? A household budget can help when making enterprise decisions and estimating how much income and farm production will be necessary. Think about your personal financial goals. These could include paying for education, saving for retirement, making purchases, travel expenses etc. If you plan to supplement income with a farming enterprise you will need to pay for the farm expenses and make a profit. Having a clear picture of what amount of money the family needs to pay bills and meet debt requirements will help with the success of the farm business and your overall profitability.
A balance sheet can be completed right away. It is completed on a specific date and lists business and personal assets and liabilities. This financial statement is often requested by lenders and is used to measure your net worth using a listing of assets and liabilities.
An asset is anything owned by the business. This can be cash, equipment, land, stocks, accounts receivable, livestock and inventory. A liability is what is owed by the business. This can be credit debt, accounts payable and loans. Most often both categories are divided into current, short term and long term. Current is one year or less and includes items that can easily be converted to cash. Short term are items like equipment that have a shorter loan term and usable life. The last is long term which are items like land that take some time to convert into cash and have longer debt terms.
When all assets and liabilities have been listed the net worth can then be calculated by subtracting the liabilities from the assets. Your net worth will be used by banks to make decisions on how much money they can safely lend you. It is a good practice to do a balance sheet each year on the same date so you can compare and see changes over time.
Enterprise budgeting is another financial document that is helpful to farm financial planning. Enterprise budgets outline and estimate the income and expenses related to a particular enterprise. Budgets are created on a unit basis such as per acre, pound, square foot, bushel, or per animal. Using the best estimates possible for yield, price, variable costs and fixed costs a farmer can predict profits. This is very helpful when starting a farm or new enterprise.
For the income section the estimated yield and price will calculate possible income for the enterprise. Expenses are divided into two categories: variable costs and fixed costs. The variable costs vary with the level of output. More acres of crop or head of livestock the higher the variable costs. They will help you to estimate the amount of seed, fertilizer, pesticides, planting or harvesting supplies, fuel and labor associated with the crop. These will be important because a farm will want to at least make enough income to cover the expense of variable costs. Fixed costs are the overhead or farm expenses that will need to be paid regardless of the enterprise. Examples include insurance, interest, taxes and equipment. Once the estimates are made for income and expenses a farm can estimate the profit per unit selected.
Cash flow is often considered the checkbook of the business and monitors the inflows and outflows of cash in the farm. Seasonality and risk are major reasons why cash flow should be a major consideration since debt and production expenses will be necessary. The cash flow statement is a great way to organize income and expenses and to ensure that funds will be available to pay expenses when they come due. Cash flow planning can be done monthly, quarterly or annually. Income will list all income sources which includes crop sales, payments, off-farm income and capital sales. Expenses included all production and operating expenses as they are incurred such as seed, fertilizer, feed, marketing, utilities, fuel, labor, living expenses and more.
There are two cash flow statements. The first is the actual cash flow. It is a checkbook register of income and expenses. The second is the projected cash flow which takes the actual and makes projections to the future income and expenses the farm will incur.
A projected cash flow statement cannot be created without estimations. This is one reason why enterprise budgets are so helpful since they list out the production expenses for each crop on the farm. The projected cash flow statement will often be requested by lenders as they make decisions on how much money to lend and if that loan can be repaid.
There are a variety of financing options for buying a farm and starting a farm business. Funding will be needed to start farming, working capital will be needed to get the product going and expansion or mechanization will need additional funding. The most popular source is selffinancing. This is using personal funds such as savings to invest in the farm. Friends and family are another possible source of funds. These investors should understand your farm plans and have the agreement in writing.
Bank loans are another popular source of financing. Along with the farm mortgage there could be a loan for equipment purchases, startup expenses, farm structures, animals and more. Often a lender will want to see a business plan, proof of concept or another way of understanding what the funds will be used for and your ability to repay the debt.
Short term credit, lines of credit, or operating loans are often used for operating expenses. This is a way to get funding upfront so that a crop can be grown and repaid after the crop is sold.
Credit cards are another source of funding but should be used with caution. These generally are easy to acquire however charge very high interest rates. Credit cards should be used as a tool for short term purchases and not relied upon for the long term financing.
A few other sources of financing include the Small Business Administration microloans, USDA Farm Service Agency loans, Farm Credit Associations and investors. All three of these will have important considerations and should be researched thoroughly. These programs sometimes partner with other lenders, are contingent upon availability and what is funded and require a process to approve.
There is a common misconception that grant funding is readily available to buy, start or operate a farm. That is not necessarily the case. There are a limited number of farm programs that provide low interest and funding for farm acquisition or expansion. However, grant funding or “free money” to purchase a farm and startup expenses is very rare. Most grants that are available to farms are through a cost share program or a new innovative practice. The most common grants are through the USDA and SARE.
As the farm dream gets closer and financing becomes necessary it will be important to get personal finances in order. A household budget and review of your credit report are two ways to do this. The household budget will help estimate how much profit the farm needs to generate to pay debts and living expenses. Credit reports should be reviewed annually and provide important details about individual credit history.
Keeping records will be part of the day to day tasks of a farm from production activities to spray applications to financial records. It will be necessary to create a system whether paper, computer or app based to record and organize farm records. Some records will be required by law while others will be helpful in making farm decisions. For financial records take time to review the IRS Farmers Tax Guide publication to learn more about how to categorize income and expenses as well as your tax liability. Make it a habit to start keeping records and schedule time to create a system that makes record keeping a part of the farm routine.
When considering financing be sure to have realistic view of your financial position and ability to meet loan obligations. Using a business, production and marketing plan will help with the farms financial success. A comprehensive listing of the startup expenses will provide you and the lender with vital information along with the financial statements discussed in this section. Working capital will outline the variable costs of annual production expenses and lastly a buying schedule will outline future needs and expansion of the business.
Farm Business Planning Workbook - a business planning template, budgets, spreadsheets and case study
Mastering Marketing for New and Beginning Farmers
- Ginger Myers, Marketing Specialist, University of Maryland Extension Director, Maryland Rural Enterprise Development Center
Sales are one-time transactions. Marketing is the process by which you identify a group of people who are willing and able to become and to remain your customers. As a new farmer, you won’t have established relationships with customers and potential buyers, yet. You must determine who wants and/or needs your products. These are your potential customers. Identifying your target customer base is one of the first elements of the marketing process.
You should determine which people have the strongest likelihood of becoming and remaining your customer. The common characteristics within this target group will help you determine which people have the strongest likelihood of becoming and remaining your customer. These characteristics will also help you better define your product, identify your best marketing outlets, and determine what marketing tools you use to reach that audience.
Having a marketing plan requires you to think through the process of how a product will be priced and promoted. This planning helps minimizes possible emotional reactions and guesswork in making marketing decisions.
This statement asks you to think about 5, 10 or 20 years from now and what your business might have accomplished. The following is a list of questions to consider as you are developing your business and marketing plan.
- What do you want to accomplish with your business and how will your marketing efforts support those goals?
- What are your personal goals?
- How will your marketing efforts help you reach the missions and goals in your farm business plan? Will they reflect your production philosophy, a community connection, a life-style pursuit, a career change, or other personal missions?
- What are your financial goals?
- How much profit do you need to generate to be satisfied with your business?
- What is your timetable to reach these goals?
- Are you working towards a part-time operation? Looking for a full-time farm in a certain number of years? Are you planning ahead for a career change or retirement business?
Market research is the process of identifying your potential market segments, then developing a targeted strategy for those segments. This research involves gathering information about customers, competition, and overall market potential.
Researching your potential market doesn’t need to be expensive in terms of dollars, but be prepared to allot copious amounts of your “planning” time to it.
Before you invest any money in your business, you need to determine:
- The projected volume of sales of your products and the price you might realistically expect to charge for them. You will need this information to analyze profitability and cash flow potential.
- Who are your potential customers? What are their ages, income levels, and when and where do they shop? Why would they buy your product rather than your competitors’ products?
- How many competitors are there for this market? What are their strengths and weaknesses?
- What are the trends for consumption, competition and pricing in your market?
- Other factors that will affect your product production and distribution (government policies and regulations, technological changes, social and cultural behavior, industry trends)
Answers to these questions will help you better understand what your potential customers, your “target” audience, wants.
Conduct a SWOT Analysis of your marketing position. S.W.O.T. is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is an organized list of your business’s greatest strengths, weaknesses, opportunities, and threats.
Strengths and weaknesses are internal to the company (think: reputation, growing practices, location). You can change them over time but not without some work. Opportunities and threats are external (think: regulations, competitors, prices)—they are out there in the market, happening whether you like it or not. You can’t change them.
SWOT Analysis is useful for your overall enterprise evaluation but it can also be used to help you carve a sustainable niche in a market.
Your business will need to earn and maximize its profits if it’s to be sustainable. For doing so, concentrate your marketing plan on the 4 P’s, i.e. Product, Place, Promotion and Price, known as the marketing mix.
The marketing mix is about putting the right product or a combination thereof in the right place, at the right time, and at the right price to satisfy a customer’s wants or needs. Adhering to the traditional 4P’s of marketing will provide you with a solid foundation as you start and grow your business.
The Product: Exactly what product or service are you going to sell to this market? Define it in terms of what it does for your customer. How does it help your customer to achieve, avoid or preserve something? You must be clear about the benefit you offer and how the customer’s life or work will be improved if he or she buys what you sell.
The Price: Exactly how much are you going to charge for your product or service, and on what basis? How are you going to price it to sell at retail? How are you going to price it at wholesale? How are you going to charge for volume discounts? Is your price correct based on your costs of production and the prices of your competitors?
The Place: Where are you going to sell this product at this price? Are you going to sell directly from your own company or through wholesalers, retailers, direct mail, catalogs or the Internet?
The Promotion: Promotion includes every aspect of advertising, brochures, packaging, salespeople and sales methodology. How are you going to promote, advertise and sell this product at this price at this location? What is the process from the first contact with a customer through to the completed sale?
Creative marketing with the 4Ps constantly questions existing situations and looks for ways to enhance your marketing mix - deleting existing products or services, selling them at a different price, offering them in different places or promoting them differently. However, it does not require abandoning your core marketing concepts.
The best marketing tool you can have is a marketing plan. From defining your goals and mission, to researching and evaluating your marketing position, and then understanding your marketing mix, you’ve been developing your business’s marketing plan.
- Product - What is my product?
- Target Customer - Who will buy it?
- Place and Promotion - Where will they find it?
- Price - How much will it cost?
- Budget - How will I get my marketing done and how much will it cost?
Take the time to write down your plan. A written plan can help keep you on track when marketing opportunities or threats arise. You’ll have a framework for decision-making with your overall business goals in mind, rather than a knee-jerk reaction to change.
Marketing takes time. But, it can be one of the most cost-effective uses of time in your business. As marketing consultant Roy Young states in his article by the same name, “Marketing is the root of all income.”
Web Links and Resources - Business Planning
Business Planning Links
- IRS Farmers Guide
- MREDC Financial Matters
- MREDC Farm Business Planning Workbook
- Review of Lender Requirements for Beginning Farmer Loan Programs
- USDA FDA Farm Loan Programs
- MARBIDCO Website
Business Planning Review - Questions to Ask Yourself
- Do you understand the financial statements for a farm business (including a household budget, balance sheet, enterprise budget and cash flow statement)?
- Does your product satisfy a want or need of your target customer?
- Have you factored all your cost of production and profit margin into your price? Including your competitive advantage?
- Have you identified market outlets for your product?
- Do you have a promotional plan on how you will market your product?
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