Farm Business Planning and Management

Our goal? To help you improve the management of your business through business planning.

Introduce some management tools Record-keeping alternatives Trend analysis Three year income and expense summary Calculating cost of production for enterprises Damona’s 30 + 1 plan

Can You Answer These Questions? Is the business headed in the right direction? Does it provide enough income to: Show a profit? Cover your loan payments? Pay family living expenses? What are your production costs? What price do you need to receive for your product to break even?

Strategic Plan Component Personal Vision, Mission, Goals Family Vision, Mission, Goals External Scanning Internal Scanning Business Vision, Mission, Goals Strategic Plan

Producers having a long-term business plan*** OSU

Components of a business plan History and general description Mission or vision statement Goals and objectives Key planning assumptions Market analysis Marketing plan Operations Organization and management Financial plan

Key Planning Assumptions List the family and ranch resources – land, labor, financial capital, other capital assets, management Identify planning restrictions and constraints Name expected products or services Identify market outlets Resources: Financial = savings, investments, ability to borrow. Land = owned and rented. Labor = owner contributed, family, hired, full and part-time, other capital = machinery, equipment, livestock, vehicles. Management = livestock, crop, financial, marketing, risk, personnel Planning restrictions and constraints: Unwillingness to take on debt? Children/help leaving for college? Off-farm job limiting hours available on farm? Products or services: Producing a commodity (e.g. calves to be sold at sale barn)? Value-added product (bred heifers sold private treaty, Laura’s Lean Beef)? Service (custom work, seed cleaning, AI)? Market outlets: Local, regional, feeder, feedlot, packer, specialized (Laura’s Lean, etc.), organic

Operations, Organization, and Management Define each individual’s role in the business Develop an organizational chart for large operations Individual roles: Johnny = machinery and equipment, Sue Lynn = money manager/recordkeeper/marketing specialist, Robert = livestock caretakers Even if not a large operation, organizational chart may be useful in identifying who reports to whom. Is everyone equal? Someone head honcho?

Small may not be simple! or or Nancy Dan Nancy Dan Dan Nancy What is different about these schemes? Dan Nancy

Operations, Organization, and Management Identify most appropriate legal arrangement: sole proprietorship, partnership, corporation, etc. Develop plans for allocation of profits Ch. 4 deals with legal arrangements Allocation of profits: can range from wage to salary, include incentives for performance such as achieving desired lbs weaned per exposed female, pregnancy percentage, etc. Want to have incentives that support goals. 100% calf crop may cost more than it returns and set up person responsible for failure.

The Financial Plan Initial financial requirements Historical and projected financial statements Enterprise analysis Risk assessment Break-even analysis The financial plan is a tool to allow you to look ahead in an objective fashion to anticipate potential outcomes, weigh risks, lay out plans to deal with potential problems. May also be a communication tool with lenders, other farm partners. Spelling out initial financial requirements is particularly important to beginning farmers, producers planning a farm expansion or new enterprise. The plan prepares you to go in with eyes wide open. Low-balling can be risky. Want to be realistic. Lender won’t be impressed if you have to come back and say you need twice as much operating capital as originally specified. Historical statements provide reference points and benchmarks, indicate what has actually been realized. While past performance doesn’t guarantee that future performance will be equivalent it does document reality. Evaluating financial performance is like the annual physical exam you may undergo personally. It isn’t something you necessarily look forward to, but it provides information from which you make good decisions and deal with problems before they get out of hand.

How would you rate your current record-keeping system? Good? Bad? Ugly?

Producers’ financial record-keeping systems** OSU

Why keep records? Provide facts about the business Include both financial and production records Measure business performance Allow producers to meet legal obligations, support loan applications, and arrange for insurance coverage Even people like Bill Gates who make tons of money realize the value of records. Wall Street Journal reported a planned increase in analysis of profits from products versus services. Psychology literature suggests that we soon mentally downplay the bad things that happen to us. For instance, KY study showed that producers overestimated yields in disaster year within 3 years of the disaster. Not written down? Fact or fiction? It’s a dream, rather than a plan. Minimal level of records needed to stay out of jail. More needed to effectively analyze the business. Accountants say producers can earn well over $50/hour investing time in keeping and analyzing records. Producer who broke his leg and hired a student to feed one winter said that it had a benefit in that he spent more time making marketing decisions, for instance, and more money.

Historical assessment Three year trend worksheet

Record-Keeping Alternatives Computerized Records Software is not expensive Easy to keep Easy to generate reports Hand Records Don’t have to learn to use software Very low cost Difficult to sort and summarize

Why Quicken? A popular personal financial records software package Inexpensive User-friendly Flexible

Quicken’s shortcomings for agricultural producers Not built to keep production records No separate physical data field (can use memo) Cash accounting (not double entry, no depreciation records) No payroll or invoicing features in basic version

Quicken features Accounts Budgeting Loan tracking Tax planning Reports and graphs Online banking, bill payment, investment features

Quicken Reports Financial Planning Features Cash flow Tax schedule Transactions Account balances Comparison Balance sheet Financial Planning Features Budgets Reconciliation Loans Savings College Retirement Refinance

Financial Records Needed Inventory of assets and liabilities Transaction journal of income and expenses Copies of tax returns filed Employment records

How Long to Keep Records Cancelled checks: At least 6 years (consider keeping longer) Investment records: 6 years after tax deadline for the year of sale Loan agreements: Until updated Receipt for large purchases: Until item is sold or discarded Tax returns: 6 years from the filing date

Enterprise Analysis With income and expenses sorted into enterprises, analysis is easy. Profit and loss centers are now visible. Might find out that it is cheaper to buy hay than it is to bale your own.

Calculating Cost of Production Identify enterprises Cow-calf Stocker Breeding bulls Native pasture Improved pasture Custom work Horses

Calculating Cost of Production Identify enterprises Allocate cash expenses Identify non-cash expenses Allocate non-cash expenses Add them up!

Calculating Cost of Production Allocate cash expenses Identify most appropriate method to match expenses with an enterprise. Number of bales of each type of hay to divide out baling expenses. Number of acres of each crop with the application rate to allocate fertilizer costs. Number of times over field by crop to allocate tractor expenses

Calculating Cost of Production Identify non-cash expenses Accrual adjustments Account for changes in beginning and ending inventories. Pre-paid expenses, supplies, accounts payable, ad valorem taxes, employee payroll withholding taxes, accrued interest, loan balances Need to have a balance sheet List of items that are owned and owed.

IFMAPS A free, confidential service assisting Oklahoma farmers and ranchers with financial planning since 1985 Trained financial specialists work with families one-on-one to develop financial statements and evaluate alternative plans Contact the local Extension office, an area Agricultural Economics specialist, or call the IFMAPS office in Stillwater at 1-800-522-3755 In place for 20 years. Specialists get good reviews. Not widely talked about as people view financial matters as private. Work with producers in evaluating all kinds of decisions. Easy way to get objective, third party review of situation, gain referrals to educators to assist in weak areas. Part-time people around the state to meet with producres locally at time and place that is convenient for producer.

Damona’s 30+1 plan Spend 30 minutes each week maintaining records Take one step each month to improve your record-keeping system

Monthly items Update your will Specify medical directives Update life insurance beneficiaries Update beneficiaries on retirement accounts Have a durable power of attorney in place Check depreciation schedule for accuracy Develop and/or update farm asset list Develop and/or update household asset list Develop a list of account numbers and contacts

Monthly items Take photographs or video of assets and place in safe deposit box Notify family members of location of important papers Relax and enjoy peace of mind knowing that your family is prepared for emergencies!

Using the Business Plan Distribute copies to those involved in business Review plan periodically Monitor progress, meet with planning team Keep records Compare actual outcomes to projected outcomes Make changes to plan as needed

Just do it! References: OSU Ag Econ Department, http://agecon.okstate.edu/websites.asp OSU Extension publications, www.osuextra.com National Ag Risk Management Library, http://www.agrisk.umn.edu/ Annie’s Project, http://www.extension.iastate.edu/feci/annie/ Business Planning Guidebook, Minnesota Institute for Sustainable Agriculture, http://www.misa.umn.edu/vd/bizplan.html FINPACK Business Planning Software, http://www.cffm.umn.edu/Software/BusinessPlan/