FARM BUSINESS MANAGEMENT AND STRATEGIC PLANNING Robert Patterson Rural Management Strategies Agricultural Consultants

SITUATION ANALYSIS OF THE BUSINESS Where are you up to? You cannot manage what you don’t measure Monitor physical productivity –Crop yields, stocking rate –Livestock performance –Lambing/calving percentages –Wool cuts 2

Example of average crop yields over the last 24 years, 1986 to 2009 in the Cootamundra/Young district Average 24 Years Average 10 Years 1990 to 1999 Average Last 10 Years 2000 to 2009 Reduction between 10 Year Periods Wheat 3.34 t/ha4.31 t/ha2.33 t/ha46% Canola 1.66 t/ha2.10 t/ha1.17 t/ha44% 3

Stocking rates in this area have also reduced by at least 30% from around 10 DSE/grazed hectare to around 7 DSE/grazed hectare over the past 10 years What is the major limiting factor in crop and pasture production? – It is likely to be reduced and variable winter/spring rainfall rather than lack of inputs Soil Phosphorus levels have increased substantially, which is evidence that more is being applied than is being utilised – This comes at a cost 4

Financial Performance Calculate present Net Worth (Assets less Liabilities) Monitor Business Performance – Annual Change and Cumulative Movement in Net Worth on an annual basis at same date eg after harvest or 30 June At 10% compound growth, Net Worth doubles every 7 years As crop yields and stocking rate capacity have declined by 30 – 50% over the last 10 years, Business Models need to be adjusted to ensure that the business is resilient enough to survive and prosper Calculate budgeted Cost of Production (COP) and Break Even Price (BEP) for coming season 5

Example of typical budgeted Cost of Production (COP) (before interest) and Break Even Prices (BEP) net of selling costs, to provide sufficient margin for interest and capital repayments COP Margin Over COP BEP Wheat2.5 t/ha $150/t net20%$180/t net 30%$195/t net Canola1.1 t/ha $385/t net20%$462/t net 30%$501/t net Merino Wool $3-50/kg net20%$4-20/kg net 30%$4-55/kg net XB lambs $50/head net20%$60/head net 30%$65/head net 6

Need to understand the breakup of the fixed and variable cost components of the Cost of Production – The challenge is to reduce the ratio of fixed costs to variable costs to make the business more resilient to the downside risk of poor seasons As output reduces, unit costs of output increase if absolute costs remain constant Therefore there is a need to focus on the unit Cost of Production or Break Even Price A well documented Business Plan enables an understanding to be gained of the business 7

Business planning requires documentation and understanding of the following: Details of Land Ownership – Who owns what Details of Business Structure – Who owns and controls it Asset Protection Plan – Death, Divorce, Litigation from 3rd Parties etc Details of Life Insurance (WOL, Term Life, TPD, Trauma, Income Protection etc) Details of Superannuation and Off-farm assets Details of Estate Plan – Proposed future ownership of assets Managerial skills/philosophies/responsibilities Marketing plans 8

Labour and Machinery Resources – Ownership vs Contractors Machinery/Vehicle Replacement Policy – Ideally should be meeting real depreciation from cashflow, otherwise the business is unlikely to be sustainable Need to understand the real ownership cost of major machinery items The ownership cost is far greater than the operating cost 9

Example of the real ownership cost of a new header New price – $700,000 Trade-in value after 4 seasons or 1,000 rotor hours – $450,000 Real depreciation is $250,000 or $250/rotor hour Harvest area – 3,000 ha 12 ha/hr average = 250 rotor hrs/year) Assume purchased in September with 4 equal instalments each February after harvest, and traded-in after 4 years in September with balloon (residual) equal to trade-in value Annual ownership costs are Principal & Interest 7% pa) instalments of $101,397 each February This represents $33-80/ha of crop harvested Insurance, repairs and labour need to be added to this figure to calculate the comparable cost to using a contractor (fuel is the same for each option) 10

STRATEGIC AUDIT OF THE BUSINESS What business are you in? Need to consider all of the physical and financial aspects of the business, to decide what business you are in SWOT Analysis of the Business –Strengths –Weaknesses –Opportunities –Threats What are you trying to achieve? - Business Mission – “We are in the business of ” How can the business grow?–Basis for Growth 11

What are the Critical Success Factors?  Productivity– Profit Drivers?  Financial– Ratios, COP etc?  Managerial– What can you control? What Competitive Advantage do you have over your competitors? Is it sustainable in the medium/long term? Unless a business can define some Competitive Advantage in Its operation, it is unlikely to have a sound future under Declining Terms of Trade 12

BUSINESS & FAMILY OBJECTIVES Where are you heading ? Business and family objectives need to be compatible Possibly different considerations over different timeframes Short < 5 years Medium 5 – 10 years Long > 10 years 13

Productivity Financial Managerial Marketing Machinery Capital Resources Personal Development Family/Lifestyle Succession/Estate Plan 14 Need to consider the following:

STRATEGIC PLAN How do you get from here to where you want to be? Productivity Financial Managerial Marketing Machinery Capital Resources Personal Development Family/Lifestyle Succession/Estate Plan 15 Need to define the relevant strategies for:

IMPLEMENTATION OF ACTION PLAN How do you make it happen? Need to document who is to do what by when Realistic time frames 16

MONITORING AND REVIEW How is it going? Business plans are dynamic and should change with new knowledge or circumstances Review every 3 – 5 years Management team – accountability to outsiders Financial discipline – set benchmarks and goals 17