Thursday, January 2, 2014

How to Get Started with a Written Business Plan

by Lynn Kime, Senior Extension Associate

Business planning is an on-going practice that most agricultural businesses try to avoid. It takes time away from working in production of crops or livestock, which is what most producers enjoy. That is one reason you started farming, to work with your hands in the field or with your livestock. However, with the changing times, more producers are being asked for business plans, especially when applying for loans from your lender.

Business planning can be an eye-opening experience for most producers. It makes you realize that you are not an island in a large ocean. You will look at your industry from a several perspectives global, regional, local, and your own operation. The research you conduct to write the plan will enrich your view of your industry and your own operation.

When you think of writing a business plan, think of the process of preparing to take a family vacation. What steps do you take when planning the vacation? You get family consensus on where to go, decide on the travel method (auto, plane, bus, train), map the route or rely on your GPS unit, take the trip, and then you evaluate the enjoyment of the trip.  Was it an enjoyable vacation form the entire family? When planning your trip, you can use a vacation planner to do the work. Business planning is much the same as planning a vacation; you are providing a map of your business for the future.  You will complete the same steps as taking the trip. When developing a business plan, you can also hire someone to write the plan. However, it becomes their interpretation of the business, not yours.

Your business should be enjoyable for the entire family as all members are impacted by the business. All family members may not work within the operation but will be impacted by the business with the owner(s) being away from the family at times. During several times of the year; planting, harvesting, calving, or when livestock are having young, the owner(s) may not be home for very long. Are all family members on board for this?

When creating a written business plan, get input from all family members as the owner(s) may fall into the rut of doing things a certain way because they have always been done that way. Other members may see ways to better the business that you do not. Also, having a business team will assist in the alternative view of the business. This business team should consist of your accountant, attorney, insurance salesperson, and any trusted mentors you have.

When writing your business plan you will develop goals and objectives to accomplish those goals and research the past, present, and probable future of the industry. You will decide if your current business structure is appropriate for the present and future of the business and which structure will assist with the transition to the next generation. Your risk management plan should also be included within the plan. This assures the reader that you have considered what may go wrong and the steps you plan to take if they do.
The marketing plan is a very important section of the plan, even if you wholesale your production. It does not matter how well you produce anything if there is no market for your production.  Having a strong market for production is critical to any business. If you are retailing or direct marketing your production, who is your customer and do they want what you produce? Your market research will determine your first and best customer. Also if you are in the retail market, what are you planning to do with the percentage of production that is not the highest grade? Having a plan for your “seconds” is something to consider as not all production is fit for your best customer.

Another important section of the plan is to create the financial documents to support your plan and to evaluate the success of the business. Your financial documents should include a balance sheet, income statement, and cash flow statement. Your lender will closely review these statements when considering your loan application. These statements may be the most difficult to develop as you should construct several scenarios for each. Your actual statements may be provided by your accountant but you should try to project two to three years out if at all possible. You should also develop best and worst case scenarios. Again, this will show the reader you have considered several possibilities.

After the plan is constructed, you will write the executive summary section of the plan. This executive summary is what the lender reads first as you will use this section to determine if the business is viable and provide the supporting information. Most lenders will read the executive summary and review the financial documents to make their recommendation concerning the loan.

There are several places to learn more about business planning. The Agricultural Alternatives series contains a publication titled Agricultural Alternatives:Developing a Business Plan. Penn State Extension has a course this winter titled Your Future in Focus. The course will be offered via live webinars on Tuesday evenings beginning January 14, 2014 from 6:30 to 9:00 pm. There are also two face-to-face sessions included in the course. 

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