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. 

Resources to Help Producers Develop Budgets

by: Lynn Kime, Senior Extension Associate

Creating budgets is a chore most people do not enjoy. If you are currently producing a crop, the task may be somewhat easy but still takes time.  If you are entering agricultural production creating a preliminary or pro-forma budget can be a difficult task. Budgets are a valuable tool to all producers and beginning producers as well. If you have been producing a crop for years and you cannot seem to determine how profitable that crop is, an enterprise budget helps make that determination. For beginning producers, producing a crop that only provides income to cover direct costs means that eventually your fixed assets (land and equipment) will be depleted and you can no longer stay in business.

For existing producers, to create an enterprise budget you will rely on your current records. The budget unit may be per acre, per bushel, per head, or another common unit. Whatever you choose, consistency throughout the process is critical. You need to determine what expenses were dedicated to that specific crop or enterprise. This will take some time to separate these expenses from your totals. For example, you determine that you purchased $2,000 worth of seed for this growing season; the problem is that you planted corn, soybeans, and oats. To determine how much you spent on the oat seed you need to look through your invoices and make that determination. This example may seem elementary but you need to do this same process for all inputs including fuel, labor, and repairs just to name a few. These items are much more difficult to extract from total expenses.

When you have determined your direct expenses, the more difficult task of allocating fixed expenses to each unit begins. For example, you made the calculations to determine how much fuel you used per unit, now determine how much of your depreciation is allocated to the equipment and buildings needed to produce that crop. What is the cost of the land required and how much of your property taxes and farm owner’s insurance policy is allocated to this enterprise? These are not as easy to break out of the invoices.

For potential producers, these tasks are even more difficult as you do not have the current production year’s expenses to use. You need to conduct research to find these numbers. There are several places to start that have budgets and templates for your use. For agronomic crops, the Penn State Agronomy Guide has budgets for you. For horticulture crops, TheMid-Atlantic Berry Guide for Commercial Growers  and the PennsylvaniaTree Fruit Production Guide are available on-line for free and printed copies are available through you local extension office or may be ordered from: Publications Distribution Center, College of Agricultural Sciences, The Pennsylvania State University, 112 Agricultural Administration Building, University Park, PA 16802-2602. Phone: 814-865-6713. On-line at: http://pubs.cas.psu.edu. E-mail: AgPubsDist@psu.edu. All of these publications contain budget sections with a column labeled “Your Estimate.” This is where you enter your figures to customize the budget. The items listed are to make sure you consider all items needed to create the budget.

 

Another source of budgets for specific crops and enterprises can be found in the Agricultural Alternatives publications.  There is a link to a PDF file for easy printing on the web pages. There are also links to interactive PDF budgets included in the web pages. These budgets can be customized to your operation by completing the necessary research to determine your income and expenses and entering these figures into the appropriate cells and the file makes the calculations for you. There are cells for both income and expenses and you use your figures so the document reflects your enterprise. You may print this budget for your use. 

I encourage you to check out the web site and discover what the project has to offer. By using these publications and the included budgets you will be better informed about the time, capital, and equipment needed for the enterprise. All issues you need to consider when creating enterprise budgets or starting a new venture or enterprise.

Starting a Farm? Get Prepared!

by Lynn Kime, Sr. Extension Associate

When beginning any new enterprise, many decisions need to be made prior to planting or purchasing the first animal.  These decisions require research and developing an enterprise budget to be sure the venture will be profitable.  Depending on the scope of the enterprise, a business plan will assist with the decision making process, especially if this is your first venture into production agriculture.  To make the transition easier, think about what you have a passion to do.  Having a passion for the production makes the entire process more enjoyable.  A list of topics to consider prior to beginning include:

• Marketing
• Production
• Harvesting and storage
• Risk management
• Environmental regulations
• Where to find information

 Before beginning any production, you need to know if there is a market for what you plan to produce and where that market may be.  Another marketing decision is whether you are going to market wholesale or retail.  Wholesale marketing may be the easiest, but may not provide enough income to sustain your enterprise.  Retail marketing will take more time to develop as you will need to develop relationships with potential customers or find a farmers' market that has enough traffic to market you production.  One recommendation is to start small and grow into your market.

There are usually several production options for any livestock or crop you plan to produce.  For example, if considering producing beef cattle, will you raise grass-fed or a more conventional grain and hay program?  For horticultural crops, will you use plasticulture or be organically certified?

Do you have the time to produce and harvest what you plan to produce?  Even one acre of some crops requires 30-40 hours to harvest and many more to produce.  The production will need to integrate into your proposed schedule.  Also, will you need to store a portion of the crop prior to marketing and do you have these facilities?

Any production contains risk.  You are at the mercy of the weather, markets, and inputs that you cannot control.  There are insurance products you can take advantage of to help alleviate some of these concerns.

All municipalities have regulations that may impact your plans and production.  The first step for you is to contact your local municipality to determine if what you are planning fits into their regulations.  Another place to visit is your local Conservation District office to see if there are any environmental regulations that will impact your plans.

Penn State's Agricultural Alternatives publication series is an excellent place to start your research into a new venture.  There are now 64 publications in the series and we cover many topics targeting the small-scale and part-time farming community.  These publications are between four and twelve pages long and any topic covering production of livestock or crops has a budget included.  The publications are not in-depth production guides, as indicated by the length, but are designed to allow the reader to make a better informed decision about the potential of the enterprise.

We have an extensive listing of livestock, fruits, vegetables, and farm management publications.  The farm management publications cover business start-up, business planning, marketing, and risk management topics.  These should be viewed first when considering a new farming venture.  The information contained in these publications is necessary when starting a business.  They will guide you through the process of the new venture and provide the information to allow you to become successful.  There is also a section covering where to find much more in-depth information into the topic covered.

You can access these publications here.  There is a link to a PDF file for easy printing on the web pages that do not link directly to a PDF.  I encourage you to check out the website and discover what the project has to offer.  By using these publications and the included budgets you will be better informed about the time, capital, and equipment needed for the enterprise; all issues you need to consider when starting a new venture or enterprise.