Farm Business Transition

By John Berry, Penn State Extension Educator, Lehigh County

Many of the farmers I work for have a tough time with the process of getting their business into the hands of the next owner/manager. The reasons for this are many; no time, unwilling to think about mortality, not aware of what should happen, and uncertainty about losing control are some of the primary reasons often heard. Because of the intimate relationship between most farms and the families that work and live there; the unknowns around a broad family conversation on business transition can be a bit scary.

 

When is the best time to start the discussion?

 

If succession planning has been on your mind remember there are just six weeks left in 2016 and some holiday celebrations coming up. This could be a great time for a discussion with family regarding farm transition and succession planning. It's great that you're thinking about succession planning, but remember, conversations about farm succession are conducted from a business standpoint. Do you really want to turn your Thanksgiving table into a business conference table?  Do you want to take your time around the Christmas tree and turn it into a water cooler discussion on strategic planning?

 

While it may be tempting to start these discussions while family is home and together, make sure you're keeping family time for family and setting aside a special time for holding a family business meeting. If it needs to be connected to a holiday to have family present, think about sending out a formal invitation and agenda to the meeting ahead of the holiday, with a set time and date for the meeting later in the holiday weekend.

 

When should I start planning?

 

You may have heard the old Chinese proverb. “The best time to plant a tree was 20 years ago, the second bet time is now.” That same principal can be applied to succession planning.  It really is NEVER too early to start planning for the future, but it can become too late to start!  Almost everyone knows a family torn apart by disagreements following the passing of a loved one. This often happens because they never found the time to put their plans down on paper.

 

You can never tell what tomorrow will bring. Starting your succession plan early in your agriculture career can help you save money and can make sure your business continues as you see fit in the case of retirement, death or disability.  If you create a plan early in your career, it does not mean you are done.  A good succession plan is reviewed and improved often to make sure it still fits with the wants and needs of everyone involved in the operation.

 

The Impact of Federal Reserve Interest Hikes on Your Farm

By Miguel Saviroff, Penn State Extension Educator, Somerset County

The Federal Reserve’s decision to increase interest rates in December has raised questions in the farming sector. The feds have announced at least two new hikes in interest rates in 2017. Although farm level interest rates have been too low for a long time, low agricultural prices can’t cover for any operational expense increases. The clear majority of non-real estate loans made to farmers carry floating interest rates which means the cost of credit adjusts upward if rates increase.

 A pie chart used to compare interest expense versus gross profit

The FRB increases the interest rate when there are signs of a strengthening economy but often agriculture is countercyclical to the national economy. One thing for sure is that farmers need to observe certain signals to maintain financial efficiency.

Farmers need to monitor their interest expense ratio, the relation between interest expense and gross farm income, which may indicate too much dependence in borrowed capital or high interest rate on existing debt. The Penn State “Farm$en$e” program recommends to maintain this ratio below 5%. An Interest-Expense ratio higher than 10% indicates that the farm is spending too much of its gross income paying interest on borrowed money. In this case a business or farm may want to look at ways to lower this expense, this can be accomplished in a number of ways including: selling of assets to pay down overall debt (negative ramification for this may include tax issues), refinancing some loans, and restructuring of debt.

Higher interest rates in a country increase the value of that country’s currency relative to nations offering lower interest rates. These higher interest rates attract foreign investment and the value of the dollar increases. A strong dollar makes our agricultural products less attractive to foreign buyers. One example is the reduction of cheese shipments to Europe due to the decline of the euro versus the dollar.

If there was one piece of advice to the agriculture industry, it would be to settle in. While you may want to secure a long-term loan or purchase more equipment, you will want to limit your borrowing; only do so when necessary.

Likewise, be sure to have a cash reserve on hand.

With interest rates expected to further increase, you will want to ensure you’re properly prepared for the effects no matter how many hikes and in what magnitude.

Shared Kitchen Incubators - A Great Place to Start Your Business

By Winifred McGee, Penn State Extension Educator, Dauphin County

A new year signals the time to think about new enterprises – exploring how, and where, to begin profiting from a “family favorite” recipe. The 2011 Food Safety Modernization Act, and subsequent FDA rules, have made it a bit more challenging (but not impossible) to start a food business, in that even if state regulations allow a food product to be made in an inspected home kitchen (in Pennsylvania, referred to as a “limited food establishment”), when the food goes regional or national, FDA requires that all products be made in a commercial kitchen.

For the start-up food venture, a shared kitchen offers an affordable, safe, legal place to launch. Instead of investing a large amount of money in designing and equipping your kitchen, a modest fee allows access an established commercial kitchen on a timeslot basis.

Loading the food dehydrator at Field to Fork Ag Incubator
Photo by Katie Kinka, Southern Alleghenies Planning & Development Commission

As you begin to search, you will learn that not all shared kitchens are created equally – and knowing the type of assistance you need makes a world of difference when searching for the “right place.” For instance, you may just need a shared use kitchen – that is, a place that provides space and equipment to multiple food business owners for the commercial preparation and handling of food that will be sold. This type of kitchen will likely be accessed very affordably, because no other services beside kitchen access will be offered. In a fast-changing environment like food business, you will have to keep up on food code and the current acceptable methods of production, as well as making, marketing and selling your product if you select a shared use kitchen – but many food businesses have gotten their start in just such a place.



The next step up is a shared kitchen incubator – at which you will not only access commercial equipment and facilities, but also benefit from “supportive services,” that apply to food production and business management. There will be an on-site manager who can help you navigate the complex network of regulation, packaging and distribution to have the best opportunity for a profitable enterprise. Because of the increased level of service, the per-hour rate will probably be higher than that of a shared use kitchen – but depending on the complexity of product and marketplace, this can be money well-spent.



You may also determine the need for small-scale co-packing – allowing trained workers who are already familiar with commercial equipment and recipe conversions to make valuable contributions to your venture. One such facility here in Pennsylvania is the “Field to Fork Agricultural Incubator,” which opened its doors at the Greater Johnstown Career and Technology Center in Johnstown Pennsylvania in September 2016. Joining “Field to Fork” not only means accessing the CTC’s commercial kitchen, but allows you to enlist the knowledge and skills of culinary arts students who are working towards their ProStart Certification, and are available to work side by side with kitchen tenants. As with all shared kitchens, “Field to Fork” is focused on specific targeted groups – local value-added producers with smaller crop yields and food entrepreneurs who need a place to start. Products that can be most easily created in this kitchen are non-organic, jarred fruits and vegetables, dried foods, and baked goods. During its pilot phase, use of the kitchen will be available on a first come, first serve basis. Dry storage and cold storage are also available for a monthly fee. 



In short, shared kitchen incubators do provide the environment necessary for food businesses to start, grow and succeed – by offering not only the right equipment and environment but many services that simplify and economically provide just what is needed in today’s food industry.

Managing Cash Flow for Your Farm

Cash flow statements are very useful – they may very well be the first place where a farmer will spot a trend in business performance that may benefit or harm the operation in the long run. Cash flow statements show the business’s liquidity, the ability to pay expenses as they come due.

In accounting, there are both active statements and reflective statements.

Active Statements

The cash flow statement, a record of the dollars that came into and went out of the farm, is considered an “active” statement because it is completed multiple times throughout the year. The cash flow statement should be regularly compared to projected cash flow budgets, estimated cash in-flows and out-flows that will occur in the business in an upcoming period. This helps the farm manager to identify how the cash in-flows and out-flows that were expected differed from or mirrored what actually occurred.

Reflective Statements

In comparison to the cash flow statement, the balance sheet and the income statement are “reflective” statements because they are completed on one particular day of the year in which the farm manager is able to see how the business has progressed. With careful management of cash, the farmer has power over his or her business dealings. Business owners and agricultural producers in particular need to take time to document all sources and uses of cash within a business to keep their “finger on the pulse” of their operation.

Updating Cash Flow Statements

To be effective, farmers should regularly update their cash flow statements. What does “regularly” mean? The answer to this question varies based on whether you have a very seasonal operation (such as selling Christmas trees) or a business that receives cash throughout the year (such as a dairy farm). It is recommended that new financial managers begin with a cash flow statement that has monthly intervals. Although there is a bit of work keeping the statement current, having monthly statements provides an early warning of cash deficits or surpluses. By using the cash flow statement and the cash flow budget the farmer can make well informed management decisions such as when to purchase new equipment, or when to open a line of credit to cover cash deficit periods.


After keeping track on a monthly basis for a while, you may find that quarterly or six-month cash flow statements and budgets meet your need because the funds don’t change that much month-to-month. On the other hand, if you grow and direct market fresh vegetables for example, you may need to use a weekly cash flow statement through the summer, because of fluctuations in the variety of produce sold and the demand for each item throughout the growing season.


Cash flow statements and budgets can be created for the entire farm operation or for a specific enterprise, or profit center on the farm. For example, a dairy farm might have several enterprises in addition to dairy production, such as custom work, hay sales, and maple syrup production. Analyzing a specific enterprise allows the farm manager to determine whether an enterprise costs more than it generates in revenue. An enterprise budget helps the farm manager determine whether a new enterprise might be feasible.

Article adapted from Farm $en$e©, Farm Management Tools for Financial Success.

Farm $en$e© farm financial management courses are offered every fall and winter in multiple locations in Pennsylvania. Contact Juliette Enfield or Miguel Saviroff  for more information.
The Farm $en$e© text will be available for purchase through Penn State Agricultural Publications in November 2016.

Contact Information

Juliette Enfield

Extension Educator

Email: jse15@psu.edu

Phone: 814-563-9388

Miguel Antonio Saviroff, MS

Extension Educator

Email: mas60@psu.edu

Phone: 814-445-8911 x144

"Mandatory" social media platforms for agricultural businesses

By Dr Kathy Kelley, Professor of Horticultural Marketing and Business Management, and Dana Ollendyke, Extension Associate

Through an internet survey conducted by researchers at Penn State, Rutgers, Cornell, and New York University in 2013, 1,183 participants answered questions concerning their wine purchasing and consumption attitudes and behaviors and their demographic and socioeconomic status. Panelists were screened for being at least 21 years old, residing in one of the targeted mid-Atlantic states (New York, New Jersey, or Pennsylvania), and for having purchased and drank wine at least once within the previous year.

This survey may be focused on wineries, but the data collected can be of use to many agricultural business types. Marketing is an integral part of doing business.  Using social media to inform consumers about your products and events is an excellent way to build relationships.

John Gillespie, founder and CEO of Wine Opinions, a wine research company, stated in the article "Who’s Drinking Wine? A Look at the Wine Market Council’s Latest Survey" that 66% of core wine drinkers (those who drink wine at least once a week) and 40% of marginal wine drinkers (those who drink wine less frequently than once a week) use the internet to get information about wine. The article also said that more than half of all wine drinkers are on Facebook.

Consumers who participated in our internet survey were asked to select from a provided list of social media platforms they felt were mandatory for a winery to offer.  As you can see by Figure 1, Facebook is the significant front-runner.  Over 40% of participants believed that this social media tool is "mandatory" for a winery to implement.  Other platforms like Twitter, Pinterest, Instagram, and YouTube were significantly less important to respondents.

Figure 1. Social media platforms that survey respondents believed were "mandatory" for a winery to implement.

More information about the survey results can be viewed in the video series "Consumer Attitudes and Behaviors Towards Wine Purchases".

To learn more about social media marketing and the survey data, please see video 5 in the series.

As an agricultural business owner, what social media platforms do you use?  Which one(s) seems to drive the most interaction with your customers?

What Is Your Business's Customer Service Philosophy?

 by Juliette Enfield, Penn State Extension Educator, Warren County

Although we give and receive customer service almost every day, we rarely take time to stop and think about what customer service means. Customer service does not come easily or naturally for most people. Providing good customer service is a skill that involves product knowledge, concern or empathy for the customer, readiness to help the customer, and knowing where to go to find answers. John Berry, Extension Educator in Lehigh County reinforces these ideas with a four step process for providing excellent customer service:

Be sure your employees know about the product they are selling.

–      Know the Product

–      Reach Out

 

–      Be Alert

–     Get Help

Customer service affects a business’s bottom line when there are many competitors. The fewer competitors, the less customer service matters, such as in the telephone and internet service provider industry. The more competitors, the more customer service matters, which is the case in the food industry. 

Another benefit to providing good customer service is the cost savings associated with customer retention. Losing one customer can have a domino effect on a business. The business from this customer is lost, but so is the business they could have brought to you, as well as the opportunity to change something that was not working well in your business. Remember these two rules of thumb: attracting new customers costs 5 times more than keeping existing customers, and 80% of your sales come from 20% of your customers.



Taylor's Farm Market (which I recently visited on our Are You Crazy Retail Farm Market Bus Tour) in Inwood, West Virginia shares their customer service philosophy.

You may have protocols in place for handling returns, or complaints, but it’s the customer service philosophy that is portrayed in these actions. Consider what script(s) you want your employees to follow when providing good customer service. For example, Sue Miller of Birchrun Hills Farm in Chester County, PA told me that for her, marketing is about having good relationships and providing good customer service.  She says she enjoys trying to guess what the customer wants. She believes that people don’t want to take advantage of you. She believes in treating people the way she would want to be treated. Sue says that if a customer is ever dissatisfied with her products, she is happy to exchange the product for a new one.

Below are some questions that can help start the customer service conversation at your business. I filled in some of my own reflections to get you started.

1. What is your business’s customer service philosophy?
We want people to feel that we care about them and their health by shopping with us.

2. What makes implementing this philosophy challenging?

Lack of sleep, not being able to relate to the customer-who may not have much awareness about agriculture, who may be from another culture, may make more money than I do, etc....

3. What works?

Not taking criticisms personally, offering services such as carrying heavy items, being honest...

4. What doesn’t work?

Apologizing when I don’t mean it...

5. What kind of customer service do you enjoy when shopping?

I like when the sales person is knowledgeable about the product, I also like when the sales person is not overly aggressive about making sales...

6. Does your business have a customer service training plan in place? Circle one.

Yes                                           No

Useful Books & Videos:
Carlaw, P. and Deming, V. The Big Book of Customer Service Training Games. McGraw-Hill. New York, NY. 1999. (This book is cheap to buy and has fun and educational training games that you could play with your employees)

Wicks, Judy. Good Morning, Beautiful Business. Chelsea Green Publishing. White River Junction, VT. 2013. (This book was featured at the Pennsylvania Women in Ag Network's Annual Symposium in 2013. Judy Wicks spoke about her inspiring business and customer service philosophy.)

Telephone Doctor® CUSTOMER SERVICE TRAINING, 30 Hollenberg Ct. St. Louis, MO 63044,(314) 291-1012, Fax: (314) 291-3710, E-mail: nancy@telephonedoctor.com, www.telephonedoctor.com (Purchasing these tools is not cheap but there are some sample materials on YouTube which are entertaining and educational)

The Learning Service, Ltd., 2800 Market Avenue North Canton, Ohio 44714, Phone: (330) 456-2422, Fax:(330) 456-8944, E-mail: learningservice@aol.com, www.thelearningservice.com (This company has published several books on customer service which are listed on their website)

Sources for this blog:

Berry, John. I Seem to Have Lost a Customer Some Place! April 8, 2014. Agricultural Entrepreneurship Blog. <http://farmbusiness.blogspot.com/2014/04/i-seem-to-have-lost-customer-someplace.html> Accessed Sept 9, 2015.

Lawrence, Alex. Five Customer Retention Tips for Entrepreneurs. Nov 1, 2012.
< http://www.forbes.com/sites/alexlawrence/2012/11/01/five-customer-retention-tips-for-entrepreneurs/> Accessed Sept 8, 2015.

Makovsky, Ken. Where Customer Service Doesn’t Matter. Jan 23, 2014. <http://www.forbes.com/sites/kenmakovsky/2014/01/23/where-customer-service-doesnt-matter/>Accessed Sept 8, 2015.