A business plan is essentially a road map.
Dan Childs, economist and senior agricultural consultant with the Samuel R. Noble Foundation, Ardmore, Okla., told Ozarks Farm & Neighbor a financial plan most often takes the form of a cash flow budget that lists expected expenses. “This cash flow budget would estimate expenses by the month for farm expenses like feed, seed and fertilizer and when revenues would come in,” he said. “It would predict when deficiencies would occur and when surpluses would become available for the coming year.”
The producer needs to decide whether the plan should be limited to the business, or also include family living and off-farm expenses. For example, if one spouse runs the farm full time while the other has a job in town, expenses could include groceries, insurance and home utilities. But the producer could also decide off-farm income takes care of family living expenses, and only include farming operations in the plan.
Childs said the plan will include projected revenue; if you have a spring calving cow/calf enterprise, that would include separating the calves in the fall. He said, “If you have 100 cows, you’ll have 85 to 90 to sell and will keep so many for heifers; you’ve got 10 percent cull cows that you’re going to sell certain times of the year and maybe one cull bull. Then, we estimate what the calf sales will be in the fall of the year, and you may have some additional hay sales projected in your cash flow and some government payments coming in.”
Expenses would include automobile costs like gas, oil, insurance and tags. These are cash expenses, while the cost of the vehicle itself is subject to depreciation; that’s a balance sheet but not a cash flowable issue, because you don’t write a check for depreciation each year. Said Childs, “We lean on the categories that are the same as those listed on IRS Schedule F, ‘Profit or Loss From Farming,’ as a guideline for items where expenses will occur, like land rent, supplies, repairs, hired labor and fuel.”
According to Dr. Gordon Carriker, a University of Missouri Extension regional agriculture business specialist based in Christian County, Mo., while many long established producers would argue a business plan is not needed since they’ve been in business for a while, “I’d suggest that writing a business plan for an established farm/ranch is easier because many of the detours and bumps in the road, to keep with the road map analogy, have been experienced,” Carriker told OFN.
While a business plan does not have to be complicated, Carriker said it should not be viewed as a document that will be put on the shelf; it should be reviewed periodically to evaluate business progress, and revised accordingly.
They’re frequently written for the first time when the producer needs to secure capital, and many lenders now require them. Carriker said even if an established producer is looking to expand the operation, a business plan is a useful tool that can assist with the decision-making process.
Carriker recommended a couple of online sites where producers can find the tools they need to draft a plan. www.cffm.umn.edu offers AgPlan, online business plan software at no charge, and the University of Missouri Farm Accounting Resources website, http://agebb.missouri.edu/mgt/mofar/, provide several additional tools. He suggested producers develop a budget for each enterprise in the operation. “For example,” Carriker said, “if a producer is running a cow/calf operation and a backgrounding operation, the expenses and revenues for each should be budgeted accordingly to evaluate the efficiency of each resource in the enterprises.”
Both Childs and Carriker stressed the importance of keeping good records. Childs said, “We really like to start with historical, past actual revenue streams and actual costs for these different items, and then adjust that for what we think the future will be…When producers have good records, where they know what they spent – and sometimes tax returns are not good references, because they can be manipulated based on tax management decisions – we can provide a good starting place.” Carriker added. “It is just as important to know the physical efficiency of the operation as the financial efficiency, and that can only be achieved when good records are kept.”
