Getting back to the basics can help producers make long-term decisions
Farming is more than planting seeds and caring for livestock. It’s a livelihood that brings a sense of fulfillment to those who choose it. It is also a choice that can bring risk. Managing that risk at all levels of the operation during all economic cycles can be daunting. How do you make decisions when times are good?
Recent years have had favorable conditions for crop farmers and expected increases in receipts for livestock farmers. When times are good how do you determine the right time to purchase capital, buy and sell or expand your operation? Financial impacts affect your farm and household. Going back to the basics can help you make long-term decisions today.
Begin by updating and reviewing your business plan. Your plan should have a goal so you know where you want to go and how will you get there. Think about short- and long-term goals. Goals are measurable and include things such as number of acres, how many cows or calves you may be running, profitability and the level of stress you may be comfortable carrying.
While the goal is critical to your plan, other items in your business plan include marketing strategies, risk management policies, tax records, a current balance sheet showing assets and liabilities, cash flow projections, a profit/loss analysis and a break-even analysis. While this is not an inclusive list, these items are fundamental in helping you manage your business to achieve your goal.
Next, put your goal into action by considering how external factors and what-if scenarios change your plan. What-if scenarios help you determine the effect of negative factors on your operation and your ability to continue operating if they do occur. Potential events may include lower prices, the loss of a key person in the operation, higher interest rates or production problems. Understanding what your operation can withstand helps you make the right decisions for the long-term success of your business.
Revising your plan frequently can ensure you sustain economic viability. The more you manage the risks of your operation and the industry, the better you can control the outcome and stay on track to achieve your goal. Signs of stress could signal the need to do a complete analysis of your operation.
This may require talking to your lender, accountant, insurance specialists and other industry experts for their insight and help. Employing additional risk management tactics should also be considered.
Business planning should be a recurring practice in every operation because things change. Checking back ensures you see your plan’s success or are able to note what changes need to take place. Your business plan is a useful guide to help make decisions at the right time. And remember, the plan is only valuable if and when you execute it. Therefore, go back to the basics, set goals, build a plan, test the plan and adjust accordingly to more likely have a profitable and sustainable operation.
Scott Schaumburg, is FCS Financial Vice President in West Plains, Mo.