The Power of Business Planning

By Dr. David M. Kohl

As the winter winds descend upon the fields and harvest comes to a close, thoughts of next year and beyond frequently occupy producers’ minds. The holiday season is a good time to dust off your computer, grab a pencil and paper, and lay out a game plan for next season and beyond.

In my work as an agribusiness professional and a businessperson, I have found that developing and executing a written business plan is becoming more accepted as a practice, particularly with high level managers. The business plan can set your business ahead not only on the bottom line, but through communications with your partners, family, lenders, suppliers, and the community in which you operate. Many producers will throw up their hands and say that with the current global economy, it is too volatile to plan ahead. On the contrary, increased volatility builds a case for proactive planning and testing on paper before executing in real life.

Does business planning pay? According to a Virginia Tech study, farms that developed business plans were twice as profitable measured by return on assets compared to those who did not have a written business plan. Business planning becomes even more critical for those businesses transitioning management between partners or family members. Rate of return on assets was 32 percent higher for those businesses that had developed and executed a written plan versus those that had no plan in place.

[rich-callout title="Low Rates Continue" image_id="3922"]

The 30-day vs. 15-Year Farm Credit Bond chart below illustrates that 30 day issues have remained at historically low levels for the last two years. These same rates remain flat as 2011 comes to an end showing little movement in the gap between long-term and short-term rates narrow. In today’s low rate environment, consider locking in historically low, fixed rates on real estate loans or other term loans in order to avoid escalating interest costs should interest rates move upward.

You may also want to talk with your FCS Financial expert about loan conversion options on those loans that do not include prepayment penalties. This benefit is available to existing loan customers and is generally less costly and simpler than refinancing your loan.[/rich-callout]

Where does one start developing a business plan? Over my kitchen table, I suggested that a father and son who met with me over the holidays start with simple goal setting. I recommend each partner and spouse write down short-term and long-term goals. Short term goals are generally to be accomplished in the next year, and long-term goals focus on the next two to five years. These written goals focus on the business, family, and personal objectives that one wants to accomplish.

It is amazing that very few Americans conduct the simple planning process of goal setting. Eighty percent of Americans have no goals or direction in life. Sixteen percent have goals but lock them in their minds. This group earns three times as much in their lifetime, compared to those with no established goals. Only one in 20 Americans have written goals. This group will earn nine times as much over their lifetime and have much more fulfillment in life. Success in goal setting requires the ability to recognize and understand opportunities and then “pull the trigger” and execute strategy.

A very important component of business planning is mapping out your operational, marketing, and risk management plans. This ranges from crop and livestock enterprises one will produce to the inputs, marketing procedures and insurances used. Does your business have current operating procedures and marketing plans documented? Where are your specific enterprises in the agriculture and business cycles, and how will this affect your plans for the next year?

Once these practices are laid out, then one can develop the financial plan. If you operate an existing business, use your last three to five years of financial operating performance as a baseline. In our dairy and dairy creamery businesses, five to ten financial scenarios will be projected based upon various price, cost and interest rate estimates. With the power of electronic spreadsheets, this task can be insightful and brings global economics to the kitchen table as one attempts to place a probability on each of the financial scenarios.

The exciting part of business planning and bringing it to action is periodically comparing your projections to actual performance, which is called variance analysis. This will allow you to tweak your game plan as economic field conditions change.

Many have told me that the business planning process takes too much time. Yes, in the first year it can take 40 to 60 hours to develop a full-fledged business plan, depending on the complexity of the business. However, in subsequent years the time is reduced in half as one becomes more adept and comfortable with the process. Much of the work is just updating and tweaking last year’s plan.

Yes, agriculture has many challenges, but is full of opportunities in an economic environment where the stakes are high for both failure and reward. A business plan can be a powerful tool to bring discipline to both business decisions and life aspirations, in your quest for a successful, balanced lifestyle.