In my previous article for Seednews, I explained how important teamwork is on farms in today’s complex agricultural environment. It is essential that all team members have a say in the overall farm business plan and that at least some of their individual needs are met.

A team with a common understanding of the intent and direction of the business will have a much better chance of achieving its combined goals. Once all the team members are around a table and conversing harmoniously, it’s time to get down to business. One of the first things to focus on should be the farm business plan.

A farm business plan has three main parts:

  • A history of the farm – when and who started it and how it has developed over the years.
  • The current status of the farm — size, businesses (grains and oilseeds, cow-calf, etc.), people involved and their responsibilities and financial details.
  • The team members’ goals and their combined objectives for the short-term (one to five years) and long-term (over 10 years) farm.

As stated above, the farm business plan should be an extension of the goals and aspirations of individual team members. Once each person feels that their own goals are being met (to some degree), they are much more likely to become motivated team members who will help drive the farm towards its overall goals. They will also feel that they have a “skin in the game” and that they are responsible for achieving the stated goals. In the last issue, I compared the farm team to a team of horses pulling a plow, where each member pulled hard to achieve goals.

Preparing a business plan is particularly important before changing any part of the operation, such as buying more land, diversifying, adding a new business (e.g. a cow-calf component ) or the purchase of new machines. As the saying goes, “guys love their iron,” and sometimes they just can’t resist the shiny new units on a dealer’s lot. I have had to help many farmers who have expanded their land or purchased new machinery and have not made the necessary financial projections before buying. Subsequently, they encountered cash flow difficulties when they were unable to repay their loans on time.

When preparing a business plan, your whole family or team should be involved to get their input and support. Remember that they are all an essential part of your operation and should be by your side as part of the operating team. The business plan will involve more than just the financial aspects (described below). Some of the overlooked items are doing their due diligence (background information), gaining new knowledge (if needed), researching possible new challenges and finding solutions for them and any possible risk management issues.

Cash flow

We’ve all heard the phrase “cash is king”. It will be important for you to review your operation’s cash flow before making any changes to determine if you can make additional financial commitments in time. There are programs that can help with this; for example, I have one called the Agricultural Business Analyzer (ABA), which is a month-by-month cash flow projection to determine if you can work within your operating loan and/or business credit. Remember to include enough money for family living expenses in your projections. I recommend at least $50,000 per year (about $4,166 per month).

Lenders also like to see sensitivity analyses, which means running your base case with market prices 10% lower, input costs 10% higher, and a third analysis combining the two. Can you achieve at least a 1.2:1 debt service ratio with all of these scenarios, and preferably a 1.5:1 ratio?

If you need financing, remember that you won’t get a second chance to make a first impression with your lender, so make a good one with a detailed business plan. The lender will be more likely to consider your request favorably if you present them with a detailed plan and they will also be more willing to negotiate rates and terms.

The business plan I use is as follows:

  • Abstract
  • Context and objective
  • Strategic plan
  • Goals – both personal (for each member) and business (for the whole farm)
  • Option(s) to achieve the objectives
  • Action plan — chosen option, implementation plan, steps and dates
  • Marketing plan
  • Risk management plan
  • Financial highlights – selected data from the ABA program (before and after scenarios)
  • Closing comments (regarding overall viability)
  • Professional advisers

Review the year, review the plan

After completing the first year of your new business plan, take some time to reflect on the past year – what worked and what didn’t? Did you at least reach some of your projections? The 2021 crop year has been very difficult on the Prairies due to widespread drought (as well as the COVID-19 pandemic). So many goals have not been achieved through no one’s fault.

The important point is to take stock of the year and review the business plan. Most likely it will need some revisions. Were you able to make your loan repayments on time? Otherwise, you may need loan consolidations and/or re-amortizations. It’s best to speak with your lender as soon as possible so you don’t fall behind on your payments. Once you’re late, it’s very difficult to get refinance.

In my experience, there are a few aspects of farm business plans that are not highlighted enough. It’s important to celebrate successes every year, no matter how small. I encourage all families or teams to take the time to treat themselves to a special occasion at least once a month, which can even be a night out. Then, at the end of the year, there should be an extra-special event or outing.

Annual family vacations or team outings are another aspect of farm life that is underappreciated. In the plans I write, I make a point of including a section that highlights them. Ask yourself, “Am I living to farm or farming to live?” I hope you can relate to the last part of this sentence. After all, what will your children take away from their life on the farm? Will it be hard work, or will it be family time by the lake and on vacation? Again, I hope it’s the latter.

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