RM3-1
Business Plans for Agricultural Producers
Dean McCorkle and Stan Bevers*
A business plan is a road map for the business. It describes the key functional areas of the business including operations, finance, management and marketing and should support the mission statement, objectives and goals set forth by the owners. Business plans are useful both internally by owners and managers as a guide to the future of the business and externally as a tool for acquiring needed capital from banks or investors.
The thoroughness of a business plan usually depends on the audience that will use the plan and the scope and situation of the business. A proposed new business that produces a nontraditional product and that is seeking outside investor capital would need a much more comprehensive business plan than an existing business that is about to make minor adjustments to its operation.
Agricultural producers have largely ignored business plans in the past. Few have had to find investor’s capital for their operations. As margins continue to tighten, agricultural producers will have to plan their business many years into the future in order to survive. Business plans will become a standard component of their operation.
Purpose of a Business Plan
A business plan serves two basic purposes:
The business plan should be tailored to the preferences and concerns of the readers (either the management team or lenders). What goes into a business plan depends on several factors including who the audience is, the type of business, and what the business plan will be used for. A business plan can be organized in a variety of ways as long as it serves its purpose.
As an example, if you are a new producer starting a production agriculture business and are seeking financing to get started, both you and the banker or other investor would benefit greatly from the business plan. For the new producer, the process of developing the business plan will provide you with valuable insight into the operation, some of the challenges that may lie ahead, strategies for managing these challenges, and can help foster an increased level of awareness of the business side of the operation. If you feel that obtaining financing will not be easy, a more formal and detailed business plan can help convince potential bankers or investors.
A business plan will also benefit an existing operation especially if it is proposing a major change to the operation. The business plan in this case should spell out the proposed changes, the financial obligations and the proposed impacts of the changes on the operation.
Components of a Business Plan
While the components of a business plan may very depending on the situation, complete business plans generally contain the following:
• Business Description and Organization
Business Description and Organization
The first portion of the business plan is an overview of the operation. It describes the history of the business, location, products produced and/or services provided, family members involved and their responsibilities, the organizational structure of the business, resource needs and availability and a summary of the business’s strengths, weaknesses, opportunities and threats (SWOT analysis). History, location and the description of products and/or services provides the reader with basic information about the business. An outline of the family members involved will assist in defining the responsibility of all involved.
Organizational structure refers to two areas: (1) whether the business is a sole proprietorship, limited or general partnership, corporation, or other form of organization, and (2) the management team. The management team should include the family members involved, any hired employees, the lender and any hired consultants. Each should be listed in the plan. In addition, a description of the number of employees and their compensation should also be included. For both management and other employees, a brief description of their duties, responsibilities, and decision-making authority should also be included. If a banker or investor will be looking at the business plan, they will be interested in who is involved, who is doing what and what their qualifications and responsibilities are.
Mission Statement, Objectives and Goals
A business plan must define why the business exists and where the management wants it to be in the future. The existence of the business is defined by the mission statement. A mission statement is a broad statement that expresses the business’s purpose. Every member of the management team should be involved in writing the mission statement.
An effective mission statement is the foundation for determining objectives and goals and steering the business in the proper direction. The objectives and goals should relate to production, production costs, debt ratios, risk management, expansion, bringing a partner into the business, or any other aspect of the business. Objectives define what the operation will look like in the future, while goals are targets to be met in order to achieve the objective and ultimately fulfill the mission statement. One common theme found in most business planning publications regarding goals is the concept of SMART goals. This concept suggests that goals must be specific, measurable, attainable, rewarding and there should be a time-frame specified for reaching each goal.
The following pyramid diagram illustrates the relationship between the mission statement, objectives, and goals. Strategy and tactics, the top two layers, are the final two steps to achieving your mission. Strategies are your overall plan for achieving the long range objectives and goals while tactics refers to how you will accomplish your strategies and goals through day-to-day operations.
Production Plan
The production plan conveys the type of commodities and the quantity that will be produced. Depending upon the detail of the business plan, three year projections of production should be included. The information in the production plan needs to be presented such that the reader can easily follow this information. These same figures are included in the financial plan.
For crop farms, the production plan should include the estimated acreage for each crop each year (crop rotation) and an estimated yield for each crop. Estimated production levels can then be combined with estimated prices to generate some of the needed figures for the financial component. Livestock operations will have several more variables that need to be included. The livestock production plan must clearly identify all related production information, including the size of the herd, cull rates, weaning rates, weaning weights, rates of gain, purchase price, sales prices, etc. If there is a replacement herd involved, such as with a cow herd or swine farrowing enterprise, the production assumptions for the replacement herd need to be spelled out separately from the breeding herd.
In any case, the production plan should be defined for a minimum of three years. While changes will occur, these projections will begin to outline where the business is going and if the business can reach the objectives and goals.
Financial Plan
The primary purpose of the financial plans is to illustrate whether or not the business is feasible. The financial plan typically includes three years of pro forma (projected) financial statements including (1) the income statement, (2) the cash flow statement, and (3) the balance sheet. This information should be closely tied to the production plan figures. For an existing business, including the actual financial statements for the past two years helps put the projected financial statements into perspective with how the business has performed in the past.
Some additional information that should be contained in the financial plan is:
These are key issues the owner and/or manager needs to think about and that lenders and other investors will be looking for. One simple approach to analyzing risks and the feasibility of the business is to look at the impacts of varying levels of income, such as 10, 20, and 30 percent increase or decrease in your budgeted gross operating receipts. The income statement and balance sheet are usually projected on an end-of-year, annual basis while the cash flow statement is usually presented on a monthly basis. For in-depth information on these financial statements, please refer to the additional readings list at the end of this publication.
Market Plan
The market plan component should not be confused with an annual marketing plan that a producer would develop during the course of annually marketing the operation’s production. While you are encouraged to develop an annual marketing plan for the first year of the projection period, the market plan section should provide information on market structure for the commodities you plan to produce and describe how your product fits into the market.
The structure and content of the market plan will vary somewhat depending on the commodity you are trying to market. The plan should provide some analysis of what the current market situation is and what you think the market will look like in the next 3 to 5 years. This type of long-range market analysis can address projected U.S. production, total supply and demand, federal farm programs, cycles and other anticipated factors. Researching what market analysts are saying about current and future market conditions can be beneficial in developing this portion of the marketing plan.
For commodities that are marketed through major market channels, such as cotton and feeder cattle, the marketing plan should also address strategies you will use to minimize price risk. These strategies can involve futures, options, marketing pools and forward contracts or any combination.
For businesses producing fruits or vegetables, specialty products or other commodities not marketed through major channels, a market may have to be developed. As such, the market plan needs to define potential buyers (target market), distribution channels, middlemen and potential pricing mechanisms such as contracts. For beef producers producing specialty beef products or participating in a beef alliance, this aspect of the market program should be addressed.
It is advisable for the market plan section to include a detailed written annual marketing plan for the first year of the projection period. A written annual marketing plan, which uses information from other parts of the business plan, involves determining marketing objectives and goals, developing your personal market outlook for the year, identifying available marketing tools you feel comfortable using, determining target price and date triggers and identifying the strategies you will implement to accomplish the marketing objectives and goals you have set forth.
Legal and Liability Issues
This portion of the business plan should define those risks that are unseen by the preparer. The business plan should outline insurance needs, legal liability and succession of the operation.
People and businesses face risks every day that could jeopardize their future. Managing these risks is usually through the use of insurance. While there are numerous risks that business are exposed to, they generally fall into five broad categories: loss of key employees from death, illness, or accident, legal liability and property loss. To minimize the possibility of catastrophic loss, several types of insurance products are available to provide financial protection. The use of a business entity can also be used to manage risks. The business plan should address the strategies you use for managing these risks. A bank or investor will have a keen interest in this area.
Another area that needs to be addressed is two-fold: (1) succession planning and (2) estate planning. Succession planning is the means by which ownership and management of the operation will be transferred to someone else. The succession plan needs to specify when this will occur, or what events will trigger the transfer, such as retirement or death. If the operation will cease operations at some point in the future, the plan needs to have a liquidation plan. Planning ahead for this important event will ease the transition.
The estate plan is usually closely related to the succession plan and involves planning for the transfer of all property to your beneficiaries. While estate planning can be a very involved process, the business plan needs only to summarize the objectives of your estate plan and the estate planning vehicles used such as wills and/or trusts.
References
Doane’s Focus Report, Focus on Success: Strategies and Tactics, Doane’s Agricultural Report, Vol. 62, No 2. January 8, 1999.
Additional Sources:
Small Business Association, 1-800-827-5722, Internet site:
Wilson, Troy D., and David M. Kohl. "Business Planning - A Roadmap for Success." Farm Business Management Update. Virginia Cooperative Extension Service. August 1997.
Due to the broad scope of a business plan, you may find several publications of interest in the Risk Management Education Curriculum Guide by the Texas Agricultural Extension Service, which can be found on the internet at:
Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board, the Texas Farm Bureau and the Houston Livestock Show and Rodeo.
* Extension Specialists-Risk Management and Associate Professor and Extension Economist, Texas Agricultural Extension Service, The Texas A&M University System.