Business Planning

• A business plan should be a combination of written plans (goals, agreements, future plans) and numerical plans. – Can be viewed as a roadmap to follow (of course

we know that plans continue to change)– Could possibly be viewed as a written agreement

with your lender as to what we plan to do

Why do a business plan?

• To determine if your business is financially feasible. Does it work? If it will not work on paper assume it will not work in real life!– Gives an opportunity to retool and refit plan.

What can we do that might work.

• To show lender that we can pay back loans.– Plan needs to cash flow and lender needs

adequate security if things “go south”.– We need to “impress” lender with our plan.

Lending equals trust

• Your lender needs to feel that you are:– knowledgeable enough to run your operation– Honest enough to pay your debts – Have a good business plan that will work– Lenders lend money and want to get paid back.

They do not lend with the hope of taking possession of the borrowers assets!

Components of a Farm Business Plan

• Balance Sheet• Cash Flow Projection• Agreements with family or business partners

(preferably written agreements)• Written notes of explanation as where we see

the business moving to etc.– Expansions planned such as “plan to rent more

pasture and increase cow herd from 200 to 300”.

Balance Sheet

• Snapshot or picture of assets & liabilities at a specific point in time.

• Divides Assets and liabilities generally in four groups.– Current– Intermediate– Long term– Personal

• Assets minus Liabilities equals Owner Equity or Net Worth.

Assets

• Current-Generally convert to cash within 1 year. Examples: Cash in checking and savings, calves, grain, feed, accounts receivable, growing crops, prepaid expenses such as fertilizer.

• Intermediate-”working assets” generally useful life over 1 year and under 10. Breeding livestock, machinery and equipment, farm vehicles.

Assets continued

• Long Term Assets: Long term in there nature generally over 10 year such as land, buildings, fences, stock in cooperatives.

• Personal assets: Assets that are not used in the business and lender will not have security in. Personal Vehicles, investments, retirement accounts, House (if not part of farm real estate), non farm business investments.

Liabilities

• Current-debt due within the next 12 months. Operating loans, unpaid accounts and expenses from this year (repair bill, land rent for current year) the payments on loans due within the year etc.

• Intermediate-generally secured by intermediate assets and are loans that last longer than 1 year and generally under 7 years in length.

Liabilities continued

• Long term- generally securing land and are over 10 years in length and may be as long as 40.

• Personal liabilities-generally all three (current, intermediate and long) grouped in this for personal. Loans on house, vehicles, credit card debt etc.

• When you sign the balance sheet you agree that it is a truthful and accurate statement of all assets and liabilities owned. – Do not leave things out! Check over carefully.– Do not omit credit card debt, unpaid bills– The balance sheet supports your cash flow plan so

if you plan to calf 200 cows you will likely need 200 cows on your balance sheet and feed to feed them.

Lets review the Fred Farmer B/S

• What is Fred’s total owner equity or net worth?

• What is the Farm Share of the net worth?• What is Fred’s total current asset?• Current Liability?• What is the current assets minus the current

liability? (Working Capital- lets discuss)

Working capital

• The amount of money you are supplying to run the operation. If Fred liquidated all current assets and paid all current debts he would have $60,258 left to spend on expenses for the coming year.

• Working capital is very important, especially in difficult times.

• Beginning farmers generally do not have much working capital.

Ratios

• The relationship between Assets, Liabilities and owner equity is a common ratio.– Farm Assets $902,492 100%– Farm liabilities $443,997 49.2%– Farm Equity (Net Worth) $458,495 50.8%

• If the lenders own a larger share of the business they make a larger share of the decisions. (corporate raiders of the 80’s)

Lender Debt to Asset Ratio

• Fred’s Chattels to debt– $437,750 chattels to $125,727 debt 28.7% debt– If the values drop or if Fred has financial setback

lender will still be in good position

• Real Estate Asset to Debt– $320,000 land to $246,838 debt (C4Deed)

77.1% debt– Might the lender feel uncomfortable with this?

Fred’s Balance sheet

• Let’s review Fred’s balance sheet and have questions from the group.

• How do we value assets?• Where do we put credit card debt?• Why do we put retirement account values on

a balance sheet?• ????

Fred’s Balance Sheet

• What are Fred’s Balance Sheet strengths?• Weaknesses'?• What can we tell about his business with a

Balance sheet only?• Might we come to different conclusions if Fred

is 62 years old than we might if Fred is 32 yrs old?

Cash flow projection

• A numerical look a next year .– Typical plan: one that looks at an average year

with average prices, yields and expenses– Supported by your past several year history

generally 3 to 5 years.– Beginning farmers use county yields and

estimated expenses. – Typical plan is used to determine if a purchase or

change is feasible.

Fred’s 2010 farm plan

• Is the information logical and realistic– Pasture and hay enough for cow herd– Calving percentage, crop yields, selling prices are

all realistic based on history and current markets.– Expenses are realistic based on history and

current markets.– Are all payments made and debts addressed– Is the “margin” enough to allow for potential

problems.