Best if printed in landscape.

Business Planning

Preface*

Just as a family plans a trip to reach its destination, so business owners plan the management and operation of their business to reach their goals. Farmers have heard similar statements in the past, but may wonder why and how their planning process could be changed. They also may question the benefit of taking the time to write down their thoughts as they think about the future of the business and their careers, especially if their business is already successful.

These and similar questions were asked of a group of North Dakota and Minnesota farmers, agricultural lenders, and adult farm management instructors, who cooperated in the development of the material located on this web site. Should farmers engage in long-term business planning for their farm operations? What are the benefits of such an effort? How does a farmer conduct long-term business planning? Their ideas, suggestions, and comments are reflected in the following discussions.

Business Planning Defined

The group agreed that business planning is necessary if farmers are to reach their goals as efficiently as possible. Furthermore, many farmers already engage in some type of business planning, but their procedure could be better organized. Based on these observations, this educational effort was commenced to suggest how farmers might think about their business and how it relates to their long-term personal and family goals.

• Business planning differs in several respects from other planning processes that farmers engage in while managing their farm. The time horizon for business planning is longer; the owner is looking at 5, 10, 20, or more years into the future rather than one or two production seasons.

• Business planning is a formalized thought process wherein farmers assess their current situation, specify their goals, identify and implement alternatives for reaching their goals, and monitor their progress. The emphasis is on the long-term goals farmers and their family set for themselves and their business.

• Business planning provides the farmer with a mechanism to adjust to changes while working towards defined goals. The process does not result in a set of self-imposed instructions that cannot be altered in the future. Such a detailed inflexible plan would be rendered valueless by unexpected future events. Instead, the business planning process anticipates that the farm operation will be altered or modified as necessary to accomplish the farmers' goals.

• Business planning does not replace other planning efforts, such as yearly production and marketing plans or capital budgeting to evaluate a specific investment decision. Alternatively, business planning can be thought of as a framework for organizing and directing shorter-term planning efforts.

• Business planning is not an exercise to be completed once and then forgotten. Instead, it is a process that is repeated at regular intervals or more often, if the need arises. The process often involves considerable detail and data about the business and the industry. As farmers repeat the planning process and refine or revise their plan, they likely will add more detail each time the process is completed.

Benefits of Business Planning

The first result of business planning is for farmers to thoroughly understand the business so they, at any time, can determine how a current decision will impact the long-term progress of the business. The process also encourages farmers to carefully think about 1) alternatives for the farm business, 2) risks inherent in available opportunities, and 3) contingency plans to follow if an obstacle or opportunity arises while implementing the selected alternatives. Business planning encourages farmers to set specific standards of performance so they can, in a timely manner, change their farm operation when the business is no longer on the expected or desired path.

A second result of business planning is that the farmer remains focused on the overall purpose of the business. Farmers who have specified their long-term goals should be able to overcome the challenge of being concerned only about current problems and losing sight of ultimate goals.

The business planning process is an opportunity to understand the relationship between the farm and the family who depends on income from the operation to meet all or part of its living expenses. Farm families know how farm income impacts their standard of living, but the business planning process allows farmers to reverse the relationship and better assess how changing family needs impact the business.

The process of business planning facilitates discussions among the farmers, their families, and others. For example, even though farmers may know their long-term plan for the business, their spouses may not. Some steps of the planning process include discussions among members of the farmers' families. Such discussions often produce several positive outcomes, including an understanding of current and long-term cash needs and resources of the family and the farm business.

Similarly, adult children involved in, or about to become involved in, the farm business may have different ideas about the future of the business than do their parents or siblings. The planning process offers an opportunity for open discussion of ideas and a chance to identify and clarify differences and concerns.

As farm businesses continue to grow more complex and farmers interact with a larger number of individuals, the need to have a future plan for the business also increases. Lenders, buyers, regulators, employees, and possible investors all have an interest in the business. Although they have some interest in how the business has performed in the past, they are probably more interested in what is contemplated for the future. Farmers who follow a business planning process likely will be prepared to work with lenders, buyers, landowners, or other business associates.

Business Planning Usually Requires Writing

Although farmers do not have to write down their thoughts in the long-term planning process, developing a document helps. Writing clarifies thinking, identifies issues that otherwise may be overlooked, and prevents a difficult or detailed decision from being postponed with an attitude of "we can work out the details later." Developing documents during business planning prompts farmers to address specific issues that are likely to arise in the future and to resolve those concerns before they become problems.

Writing also reduces "selective recall" which can cause problems when family members or partners have different recollections of a discussion. Similarly, writing provides a record of the farmer's actions, thoughts, and reasoning; a record that can guide others if the farmer is not present when a decision needs to be made in the future.

The Steps of Farm Business Planning

Developing a farm business plan is a multi-step process to answer several key questions. The process can be summarized as follows.

Assess the Current Situation

1.   What is the current status of my farm business?

2.   What are my interest and skills?

3.   What are my expectations about the future?

Determine Where the Farmer Wants to Be

4.   What do I want to accomplish?

Identify, Select, and Test Alternatives

5.   Will the current farm be feasible in the future?

6.   What alternatives are feasible for the future?

7.   What steps are needed to implement the feasible alternative?

8.   What might prevent me from implementing the plan?

Monitor Implementation

9.   How do I monitor progress over time?

10. How should I prepare to document, share, and revise my plan?

For the initial business plan, farmers may want to proceed through the planning process and complete each step without being concerned about assembling all the details or data. Then the next time through the process, farmers can emphasize those aspects of their planning effort that need additional detail. After several times through the process (probably over several years), farmers will have developed a plan containing the necessary detail for each step. This approach should reduce the likelihood that farmers abandon the planning process (because of the detail that can be incorporated into each step) without at least attempting all the steps

Business planning is a circular process. The starting and stopping points are not always clear. After the initial run through the planning process, farmers can select any point at which to "hop on" and then proceed to "go around."

Other Observations

The group of farmers, lenders, and adult farm management instructors who discussed business planning provided additional observations. Farmers know that many years will not turn out as planned. Some years will be disappointing, while other years will be better than expected. These uncertainties, unexpected events, and changed circumstances will be the primary reasons for revising the plan. As the plan is revised, some farmers will look at where they hoped to be, assess where the business and family are, and decide how to proceed to best reach where the family wants to be.

The plan belongs to the farmer and family; they share the plan with whom they choose. They do not need to share the plan with anyone. However, the added confidence that the farmer and family feel as a result of completing the plan often may convince them to share portions of the plan with others (such as a lender or landowner).

The goal of this educational effort is to provide suggestions to help farmers and their families organize their thought process. It does not hand a business plan to a farmer, nor does this effort develop one business plan for all farmers to use. Each farm business needs its own unique plan.

An important aspect of business planning is to link the progress of the farm to the activities and goals of the family. Business planning cannot be accomplished if a spouse, partner, or anyone else whose desires, decisions, and actions directly impact the farm operation has been excluded from the process. Effective communication within the business and family is a necessity. There is no right or wrong way to plan, but the farm business may not achieve its full potential without thinking and planning.

A computer is not necessary for business planning, but it is difficult to imagine this process without a computer to store and analyze information.  Farmers may find that a computer can help in organizing (and reorganizing) their thoughts and completing numerous computations.

Farmers need to repeat the thought process and revise the plan as necessary because long-term planning is not done once and forgotten. Whatever the time frame for revising the plan, the farmers are responsible for developing, using, and maintaining their planning process.

This planning process may leave the farmer and family feeling frustrated because they do not know all the answers, have all the necessary information, nor understand how to use the information they possess. They occasionally may feel like they are hitting their heads against a wall. This does not differ from the planning process that everyone follows; questions are asked and needed information is researched. However, farmers are urged not to despair; repeated efforts almost always pays dividends.

At times, farmers and their families may not like what they discover about themselves or their business, but it is better to know as early as possible what may not work in the future and take appropriate action now.

Finally, planning is hard work, but it can be enjoyable because farmers and their families are working together to have a better tomorrow. They are using their imaginations and creativity to shape new ideas.

The Farm Business Planning Web Site

This page introduces a web site on farm business planning. Each web page addressing one step of the planning process. An overview on each page explains the purpose of the step, provides information and analytical tools that can be useful in completing the step, and specifies what is accomplished by completing the step.

Several steps also includes questions to guide users. However, many farmers will modify these guides to meet their needs or situation. Most sections link to one or more pages that provide additional information about questions that may arise in completing the step or about relevant analytical procedures.

Compile your thoughts into a computer file so new information or documents can be added, obsolete materials can be discarded or replaced, and farmers can include other documents or references they use in their planning process.

This project is a cooperative effort among agricultural economists from North Dakota State University, lenders from Farm Credit Services, several North Dakota and Minnesota farmers, and instructors from the North Dakota Vocational Education Farm Management program.

Conclusion

Farm business planning is a process that could become a routine to help farmers think about the long-run implications of immediate actions. The process also should assist farmers formalize their long-term vision. Planning often facilitates communication, reduces the temptation to minimize or delay detailed analysis, and helps to answer the question "what should I do now?" Business planning is that process of mapping the future so the destination is reached, whether the traveler is a farmer who is just starting, or who wants to maintain an existing business, or who is retiring.

Strategic Planning -- Overview

*  Prepared by David M. Saxowsky, Dr. Cole R. Gustafson, Dr. Laurence M. Crane, and Joe C. Samson, agricultural economists, Department of Agricultural Economics, North Dakota State University. August 1995.

Last Updated May 30, 2007

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

E-Mail:sswandal@ndsuext.nodak.edu
Published by Agricusiness and Applied Economics
Morrill Room 217
North Dakota State University, Fargo, ND 58105-5636
Phone: (701) 231-7441