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Functional Plans
(Appendix to Step 5 of Business Planning)
Part of developing and documenting an overall farm plan is to develop detailed plans for specific activities or functions. The categories of functions include:
- production
- marketing
- financial management
- capital budgeting
- labor management
- risk management
- research and development of new ideas
- conservation and environmental management
- recordkeeping
- income and self-employment tax management
- retirement and estate planning
Some of the functional activities or plans may be enterprise specific, such as production and marketing plans. Other functional plans may apply to the whole-farm, such as income tax management. The farmer will need to decide whether the functional plan encompasses the whole-farm or only parts of the operation.
The information compiled in the functional plans has several uses. One, the information can be used in developing budgets. For example, the production plan should provide details about the type, quantity, and timing for inputs. This information can then be used in the development of enterprise budgets and the whole-farm cash flow budget. Two, the information can be used in assessing whether there are adequate resources to operate the business. For example, the labor management plan should provide an indication as to whether there will be sufficient workers available throughout the year. Three, the plans should indicate how resources will be managed. Examples would include the labor management plan and the capital budget. They should reveal how employees will be directed or when capital assets will be acquired.
Collectively, the functional plans could be considered an overall strategy or plan describing how, when, and where the objectives and goals will be accomplished for each function as well as for the entire business. Plans for production, marketing, and financing are the minimum that need to be developed. Depending on the business, additional plans can be integrated into the strategic plan. For example, an estate plan describing the type of ownership arrangements, on- and off-farm investment actions, retirement plans, intended intergenerational transfers, and other legal issues will likely be an important functional plan.
The purpose of planning is to help make decisions. Strategic planning is the process of allocating resources and initiating actions to accomplish predetermined objectives and goals. A strategic plan is the framework that results in the combining and coordinating of the functional plans. The challenging part is coordinating the various aspects of the different functions and some functions are easier than others. These functional steps include concrete, specific actions, and the time frame for when they are to be performed.
The size and complexity of the farm business impacts the coordination task. Strategic planning is a skill that becomes easier as the owners proceed with the planning and coordinating efforts. Moreover, the more accustomed the owners are to strategic planning, the more comfortable they will be when adding detail to their plan. Success is a great motivator and the rewards of strategic planning can provide the incentive to continue the process to improve the business' plan and performance.
The following sections suggest ideas farmers may want to consider as they prepare functional plans.
Production Plan
A production plan is an opportunity to specify the production practices for crops (such as no-till, minimum-till, organic, or conventional) and/or for livestock (such as cow-calf, feeder, dairy, or layers). Attention to labor requirements and crop or grazing rotation requirements could be critical for the enterprise. Even if it does not appear to be critical at this point, it could become critical as the whole farm plan is put together. For example, raising sugar beets requires a three year rotation whereas winter wheat requires the crop be planted in the fall. Therefore, winter wheat may not be able to follow sugar beets every year, especially during late harvest seasons for sugar beets.
The expected yields for the enterprise can be taken from step 3, but the owners may want to specify a range of yields. Step 9 addresses specifying benchmarks (or milestones) for the farm business. If the expected yields for the first year are used in the analysis, the long-run profitability could be understated. If the expected yields for the later years are used, the short-run profitability could be overstated and there are no guarantees that the long-run expected yields can be achieved. In addition, the range of expected yields can be considered during step 8 in testing the sensitivity of profitability to changes in yields.
Marketing Plan
In the marketing category, the owners can identify the consumer of the output of the enterprise. This allows the owners to adjust their production practices to better match the market. The availability of markets is an important factor for some commodities because a farmer could have a product that cannot be sold. Assessing the availability of markets could be important, depending on the commodity, and can be tested as price variation as part of step 8. Also, the owners can specify whether they plan to forward contract, hedge in the market, or assume the risk of marketing. These are only a few suggested questions; there may be other factors that the owners feel are important -- depending on the enterprise or commodity.
Financing Plan
The operation needs cash to operate. The farmer may have the cash; but more likely, the farmer will need to borrow some. A financing plan addresses who to borrow from (lending institutions, suppliers, relatives), when to borrow, when to pay back (fall, winter, spring, monthly), how long the repayment period should extend (e.g., 6 months, 1 year, 5 years, 30 years), and which aspects of the farm will be financed with borrowed capital (operating, equipment purchases, land purchases).
Capital Budgeting Plan
Capital assets is the theme of this functional plan. Some questions might include what assets will be acquired; when will they be acquired; whether they will be purchased or leased; and if purchased, what will be the likely source of cash for completing the purchase. Likewise, a capital budgeting plan may address when assets will be disposed of, and whether they will be sold to a co-owner of the business.
Labor Management Plan
A labor management plan may address family workers, employees or both. Issues might include defining tasks and jobs; assigning responsibilities and tasks; devising a communication system; designing a procedure for performance evaluations; determining the form and amount of compensation; assesssing need for additional laborers; and recruiting, training, and supervising employees.
Risk Management Plan
This functional area primarily addresses how risk exposure will be managed. Most farmers do not want to eliminate risk exposure because that also eliminates most opportunities for earning a profit. But farmers will want to manage their risk exposure through diversification, insurance, enrolling in government farm programs, or entering into contractual arrangements. Part of this functional plan has been addressed in earlier steps when the farmer identified risks the operation is exposed to. The issue of risk management also is addressed in more detail in step 8.
As a member of the food industry, each firm also needs to consider how their activities impact the final consumer product both in terms of quality and safety. For example, producers are increasingly being expected to address where or how, within their business, the safety of the final food product may be compromised. Accordingly, producers may consider adopting good agricultural practices (GAP) as the norm for their operation.
Research
and Development Plan
Many business managers recognize the value of testing new ideas and incorporating into their business those ideas that appear to offer the best opportunity. Managers also recognize there is a cost and risk associated with testing and adopting new ideas. Accordingly, business managers may want to consider developing a
vision or plan for identifying and assessing new ideas. A research and development plan most likely would include 1) identifying innovations to test, 2) estimating the resources these efforts will
require, 3) establishing a preliminary time for conducting the research or test, and 4) defining an outcome or level of performance necessary to justify continuing to test and possibly adopt the innovation.
Conservation
and Environmental Management Plan
Businesses must comply local, state and federal resource management laws. In addition, there are often opportunities for businesses to participate
in incentive programs. Managers need to develop a plan for how they will maintain an awareness of relevant legal requirements, how they will fulfill those requirements, and they may take advantage of available programs or incentives to assist in meeting the legal requirements.
Recordkeeping
Agricultural producers are increasingly being expected to document their production practices, ... Accordingly, a recordkeeping system that tracks production practices need to be part of the overall business management strategy. Questions producers need to ask themselves is what is the status of their recordkeeping system and what changes need to be made to assure they have documented the information being required by buyers, regulators, insurers, etc.
Income and Self-Employment Tax Management Plan
Tax management could identify tactics to follow to assure that a reasonable level of income and self-employment tax is paid by the owners. The goal should not be to eliminate these taxes, but to maximize after-tax income.
Plan to Transfer Ownership of Assets and Business
Acquiring a business also means that someday ownership will be relinquished. For most family businesses, one person's sale or disposal is another person's opportunity to acquire. Therefore, this functional plan will likely address when does someone else become a co-owner of the business, when will ownership of assets transfer to someone else, does an artificial entity hold ownership of assets so only ownership of the business needs to change over time. This is a complex area that often has ramifications throughout the business and family. Professional counsel is highly recommended in the development of this plan.
Conclusion
Individuals with formalized plans for production, marketing, and financing may find that modifying these plans is all that is required. One focus might be to reconcile existing practices with current goals and objectives. For individuals who are formalizing their production, marketing, and finance plans for the first time, new questions may appear as the owners record their plans on paper.
These are only some of the functional plans that the owners may want to develop for their farm business. Some businesses may find that they have other topics that deserve detailed planning; perhaps a plan for leasing assets may be appropriate.
Last Updated June 7, 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.
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