Business planning and financial management: An introduction
28 June 2024Monitoring and planning the business are essential components of good business management and should be viewed as a high yield piece of paperwork.
The use of business planning is valuable for both farmers and lenders to help structure business decisions. It can document the financial viability of existing and projected business performance. A business plan helps critical analysis of current performance, provides a baseline for realistic forward budgets, set goals, and projects the impact of future farming policy.
Business plans are more than a budget
While the financial section of the plan is often the core underpinning, a full business plan should go further than this. A good business plan demonstrates that the farmer has taken the time to think through the proposal, to make the business succeed. The reader should be able to quickly evaluate how well the farmer has considered the operational, personnel, skills, marketing and financial aspects required to successfully implement a future plan, such as proposed expansion or start-up.
Two common reasons for creating a business plan
- Business start-up and
- Expansions
Business plans are a useful management document to help highlight any weaknesses in a business or identify where you need further financial or technical support. Often business plans are created to help access funding. When trying to obtain a loan from banks or investors, providing 3 years of past accounts is usually the first step in analysing a business’ performance. However, for new entrants or for a new venture this is not an option. Therefore, any lending decision would have to be made on a business plan and the forecasted financial performance of the venture.
How to use your business plan
An accurately prepared forward budget can assist a farmer to make decisions between a whole range of options that exist for management of the farm and its resources.
By looking ahead, it is possible to anticipate the likely outcome of decisions that need to be made today, and how they will impact on the future profit potential of the farm.
Assessing different scenarios, allows the business to identify the factors that are most important to future profitability, and to highlight where changes could be made that may improve the overall trading position of the farm.
How to structure a business plan
A business plan should contain the following sections:
- Operations plan
Description of the farm, land, cropping, livestock, as well as details of any specific environmental or conservation features.
A practical outline of any new proposals within the business plan.
- Business objectives
Include specific and measurable short and long term business objectives with timescales.
Without objectives or goals, it is difficult to measure performance or success. Setting out objectives within your business plan helps clarify both to yourself and any potential lenders what you are trying to achieve with the business and what your ultimate goals are. Make the objectives as specific as you can to ensure that you can look back at the end of the specified time period and assess whether the objective has been achieved.
- Current financial performance (if relevant)
Analysis of recent financial performance if available can help set the context and realistic expectations for the financial forecasts. If you don’t have 3 years of accounts, you may be asked to include what you have to date.
- Financial forecasts
Typically, a 3-year cash flow forecast with projected profit & loss accounts and farmers balance sheet. If you don’t have figures to use for your forecasts, start with standard figures such as those found in the Farm Management Handbook and adjust for your own scenario.
In order to be financially viable, the business plan should demonstrate that the business can generate sufficient profits to cover:-
- personal drawings;
- income tax;
- capital for reinvestment and major repairs;
- repayments on borrowing.
Uncertainty will always be a feature of business; there are many factors out-with our control. However, we should try to quantify these to assess how resilient the business is. The most common stress test within a business plan is to consider viability under a high interest rate scenario. The rate to use for stress testing the plan will generally be provided by the lender. Other examples could include stress testing the plan against lower sales prices or higher input prices.
- Financial Control
A business plan that sits in the office filing cabinet once created is no use to anyone. Consider how you will review actual business performance against the original plan as time progresses and how often this will take place.
By monitoring actual income/expenditure against budget during the year, this provides an early warning system, and allows you to make informed decisions as the year progresses. Remedial action can be taken, when problems are identified early, and this helps to avoid future problems.
- Marketing and sales strategy
Include details of the target market, sales volumes and timing throughout the year.
Farmers now face the commercial reality of having to sell their produce into a marketplace linked into world supply and demand trends. This has shifted risk and potential reward onto farmers, who must now ensure they are producing a product the consumer wants and be able to negotiate a price above their cost of production, in order to secure a successful future.
- Management team and staffing information
This should include details of the individuals running the business.
Outline key staff members along with their responsibilities, individuals skills and experience. It may also detail any other relevant family members and their roles.
If lending is being sought based on financial projections, lenders will be as interested in learning about key personnel as they are in the forecasted financial information - so take the opportunity to show off your own skills, knowledge and experience. If possible, create a summarised CV for each key member of the team.
Reviewing and updating an existing business plan
Even if your farm business plan is successful in obtaining the funding required, you should always consider reviewing it for possible growth opportunities and improvements to farming operations.
Things to think about:
- Your goals, for example, do you want to increase your profits?
- What changes you want to make to your business?
- How to best make these changes to your farm?
- How you will carry out this change?
- Any financial implications of this change, e.g. demands on cash flow
- How long the changes will take to implement?
- Potential risks (financial or otherwise) to your business
Further Guidance
Further advice is available from the Farm Advisory Service at https://www.fas.scot/rural-business/business-tools/
Financial assistance is available for all farmers in Scotland to engage an accredited consultant to help review and plan their business using an Integrated Land Management Plan or Specialist Advice Plan. For further details please visit https://www.fas.scot/integrated-land-management-plans-ilmps/ or https://www.fas.scot/specialist-advice/
Related FAS Resources
https://www.fas.scot/article/building-good-financial-habits-with-cash-flow-forecasting/
https://www.fas.scot/publication/writing-a-marketing-plan/
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