While farming is a long term business, many farmers get trapped into reacting to immediate operational, problems. As a result, opportunities are missed to grow the business. Strategic management involves stepping back from the everyday buzz of farming and answering four questions:
The process of answering these questions may take months and involve discussions with partners (often family) plus outside parties like lenders, consultants and solicitors. Therefore the first step is to clearly define why you are undertaking the process (eg, buying the farm next door, passing farm onto next generation, cutting fixed costs, etc). A sentence or two is enough.
Now work through the planning or budgeting process by clicking on the questions. Have a quick look through all four to get an overview of what’s involved.
If you want to speak to one of our trained advisers about a business issue or undertake an Integrated Land Management Plan, please phone the helpline on 0300 323 0161, or explore this website in more detail.
>Where am I now?
Establishing your current situation involves critically reviewing your current farm and system. Use this checklist to help.
The next action is to assess your financial position. For an established business, the tax accounts viewed over the last few years will provide much, though far from all, of the information needed. A new entrant may not have accounts, but establishing their financial basis (income, savings, assets, etc) is no less important, especially if bank help is being sought.
Estimating your cash needs is the first step.
Then review your tax accounts to benchmark your business against similar farms before calculating an up to date farmer’s balance sheet. Refer to the understanding farm accounts tool in the benchmarking section if you need to refresh your knowledge of how accounts work. It is also important to specify your current support income and how it might change over the next year or so.
At this point, you can gauge your current business health.
>Where do I want to go?
Answering this question involves covering two key areas;
- Establishing your (long term) goals – Do not confuse goals with objectives. Goals are typically descriptive (eg, to diversify the business away from pure farming) and limited to three of less. While objectives often relate to the coming year, or so, and involve numbers (eg, achieve an average lamb weaning weight of 30kg at 90 days). See action plan for more on objectives.
- Completing a market analysis – most farm business plans do not undertake a market and competitor analysis unless they are considering diversifying into a non-farming activity. Yet finding out exactly what consumers (and processors) want from their dairy, meat or crop products is critical to long term success. Likewise, being aware of how competing farmers here, in the EU and beyond, might react to, for instance, Brexit, is equally important to assessing how best to take the business forward.
A wealth of information is available through the publications and events section of this website. In addition, QMS and AHDB provide regular market reports and reports on longer term market developments.
Having reviewed your business, defined your long term goals and investigated relevant markets, use a SWOT analysis to summarise all you have gleaned about your current situation and opportunities.
>What’s the best way to get there?
With a good grasp of your current situation and where you want to go, time to consider the best way to get there. This is a key stage that involves thinking through the consequences of a range of options, which in outline are:
- Carrying on with the current system (the status quo).
- Upping performance of the current system.
- Significant change from the current system.
- Upsizing or downsizing.
- Exiting farming.
Good business planning involves using budgets to check which option is likely to best meet long term goals. What are you checking for?
- Profitability – when established will profit be high enough to consistently cover cash needs?
- Feasibility – how tight will cashflow be in the initial establishment stage? If tight, are there capital reserves to draw on or will a bank loan be required?
- Practicality – can the levels of performance built into the budgets be delivered?
- Riskiness – how vulnerable is the option to a bad harvest or price collapse?
- Flexibility – if something goes wrong, is there another way of readily getting things done?
- Commitment – are all partners agreed on the way forward?
No one can predict the future with totally clarity. But experience shows that businesses that mull over their options through a rigorous budgeting process, tend to make choices that give them the best chance of long term success.
Start by budgeting the current system using realistic assumptions on the levels of performance, prices and costs expected in the year ahead. This status quo budget provides the benchmark option for comparing with other options for running, or indeed exiting, the business. Hence, this is termed a “with – without change” analysis.
There are various budgeting formats available. This whole farm budget template is useful as it shows everything on a side of A4. Your gross margin performance will be based on expected levels of performance and prices and costs in the coming year. If you already complete a plan for the year ahead, you have the “without change” budget. The Farm Management Handbook and Enterprise Gross Margins are useful references along with the monthly market updates (eg, Milk Manager News, Agribusiness News) that can be found in the publications section.
If you are an established business, comparing your forward budget against the accounts analysis (eg, gross margin per adj.ha) you completed earlier, will help check the plausibility of your assumptions. But always do some “what-if analysis”. That is, test the impact of changes in the big assumptions (eg, milk price, grain yields, concentrate costs, etc) on profitability.
If the status quo budget indicates that profitability will comfortably cover future cash needs, the decision may simply be to carry on with the current system. However, experience tells us that the most successful businesses are always looking at options for growing the business or planning succession and generally keeping one step ahead. Indeed such farmers tend to be the best budgeteers.
To assess the alternatives you can use either a whole farm budget or a partial budget. The latter has the advantage of highlighting the marginal impact of a proposed change to the business. However, some people find partial budgets confusing and prefer to simply complete another whole farm budget. Whichever approach is used, always apply the above checks (eg, impact on profit, risk, practicality, etc) to each option. The budgeting calculator includes some examples to aid understanding.
Having done the budgeting, picking the best option depends on more than simply which option gave the biggest profit. You, and your partners, attitude to risk are especially important. Given adequate weighting to the range of checks or hurdles sited above is therefore recommended.
>How to stay on track?
Some plans will fail thanks to bad luck. However, far more plans fail because of poor implementation. Given how the best made plans can be buffeted by changes in market prices, subsidy changes, weather, changing family circumstances, etc.
Two means of keeping a plan on track are recommended.
Finally, remember that long-term, strategic planning is an ongoing process that should include contingencies that can be triggered if necessary. Where circumstances affecting the business change dramatically new opportunities (eg, the farm next door comes up for sale) or problems (eg, ill health) may be created. Such changes may require a completely new strategic look at the business. Continuous improvement is a mantra of resilient, successful businesses.
Sign up to the FAS newsletter
Receive updates on news, events and publications from Scotland’s Farm Advisory Service