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Session 2: Business Planning and

Farm Finance Introduction

UVM Farmer Training Program

Mark CannellaFarm Business Management Specialist

Mark.Cannella@uvm.edu 802-223-2389 UVM Extension Farm Viability

Last Time

• Values

• Start Up Decisions and Check List

• SMART Goals

• SWOT

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Today

• Farm Business Plan Overview

• The financial plan– Financial Goals

– Balance Sheet

– Cash Flow

SWOT Analysis

• Internal: Strengths and Weaknesses

InternalAnimal Husbandry

Secured Land Base

New Equipment

Limited Cash

Unreliable Staff

Bad Credit Score

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External: Opportunities and Threats

Capitalize or

Mediate?

Rain During Haying

Animal ID Regulations

Diseases, Bio Security

Food Safety Recall

Strong Local Demand

Adjacent Property for

Rent

• Sample SWOT

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The Assignment

• Develop an enterprise plan for an element of a future business. The plan must include a budget and one of the following analyses for this element of the business:

– Market analysis

– SWOT Analysis

– Production Analysis (systems, methods and technology)

– Management Analysis (HR plan, Job Descriptions)

– Risk Management Plan

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Plan/Goal

Land

Equipment

Labor

Product

Markets

Business Plan Basics

• Reasons to write a plan– a “feasibility” plan beforehand

– To fine tune an existing business

– To justify new investments or strategies

• Who is the audience?– Internal plan to guide management

– External plan (lenders,investors,others)

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Business Plan Elements

• Executive Summary

• Farm Description

• Products and Markets Description

• Analysis:– SWOT

– Management and Operations

– Market

• Financial Information– Net Worth

– Gross Sales

– Return on Assets

– Net Income

• Planning

- Goals and Strategies

- Implementation Plan

• Supporting Documents

- Financial Statements: (Balance Sheet, Income Statements, Cash Flow)

- Technical Assistance Reports

- Farm Maps/Soil Maps

- Pictures

- Other

Financial Statements

• Balance Sheet

• Cash Flow Statement

• Income Statement or Profit and Loss

• Derived from your accounting system/records

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What is the Point?

• Am I generating wealth for my future?

• Can I access credit to buy the farm?

• Do I have money to purchase garlic seed this fall?

• Can I pull cash out for family living?

• Is garlic farming profitable?

The Skills You Need• Addition, Subtraction, Multiplication, Division

What you really need

• Time and System to RECORD

• Commitment to REVIEW

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Financial Goals

• Increased Equity and Net Worth

• Cash generation for owner draw (your paycheck)

• Profitability: Covering all costs and generating a positive return on capital investments.

Equity or Net Worth• Assets – Liability = Equity

• Generating wealth over time through increasing ownership of assets

• Can help access capital through borrowing

• Can be liquidated (converted to cash) through a sale

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Equity Looks Like

Balance Sheet

• A snapshot of the farm worth at a single point in time. Successive balance sheets need to be completed over time to analyze trends.

On a balance sheet:

• Inventories and their value

• Assets Value: Items with a useful life over 1 year

• Liabilities: Obligations to be paid back

• Net Worth = Assets minus Liabilities

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Balance Sheet• Current Term Asset: sold or used up in the next 12 months

cash on hand, accounts receivable, feed inventory, marketable livestock

• Intermediate Term Asset: useful life from 1-10 yearsmachinery, breeding livestock, equipment

• Long Term Asset: useful life of 10+ years

land, buildings, improvements

• Current Liability: needs to paid off in the next 12 months

• Intermediate Liability: Paid off in 1-10 years

• Long Term Liability: Paid off in over 10 years

Samples

• Equipment Inventory

• Balance Sheet Sample

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Cash Flow

• The Purpose: to maintain sufficient cash on hand so you can pay bills as they come due– Will you need to borrow, when?

– How much can you draw for salary?

– Unplanned opportunities or problems

Cash Flow Statements

The focus is on transactions

Cash Flow Statement: summarizes all cash in-flows and cash out-flows over a specific time

Cash Flow Budget/Projection:

Forecasts cash activity for a future time period.

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Clues to Improved Management

- Find the major expenses

- Identify where the income comes from

- Measure how much the business supports the livelihood of owners

- What else can you find?

Expense Categories

• Variable Expenses: Expenses that go up or down in relation to changes in production level.

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Expense Categories

• Fixed Expenses: Expenses that hold steady even if the business produces more or less goods

Expense Categories

• Capital Expenses: A special category for the purchase of items or improvements that have a useful life more than one year. These items can often be re-sold (ie. used drip tape cannot)

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Cash Flow #1

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Capital Activity+ Capital Inflows +

• Sale of Farm Assets

• Contributions from Savings

• New Loans/Borrowing

- Capital Expenses -

• Purchase of Equipment and Real Estate

• Loan Payments

• Cash Draw to Owners

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Samples

- What are the major expenses

- Where does the income come from

- How does this business support the livelihood of owners

- What else can you find?

The Five C’s of Credit

CHARACTER – Credit History, knowledge, experience

CAPITAL - Financial position, equity, cash

CAPACITY – Repayment ability and borrowing capacity

COLLATERAL – Lender’s security

CONDITIONS – Of the economy, the industry

32Intro to Ag Fin Mgt, UVM Ext, Feb 2015

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Loans

• Loan Schedule:– Interest Rate

– Periods (# of months)

– Borrowed Amount

• Try a loan calculator online

Readings

• MF 275 Kansas State Farm MgmtGuide: Cash Flow

• MF 291 Kansas State Farm MgmtGuide: Balance Sheet

• Building a Sustainable Business: Task 4: pp 103-175

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Next Time

• Market Research

• Setting Prices

• Product Development

• Promotion and Sales