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A business
plan is a road map for the business. It describes
the key functional areas of the business including
operations, finance, management and marketing and
should support the mission statement, objectives
and goals set forth by the owners. Business plans
are useful both internally by owners and managers
as a guide to the future of the business and externally
as a tool for acquiring needed capital from banks
or investors.
The sophistication
of a business plan usually depends on the audience
that will use the plan and the scope and situation
of the business. A proposed new business that produces
a nontraditional product and that is seeking outside
investor capital would need a much more comprehensive
business plan than an existing business that is
about to make minor adjustments to its operation.
Agricultural
producers have largely ignored business plans in
the past. Few have had to find investor's capital
for their operations. As margins continue to tighten,
agricultural producers will have to plan their business
many years into the future in order to survive.
Business plans will become a standard component
of their operation.
Purpose
of a Business Plan
A business
plan serves two basic purposes:
- to
help guide the business management team in directing
the business decisions to meet the specified objectives
and goals
- to
help sell the feasibility of the business to potential
bankers or other investors for the purpose of
acquiring needed capital
The business
plan should be tailored to the preferences and concerns
of the readers (either the management team or lenders).
What goes into a business plan depends on several
factors including who the audience is, the type
of business, and what the business plan will be
used for. A business plan can be organized in a
variety of ways as long as it serves its purpose.
As an
example, if you are a new producer starting a production
agriculture business and are seeking financing to
get started, both you and the banker or other investor
would benefit greatly from the business plan. For
the new producer, the process of developing the
business plan will provide you with valuable insight
into the operation, some of the challenges that
may lie ahead, strategies for managing these challenges,
and can help foster an increased level of awareness
of the business side of the operation. If you feel
that obtaining financing will not be easy, a more
formal and detailed business plan can help convince
potential bankers or investors.
A business
plan will also benefit an existing operation especially
if it is proposing a major change to the operation.
The business plan in this case should spell out
the proposed changes, the financial obligations
and the proposed impacts of the changes on the operation.
Components
of a Business Plan
Complete
business plans generally contain the following:
Business
Description and Organization
History
Resource Inventory including:
Human
Land
Equipment
Capital
Commodities
Natural Resources
Mission Statement
Objectives and Goals
Production Plan
Financial Plan
Market Plan
Legal and Liability
Insurance
Succession and Estate Planning
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Business
Description and Organization
The first
portion of the business plan is an overview of the
operation. It describes the history of the business,
location, products produced and/or services provided,
family members involved and their responsibilities,
the organizational structure of the business, resource
needs and availability and a summary of the business's
strengths, weaknesses, opportunities and threats
(SWOT analysis). History, location and the description
of products and/or services provides the reader
with basic information about the business. An outline
of the family members involved will assist in defining
the responsibility of all involved.
Organizational
structure refers to two areas: (1) whether the business
is a sole proprietorship, limited or general partnership,
corporation, or other form of organization, and
(2) the management team. The management team should
include the family members involved, any hired employees,
the lender and any hired consultants. Each should
be listed in the plan. In addition, a description
of the number of employees and their compensation
should also be included. For both management and
other employees, a brief description of their duties,
responsibilities, and decision-making authority
should also be included. If a banker or investor
will be looking at the business plan, they will
be interested in who is involved, who is doing what
and what their qualifications and responsibilities
are.
Mission
Statement, Objectives and Goals
A business
plan must define why the business exists and where
the management wants it to be in the future. The
existence of the business is defined by the mission
statement. A mission statement is a broad statement
that expresses the business's purpose. Every member
of the management team should be involved in writing
the mission statement.
An effective
mission statement is the foundation for determining
objectives and goals and steering the business in
the proper direction. The objectives and goals should
relate to production, production costs, debt ratios,
risk management, expansion, bringing a partner into
the business, or any other aspect of the business.
Objectives define what the operation will look like
in the future, while goals are targets to be met
in order to achieve the objective and ultimately
fulfill the mission statement. One common theme
found in most business planning publications regarding
goals is the concept of SMART goals. This concept
suggests that goals must be specific, measurable,
attainable, rewarding and there should be a time-frame
specified for reaching each goal.
The following
pyramid illustrates the relationship between the
mission statement, objectives, and goals.
Strategy and tactics, the top two layers,
are the final two steps to achieving your mission.
Strategies are your overall plan for achieving the
long range objectives and goals while tactics refers
to how you will accomplish your strategies and goals
through day-to-day operations.
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Production
Plan
The production
plan conveys the type of commodities and the quantity
that will be produced. Depending upon the detail
of the business plan, three year projections of
production should be included. The information in
the production plan needs to be presented such that
the reader can easily follow this information. These
same figures are included in the financial plan.
For crop
farms, the production plan should include the estimated
acreage for each crop each year (crop rotation)
and an estimated yield for each crop. Estimated
production levels can then be combined with estimated
prices to generate some of the needed figures for
the financial component. Livestock operations will
have several more variables that need to be included.
The livestock production plan must clearly identify
all related production information, including the
size of the herd, cull rates, weaning rates, weaning
weights, rates of gain, purchase price, sales prices,
etc. If there is a replacement herd involved, such
as with a cow herd or swine farrowing enterprise,
the production assumptions for the replacement herd
need to be spelled out separately from the breeding
herd.
In any
case, the production plan should be defined for
a minimum of three years. While changes will occur,
these projections will begin to outline where the
business is going and if the business can reach
the objectives and goals.
Financial
Plan
The primary
purpose of the financial plans is to illustrate
whether or not the business is feasible. The financial
plan typically includes three years of pro forma
(projected) financial statements including (1) the
income statement, (2) the cash flow statement, and
(3) the balance sheet. This information should be
closely tied to the production plan figures. For
an existing business, including the actual financial
statements for the past two years helps put the
projected financial statements into perspective
with how the business has performed in the past.
Some
additional information that should be contained
in the financial plan is:
The
amount and timing of money that will be borrowed
The specific use of these funds (operating, land,
equipment, etc.)
The length of the loan(s) and interest rates
The financial risks associated with the business
Strategies you will use to minimize these risks
These
are key issues the owner and/or manager needs to
think about and that lenders and other investors
will be looking for. One simple approach to analyzing
risks and the feasibility of the business is to
look at the impacts of varying levels of income,
such as 10, 20, and 30 percent increase or decrease
in your budgeted gross operating receipts. The income
statement and balance sheet are usually projected
on an end-of-year, annual basis while the cash flow
statement is usually presented on a monthly basis.
For in-depth information on these financial statements,
please refer to the additional readings list at
the end of this publication.
Market
Plan
The market
plan component should not be confused with an annual
marketing plan that a producer would develop during
the course of annually marketing the operation's
production. While you are encouraged to develop
an annual marketing plan for the first year of the
projection period, the market plan section should
provide information on market structure for the
commodities you plan to produce and describe how
your product fits into the market.
The structure
and content of the market plan will vary somewhat
depending on the commodity you are trying to market.
The plan should provide some analysis of what the
current market situation is and what you think the
market will look like in the next 3 to 5 years.
This type of long-range market analysis can address
projected U.S. production, total supply and demand,
federal farm programs, cycles and other anticipated
factors. Researching what market analysts are saying
about current and future market conditions can be
beneficial in developing this portion of the marketing
plan.
For commodities
that are marketed through major market channels
the marketing plan should also address strategies
you will use to minimize price risk. These strategies
can involve futures, options, marketing pools and
forward contracts or any combination. For businesses
producing fruits or vegetables, specialty products
or other commodities not marketed through major
channels, a market may have to be developed. As
such, the market plan needs to define potential
buyers (target market), distribution channels, middlemen
and potential pricing mechanisms such as contracts.
For beef producers producing specialty beef products
or participating in a beef alliance, this aspect
of the market program should be addressed.
It is
advisable for the market plan section to include
a detailed written annual marketing plan for the
first year of the projection period. A written annual
marketing plan, which uses information from other
parts of the business plan, involves determining
marketing objectives and goals, developing your
personal market outlook for the year, identifying
available marketing tools you feel comfortable using,
determining target price and date triggers and identifying
the strategies you will implement to accomplish
the marketing objectives and goals you have set
forth.
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Legal
and Liability Issues
This
portion of the business plan should define those
risks that are unseen by the preparer. The business
plan should outline insurance needs, legal liability
and succession of the operation.
People
and businesses face risks every day that could jeopardize
their future. Managing these risks is usually through
the use of insurance. While there are numerous risks
that business are exposed to, they generally fall
into five broad categories: loss of key employees
from death, illness, or accident, legal liability
and property loss. To minimize the possibility of
catastrophic loss, several types of insurance products
are available to provide financial protection. The
use of a business entity can also be used to manage
risks. The business plan should address the strategies
you use for managing these risks. A bank or investor
will have a keen interest in this area.
Another
area that needs to be addressed is two-fold: (1)
succession planning and (2) estate planning. Succession
planning is the means by which ownership and management
of the operation will be transferred to someone
else. The succession plan needs to specify when
this will occur, or what events will trigger the
transfer, such as retirement or death. If the operation
will cease operations at some point in the future,
the plan needs to have a liquidation plan. Planning
ahead for this important event will ease the transition.
The estate
plan is usually closely related to the succession
plan and involves planning for the transfer of all
property to your beneficiaries. While estate planning
can be a very involved process, the business plan
needs only to summarize the objectives of your estate
plan and the estate planning vehicles used such
as wills and/or trusts.
References:
Doane's
Focus Report
Small Business Association
Wilson, Troy D., and David M. Kohl. "Business
Planning - A Roadmap for Success, Virginia Cooperative
Extension Service.
Dean McCorkle and Stan Bevers, Risk Management
Education Curriculum Guide by the Texas Agricultural
Extension Service.
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Business Planning