Farm Horizons, Feb. 2011
Have you made a plan yet?
By Myron Oftedahl
Did you make a New Year’s resolution? Maybe you said, “I want to be better organized this year.” When it comes to managing your farm, planning is a little like making a resolution to be more organized.
There are a number of plans that you should consider if you are managing a farm business. These would include a cash flow projection, a marketing plan, crop budgets and a cropping plan, a capital purchase plan, a tax estimate or tax management plan, a retirement plan, and a business plan. There could be others depending on your needs, but the most important part of all of these possible plans is that the plan be written. Once you put the plan on paper, it helps remove some of the emotion and it will be easier to implement the plan.
Let’s take a look at these plans:
• A crop budget will give you income and expenses on a per-acre basis, and will give you a fair break even value, assuming you follow the budget and Mother Nature cooperates. A cropping plan brings in what variety will go where. You want to make sure that the soybean variety that can withstand high pH areas in a field actually gets planted in that area. This would be where you can keep track of if this field had corn or soybeans or small grains last year. A nutrient management and/or pest management plan would fit into this group of plans nicely.
• A capital purchase plan or budget is simply a list of capital assets that you would like to replace or add over the next three to five years. Your priorities may change from year to year, but it eliminates the compulsive purchases and helps you to keep your focus on the planned items.
• The marketing plan can be split into two different plans, one being a pre-harvest plan and the other a post-harvest plan. The pre-harvest plan would note that you are planning for x number of acres with a planned yield of x bushels, and that you are planning to price one-third of the crop before harvest.
I always look at the total bushels to be harvested and subtract the possible storage capacity and figure that any bushels over the storage amount have to be priced before harvest. This allows me choose a better basis than would normally be available during harvest.
The post-harvest plan is written after harvest. Now I know how many bushels that I have to sell, and I can make sales as the carry in the market indicates, or I have cash needs, or I have time to haul the grain. Both plans need to be written, as this helps remove the emotion and greed that often impacts our grain marketing decisions.
• A cash flow projection now incorporates the crop budgets, the cropping plan, the capital purchase plan, and the marketing plan into a cash flow projection that identifies income and expenses, along with when they will occur. Then add the loan payments that must be made and it allows us to project which months the operation will need additional cash in the form of an operating note and which months we can pay the operating note down. It also allows us to project the profitability of the operation and to look at “what if” scenarios. What if I raise all corn or expand the dairy herd? How does this impact the rest of the farm business?
• At this point, you work on the business plan. I like to say that this is the narrative to go with all of the other plans’ numbers. This tells the story of how you will get from here to point B, and gives some alternatives if things change along the way.
For those of you who have been in agriculture for a number of years, you know that things don’t always go the way that you had planned. But, don’t let this discourage you, make the plans, think them through, develop alternatives. How many different ways can you make lemonade out of lemons?
Making plans requires time and commitment. Plans need to be written down. We can have a plan in our head, but it’s too easy to not implement it because greed took over and you waited for $7 corn or $15 soybeans, instead of selling some $5 corn, $5.50 corn, and $6 corn. If it is on paper you have already told yourself that this is a good price, I have made a profit, I need the cash for these expenses, and it is easier to carry out.
So, take some time and develop some plans and make a road map for your business to follow. If you need help with these plans, contact a farm business management instructor in your area.
Have a profitable year.