Developing a farm business plan

An effective business plan is a blueprint for future business success

It demonstrates that you are looking at all the possibilities and gives you confidence that you have the best chance of making your business succeed.

A business plan also helps you identify opportunities you may not have recognised – and avoid potentially expensive problems you wouldn’t have otherwise seen coming.

Yes, and here’s why. Research shows that businesses with a business plan perform better than those without. 

Business planning works because it:

• Challenges you to really think through your ideas and identify possible issues
• Helps you to consider where you are now, look at options, receive advice and select the most important things to take forward
• Gives a sense of direction and urgency, which helps you, staff and advisers to prioritise effort
• Allows you to measure progress towards goals and take action to ensure you keep on track
• Builds your credibility and convinces others (including lenders) that you know what you're doing.

A manager is usually responsible for the business plan, but good plans are contributed to by staff and advisers; overseen by directors, trustees and owners; reviewed by financiers; and implemented by staff. This helps make sure everyone is pulling in the same direction.

A good business plan answers key questions about the Business Management Cycle:

• Where are you now?
• Where do you want your business to be in the future? Analyse your options and decide what you’ll do.
• How will you get there? Put it in a plan which you monitor and implement.

There’s no set formula for writing a business plan. The secret is to keep it short and simple so you focus on what is important.

Here we are highlighting areas to consider – but that doesn’t mean you need to cover everything. It’s a process of consideration, consultation, and analysis.

You don’t need to do it all yourself, get someone to help.

If you don’t have the information at your fingertips, we suggest talking with your accountant or farm advisor. They will be able to help you focus on the important questions the plan covers.

No situation stays the same for long, and your business will always face new challenges and opportunities over the years.

That’s why it’s essential you review and update your business plan regularly – at least annually.

Start your business plan with a summary of why the business exists, how it’s organised, and what the owners expect from it.

This could include:

• A brief explanation of the business and it’s background.
• What the owners want to achieve from this business, both financially and personally. You could describe the values the business owners hold – what they stand for and want to be known for. For example, developing young people, protecting the environment, or giving something back to their community or industry. If it’s written down, staff, advisers and others may be able to help.
• The long-term vision for ownership, management succession and business exit. It’s never too soon to think about that, and it may be appropriate to make it part of the business plan.

Who sets the long-term direction of the business? Outline who the owners, directors, trustees and key advisers are.

Who is responsible for delivering on the owners’ expectations?

Who are the other key staff in the business? Describe their skills and experience. Communication is critical to teamwork, so set out how you will maintain this.

Comment on external factors that will affect your business and how you plan to respond to them. 

This could include:

• The economy, exchange rates, interest rates and product prices
• Key markets, such as for livestock
• Suppliers, buyers, competitors, threats of substitutions, new technologies.

Describe the assets, as they stand. Describe the ability of the land, stock, races, machinery, etc, to generate production and operate cost efficiently. You can comment on things like fertility, quality of pasture, fencing, and whether the farm is set up to be labour efficient. Think about how you could improve productivity and efficiency in the future.

Describe how the business has performed in generating income. How does it compare to similar farms? 

With help from your accountant, review the past three years of your annual accounts. Compare across the years. Consider trends in key ratios, like Earnings Before Interest and Tax (EBIT), over time. When looking at EBIT, include ’normal’ shareholder drawings as an expense, and make allowance for any expenses that will generate increased income. Look deep into the EBIT, ascertain why it is where it is and how it compares to benchmarks. All this will help you better understand your business performance and highlight trends and opportunities.

Is the farm performing productively over time? How does it compare to the average and best similar farms? Where is production heading next year and in following years?

This could include:

• Key drivers of performance such as pasture harvest per hectare, again relative to peers and high performers
• What has been done to generate future production.

What are the operating costs in total and per unit of production? Is production generated efficiently, compared to the average and the best similar farms? Where are costs heading next year and the following years? Comment on costs per unit of production and compare to others and the best.

Is there an adequate return from the assets, compared to other places capital could be invested? How does the Return on Assets (ROA) compare to similar farms?

What is the financial outlook for this year and coming years? Use the expected (budget plus actual) result for this year, and budget for at least two more years after that, so you can see where you are likely to go.

Comment on the financial structure of the business, the asset value and the debt relative to the business.

• What is the debt-to-equity ratio (ratio of borrowed money to owner’s money) and the debt per unit of production relative to similar farms?
• What is the interest cover (EBIT divided by interest and rent)? What does this indicate about how readily debt is serviced from income? How does it compare to industry norms?
• How appropriate is the financial structure?
• Is there scope for new equity investment or additional debt to fund new assets?

In this section, set out ways to increase performance to be considered, along with estimates or analysis of returns. Intuition is important, but analysing options in greater depth usually gives a better basis to prioritise and compare. Your options might include things like capital investment, better management and a greater focus on key success factors.

Some methods farmers consider for increasing performance:

• Pasture or forage species renewal
• Animal genetics
• New fencing
• Feed budgeting
• Fertiliser
• Animal ID/performance
• Feed conservation
• Irrigation
• Standoff shelters and feedpads

Take all of the previous sections of the plan into account and consider the overall business situation.

What you are good at, and can build on?

Where do you need to improve or mitigate risk?

What areas could become future strengths?

What could derail the business?

Turn ideas into action by setting specific goals for each aspect of your business then measuring your progress towards them. You’ll then know if you’re on track, or if you need to adjust either your goals or the assumptions behind them.

Set out here who will do what, when, how it’s going to happen and what results are expected.

Ensure the goals are SMART – Specific, Measurable, Achievable, Relevant, Time framed. Some examples of SMART goals:

• Financial: turnover of $x and profits of $y by the end of the financial year.
• Strategic: to acquire a new lease, irrigate, convert pasture by the end of the year.
• Operational objectives: to increase staff productivity by x% by the end of the second year.
• Marketing objectives: to increase the percentage of lambs finished by 1 December.

Budgets are part of a business plan, and vice versa.

Comment on policy and plans in key areas:

• Capital budgets, for new investment.
• Refinance of debt, and its sources.
• Assumptions on productivity, product prices, costs and interest rates. ANZ economic forecasts can provide a basis for short and medium term assumptions.
• Sensitivity of the budget to changes in these assumptions.

Describe the cash position of the business now and how it is likely to change going forward. Identify cash shortfalls and how they are intended to be filled.

• Comment on cash flow and liquidity requirements for the short term (1-2 years), and the medium term (3-5 years).
• You should understand critical areas such as the banks’ expectations of debt repayment, willingness to extend further credit and shareholder’s expectations of dividends.

The business plan needs to set out how you intend to use any surplus. This could be by:

• Reinvestment into the business
• Debt reduction
• Distribution to shareholders.

Your accountant or ANZ Agri Manager can comment on your financial assumptions and ensure they’re realistic.

What are the elements that you will focus on to make the business, and any planned changes, successful?

Think about the skills and systems behind the activity. For example, to be successful, irrigation investment will probably require new pasture management skills and pasture monitoring systems.

Risks are things that may happen; issues are things that you know will happen. For risks, consider how likely they are. For both, consider their impact and ways you can reduce it.

Comment on the environmental considerations. Have you done a Farm Environment Plan? Do changes put pressure on infrastructure or the farm system? Will further investment be required? Will there be greater operational costs, such as more staff?

Economist market and product price forecasts allow you to adjust your budgets and work out implications. You can then take action to protect your profit.

List when annual accounts are received, your budget and cash flow completed, how often you report results against budget, who sees this and what their responsibility is to take action.

Monitoring should prompt action. Plan when information is received – who sees what, when, and what their responsibilities are to do something about it.