Have a Plan

Farm management specialist offer young producers tips for financial planning.

by Troy Smith, field editor, for Angus Media

“Failing to plan is planning to fail.” That adage is often attributed to Alan Lakein, a writer of books about time management. Yet former British Prime Minister Winston Churchill and U.S. Founding Father Benjamin Franklin each have been credited with quotes consisting of only slightly different wordings. Regardless of its origin, the maxim is one that farm management specialist Curt Lacy uses to advise young, beginning cattle producers to heed.

Lacy, a Mississippi State University Extension professor of agricultural economics, talked during the Young Producer Symposium in Athens, Ga., about the importance of having a business plan. The program targeting aspiring beef cattle producers was hosted in conjunction with the Beef Improvement Federation annual convention May 31-June 3.

“A business plan has two purposes,” stated Lacy. “It states what you want to do, so it guides your management team in making decisions to meet specific objectives and goals. It also helps you get the money to do it, by demonstrating to a lender that the business is feasible.”

Before sitting down to prepare a business plan, Lacy advised his audience to consider certain basic truths about business economics and financing. To begin with, anyone producing for a commodity market must understand that, long-term, the price of a commodity will be approximately equal to the average cost of its production.

“That’s why there’s an advantage in being able to do it cheaper — to be a low-cost producer,” explained Lacy.

A second basic truth is that, usually, there are significant reasons why others are not engaged in certain kinds of enterprises. When considering a start-up business that serves a niche market with little competition, Lacy advises would-be entrepreneurs to find out why so few others are doing it.

Thirdly, Lacy told listeners that any enterprise can be profitable if the price received for the product is high enough. But what price will the market support?

Next, Lacy reminded his audience that the best marketing plan begins with a thorough understanding of the cost of production. Producers must know all of their costs in order to determine if the business is profitable.

Lastly, Lacy reminded young producers that lenders really do consider the reputation and character of loan applicants. Many times, the decision to approve or deny a loan hinges as much on the person as his or her plan. However, that does not discount the importance of a business plan.

“Most lenders want to know two things: How much do you want? Can you pay it back?” said Lacy, emphasizing that the plan should show that the proposed business will make money and the loan can be repaid.

While the components of a business plan can vary, Lacy said a complete plan must contain the following: a business description including mission statement, objectives and goals, a production plan explaining what and how a marketable product will be produced, a financial plan illustrating that the business can make money long-term, a marketing plan and a risk management plan.

The Three Ps

Lacy advised the audience to remember “The Three Ps” of financial sustainability: The first “P” stands for profitability over the long run. The second “P” stands for payments. Can you maintain cash flow and pay bills in timely fashion? The third “P” represents position or solvency. Is your financial position improving over time, as indicated by a declining debt-to-asset ratio?

Lacy emphasized a smart approach to determining profitability, which starts with the inclusion of all costs. Along with operating expenses such as feed, seed, fertilizer and machine repairs, fixed costs like interest and depreciation, and labor, costs associated with management must be included. While figuring total costs on the basis of dollars per cow may be useful for some things, calculation on the basis of dollars per unit of product sold is necessary to determine profitability.

“Cattlemen sell pounds, and they need to know what it costs to produce a pound sold,” said Lacy.

 

Financing options

Discussing options for obtaining financing, Lacy said the conventional way is through commercial banks or the Farm Credit system, but the USDA Farm Service Agency and certain state agencies also provide options that may be advantageous to young producers. He also noted lease-purchase and share-rental agreements as potential avenues to establishment of new cattle operations.

For those determined not to fail for lack of a plan, but in need of help, Lacy recommended a University of Minnesota website dubbed AgPlan. Created by the University’s Center for Farm Financial Management, the site’s sole purpose is to aid rural businesses with business plan development. Lacy suggested that interested parties try one of AgPlan’s business plan “templates.” Users are guided step-by-step through the process of developing each of the important parts of a business plan. The website also directs users to additional resources. Connect to the site at www.agplan.umn.edu.

To view the PowerPoint that accompanied Lacy’s presentation and/or to listen to his presentation, visit the newsroom at www.bifconference.com.

Editor’s Note: This summary was written under contract or by staff of Angus Media. Through an agreement with the Beef Improvement Federation, we are encouraging reprinting of the articles to those who will adhere to the reprint guidelines available on this site. Please review those guidelines or contact Shauna Rose Hermel, editor, at 816-383-5270. PowerPoints are posted with permission of the presenter and may not be reproduced in whole or in part without the express permission of the presenter.

Angus Media’s coverage of the event is made possible through collaboration with BIF. For questions about this site, or to notify us of broken links, click here. Look for additional coverage in the Angus Journal, the Angus Beef Bulletin, the Angus Journal Daily, the Angus Beef Bulletin EXTRA and Angus TV.