Business Planning for P rofitability – Financial Planning, Risk Management and Record-Keeping

1. Business Planning for Profitability –Financial Planning, Risk Management and Record-Keeping Dee Singh-Knights , Agricultural Economics Specialist WVU Extension Service May 7th, 2013, Charleston, WV Dosingh-knights@mail.wvu.edu, 304-293-7606

2. Business Planning – Begin with the End in Mind! Dwight Eisenhower: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

3. Which is Most Important to a Successful Small Agricultural Business? • A good product • Marketing your product to the right set of customers • Selling at the right price and the right amount to be profitable • All of the above

4. Planning for Profitability – Understanding the BIG PICTURE Sustainable Production Practices Value-Adding and Direct Marketing Networking Partnership

5. The Business Plan Ties Everything Together The Business Plan Financial Production Risks Goals Products Personal Characteristics Investment Financial Risks Marketing Marketing Risks Equipment and Supplies Projected Sales Budgets Legal Risks Resources Competition Costs Financial Statements Human Risks Skills Customers Price Taxes Contingency Plans Labor The Business Plan

6. ‘Just Enough’ Business Planning – Five Page Business-Plan

7. Where are you, what can I do, and what have you got? Financial Management What are my Farm Numbers? What do these Number Mean? How do I Improve my Farm Numbers?

8. Farm Financial Management is about using farm numbers to choose the right marketing strategy in order to maximize profits while reducing income variability and meeting strategic goals

9. 4. Business Planning • Farm and Family Goals • Farm and Family Goals Financial Management - Putting it Together

10. Why Keep Records • I don’t have time • I’m not that organized • I consume everything I raise • Taxes • Gov’t Programs • Loans/Credits • Leasing Agreements • Farm Planning and Management Top reasons not to keep records Uses of Records

11. Use Enterprise Budgets to estimate your break-even point Basic Record-Keeping- 6 easy steps

12. Record-Keeping - Step 1 Develop an Enterprise Budget • An enterprise budget is a written GOAL statement for a crop or livestock production activity. • It summarizes: • production goal, • expected market price and gross receipts, • planned management activities with required resource inputs and costs, and • estimated net return and break even price (BEP) for the goal production. • Sample Enterprise Budget – Sweet Corn

13. Revenue, which is the expected Market Price multiplied by the quantity you will sell. Variable Costs, which is the expected costs of all inputs needed to produce the corn crop. Fixed Costs, which is the expected costs of all capital items needed to produce the corn crop. Returns or Expected Profits, which is the expected returns minus the expected costs of the corn crop.

14. Different Types of Budgets • Total – Whole Farm Budget • What are my costs and returns for the whole farm having multiple enterprises • Enterprise Budgets • Which enterprise is more profitable • Partial Budget • How will a proposed change affect my business

15. How can I use my Enterprise Budget • Estimate Costs and Returns • Pricing • Determine most profitable enterprise. • Assess product mix • Track key costs • Enterprise Diversification • Answer ‘what if’ scenarios • Make changes to your farm: • adopting a new technology • Expanding an enterprise • adding new enterprises • Using different production practices • custom operation or buy or lease • making a capital improvement • value of a marketing plan change

16. Estimate Whole-Farm Farm’s Costs and Returns • The Whole Farm Budget • Estimates Incomes is on the left • Estimates Expenses on the right • The Whole-Farm Budget estimates potential profitability • Getting the maximum net farm income is the goal of most farmers • To do this, you must select the most profitable enterprises

17. Estimate Enterprise Costs and Returns • The layer enterprise generated $4,800 is revenue and $5,680 in expenses for a net loss of $880 • This is important in deciding which combination of enterprises will be most profitable

18. Estimate Enterprise Costs and Returns • The sheep enterprise generated $6,800 is revenue and $3,915 in expenses for a net profit of $2,885 • This is important in deciding which combination of enterprises will be most profitable

19. How can I use my Enterprise Budget • Estimate Costs and Returns • Pricing • Determine most profitable enterprise. • Assess product mix • Track key costs • Enterprise Diversification • Answer ‘what if’ scenarios • Make changes to your farm: • adopting a new technology • Expanding an enterprise • adding new enterprises • Using different production practices • custom operation or buy or lease • making a capital improvement • value of a marketing plan change

20. How can I use my Enterprise Budget to manage Production, Financial and Marketing/Price Risks • Determine most profitable enterprise. • Handouts for Presentation\Cornell High Tunnel Enterprise Budgets - DSK Edits.xls • Can also use it to assess your product mix

21. How can I use my Enterprise Analysis to manage Production and Financial Risk – Analyzing my Returns to Labor

22. Using my Enterprise Budget to manage Production and Financial Risk • Pricing Decisions • Much should I charge for a pound of tomatoes • Get Break-even Price: take total expenses per tunnel/pounds of tomatoes sold per tunnel • Total expenses = $2,123 per tunnel • Lbs of tomatoes sold/tunnel = 5,869 lbs • Break-even price = minimum acceptable selling price • $2,123/5,849 = $0.38/lb • Tomatoes in an Unheated High-Tunnel Template: • Handouts for Presentation\Cornell High Tunnel Enterprise Budgets - DSK Edits.xls

23. Break-Even Price To Cover Variable Costs: $404.03/1000lbs = $0.40/doz. To Cover Total Costs: $663.03/1000lbs = $0.66/doz. Break-even Price = Minimum Selling Price

24. Using my Enterprise Budget to manage Production and Financial Risk • Track Key Costs • Handouts for Presentation\Cornell High Tunnel Enterprise Budgets - DSK Edits.xls • Are your major costs in line with your expectations? • Lower – good • Higher – is it acceptable? can it be better managed?

25. Using my Enterprise Budget – What is Costs or Prices Change? • Answer ‘what if’ scenarios – Price Sensitivity Analysis • Sensitivity Analysis • What happens if I produce more or less than expected – how does that change my break-even point? • What happens if the market price is different than I expect?

28. Your Enterprise Budget can help you answer:“What Does it Take to Make a Living with my Business?” • What is your net income goal? • A common net income estimate is 20% to 25% of your gross income • In our example (Dee’s Farm), it was 37%

29. Your Enterprise Budget can help you answer: “Is My Farm Big Enough?” • You must have a appropriate farm size to have a steady and appropriate volume of product Big enough to access profitable markets Big enough to satisfy your income needs Big enough to Capture ‘economies of scale’ – the bigger you are, the lower your fixed costs

30. Record Keeping Tool • Keeping good records can help you to prepare: • an enterprise budget – what are my costs and returns • an annual Balance Sheet – is my equity growing • an annual Income Statement – am I making a profit • an annual Cash Flow Statement – do I have cash to pay my bills • Once I understand my farm numbers, I can use them to make better farm decisions

31. Why Keep Records • I don’t have time • I’m not that organized • I consume everything I raise • Taxes • Gov’t Programs • Loans/Credits • Leasing Agreements • Farm Planning and Management Top reasons not to keep records Uses of Records Handouts for Presentation\Record-Keeping Toolkit.docx

32. How to organize and use your records to develop financial statementsHow to use financial statements to make effective decisions Dee Singh-Knights , Agricultural Economics Specialist WVU Extension Service Dosingh-knights@mail.wvu.edu 304-680-9925

34. Financial Statements – Projected Cash Flow Statement • Can I pay my bills when they come due - Liquidity? • Provides information on the farm’s ability to meet financial obligations when they come due • Helps to identify the sources and uses of cash in the business • Early warning system for cash flow shortages • Does NOT provide an estimate of profitability • Helps plan for cash fluctuations in the business

36. Market Analysis Now I understand my Farm Numbers? Which Markets are best suited to my Operation? Which Markets will Help me Realize my Farm Goals?

37. Which Market Option will Help me Reach my Farm Goals? • What is your net income goal? • Which marketing option will help me reach this goal • Am I a low-cost producer • Can be price-taker or price-maker • Am I a high-cost producer of a unique, limited, value-added product • Choose marketing option in which I am a price-maker • To-market-to-market Workbook • http://aesop.rutgers.edu/~farmmgmt/marketing/tomarket.pdf

38. Compare Transaction Costs by Market Option

39. Business Planning Making sure all the parts of the business work together – Do my Farm Numbers match my overall Farm Plans?

40. Without understanding your farm numbers, you never know where you really are!!!!

41. Useful Links • Enterprise Budgets • http://www.hort.cornell.edu/hightunnel/business/budget.htm • http://www.uky.edu/Ag/NewCrops/budgets.html • http://www.uky.edu/Ag/AgEcon/pubs/software/budgets_livestock.html • Trends in Pricing • WVDA posts a Livestock Price Report every week • http://www.wvagriculture.org/Division_Webpages/marketing.html • Boston Terminal (where fruits and veggies come into the east coast for Distribution) posts daily price reports: • http://www.terminalmarkets.com/bostonterminal.htm • Rodale Institute publishes a Daily Organic Price Report: • http://www.rodaleinstitute.org/Organic-Price-Report • MOFGA Organic Price Reports are monthly • http://mofga.org/Publications/OrganicPriceReports/tabid/260/Default.aspx • Market Options and Transaction Costs • http://aesop.rutgers.edu/~farmmgmt/marketing/tomarket.pdf