Business Management and Enterprise Development

Shannon DillMaryland Cooperative ExtensionTalbot County

Objectives

Business PlanningMarketing and SalesCustomer ServiceResources

Business Plans

No matter how large or small it is necessary for you have a written farm business plan Business plans help with

Supporting a loan applicationDefining a new business, goals and steps to achieve those goalsEvaluating the effectiveness of business and marketing strategiesSet a direction for the business in the next five yearsGrowth and development for established businesses

Business PlansA good business/marketing plan should be realistic, simple, specific and complete.

Is your plan realistic? Are your goals, dates and objectives realistic to your farm operation?Is your plan simple? Can you and others read and understand the farm business plan?Is your plan specific? Are goals, objectives and finances measurable?Is your plan complete? Does your plan include all aspects of your farm business?

Contents of a Business Plan

Executive SummaryMission and GoalsBackground InformationFarm StrategyMarketing Strategy and Plan

Enterprises Analysis and PlanFinancial PlanImplementation StrategyHuman Resource PlanResource Inventory

Executive Summary

It is in the front of the document BUT the last task to be completed. Overall summary of your business goals and objectives and how you plan to meet them.

Mission and Goals

Mission Statement: purpose of your farm operation (1 or 2 sentences)

Answer – Why does your business exist, what purpose and where are you headed.

Goals: Specific and measurable statements of what the business expects to achieve. Can include production, marketing, financial, etc…

Mission and GoalsUse them in marketing

MISSION

GOALS

Background Information

Logistics: Name, address, ownership, advisors, employeesHistory: A Summary of the history of the farm operation/businessOperation LayoutLegal and Contractual Situation: Assets, contracts, insurance, estate plan, retirement, conservation programs, otherProduction: Acreage, yields, livestock

Farm Strategy

Step 1: Gathering information and market research. Step 2: Analyzing the external and internal components of your business using the S.W.O.T. analysis. Step 3: Creating alternative plans of action and identifying areas of competitive advantage. Step 4: Formulating a strategy is selecting the best plan that fits your overall farm mission.Step 5: Implementing and evaluating the strategy.

Step 1: Gathering information and market research.

Market Research: Research your current and potential markets to identify trends, competitors, needs and buyers. Focus groups, demographics, surveys, observation, interviews

Step 2: Analyzing the external and internal components of your business using the S.W.O.T. analysis.

S.W.O.T. is an acronym for: StrengthsWeaknessesOpportunitiesThreats

Strengths and Weaknesses

Evaluation of the Internal EnvironmentFinancial resourcesManagement capabilityHuman resourcesLocationFacilities

Threats and Opportunities

Evaluation of the External EnvironmentCompetitor analysisNew/expanding marketsRegulationsTechnologyeconomics

S.W.O.T.ACTIVITY

Step 3: Creating alternative plans of action and identifying areas of competitive advantage.

Pulling it all together – Internal Strengths with External OpportunitiesPlan of ActionWhat is unique, what is your competitive advantage, what will your consumers value

Step 4: Selecting the best plan that fits your overall farm mission.

It is now time to select the plan that best fits your overall farm operationKeep in mind SWOTCan you see yourself doing this in 5-10 years?Include marketing, production, finances and management along with your competitive advantages.

Step 5: Implementing and evaluating the strategy

How are you going to get it done!

Following the financial plan there is a section that focuses on implementation

Marketing PlanMarket research – Completed during the SWOT analysis

Target Market - It is important to understand who is purchasing your products so that your marketing efforts will reach that segment. You cannot be everything to everyone. In order to effectively market, you need to cater your product and services to the set of customers who will see value in the product you are offering. Who are you marketing to?

A target market can be developed by:Demographics – age, gender, family size, education, occupationGeographic – location, city, urban, ruralPsychographic – behavioral patterns, lifestyle similarities, common interests, beliefs and hobbies

Marketing StrategiesThe 4 P’s of marketing

ProductPricePlacePromotion

4 P’s of Marketing - PRODUCTWhat sets your product apart from others? What are the products main attributesIncludes – Market research, logos, slogans, sizes and packaging

Physical/service

Features vs Benefits

4 P’s of Marketing - PRICE

How much value does your product offer? How are you going to make pricing decisions?Cost of productionBreak even pointMarket positionRe-price and evaluatePerceptionLocationSupply and competition

4 P’s of Marketing - PLACEWhere will you sell your product? Where does your target market shop?Locations and logisticsTransportation and distribution

4 P’s of Marketing- PROMOTION

Where is the best value for your promotional money and efforts and how will you determine if they are working?Unpaid – Positive, PR, newspaperPaid – Advertising, publicity, sales promotionsBe creative!

Positive?

Positive

Marketing Budget

ResearchCommunicationsNetworkingPromotionsAdvertisingPublic RelationsDistribution

MARKETINGACTIVITY

Enterprise Analysis and Plan

Divides costs and returns for each farm enterpriseHelps to determine the productivity of enterprises and if a farm should continue or change enterprises

Net Income: Net income is the money left after subtracting variable and fixed cost. This is the bottom line. NET INCOME = Gross Revenue – (Variable + Fixed Costs)

Variable Cost: Cost items that vary with production volume. Examples of such items include fertilizer, seed, fuel, electricity, piece-work labor charges, pesticides, packaging cost, and custom charges.

Fixed Cost: Those cost that you will incur regardless of whether you produce any output. These costs are determined using the DIRTI 5 method which includes Depreciation, Interest, Repairs, Taxes, and Insurance. Often a piece of equipment or building will be used for more than one enterprise. In these cases it is important to estimate the percentage of use for each enterprise and allocate the cost accordingly.

Gross Revenue: The total sales of product or services from the enterprise. Revenue can be calculated with the following formula: Price x Units Sold= Gross Revenue

Components of an Enterprise Budget

Financial Plan

Very important and necessary component of the business plan

Balance Sheet – Net WorthCash Flow – LiquidityIncome Statement – ProfitabilityPro Forma Statements

Balance SheetSummarizes Assets, Liabilities (Debt), Net WorthNet Worth = Value of Assets – Value of LiabilitiesCurrent (< 12 months), Intermediate (1-10 years) Long Term (>10 years), Non-farm“A Balance Sheet is a snapshot of the farm’s financial position”

Cash Flow

Summarizes all cash in-flows and out-flows for a period of timeCheckbook Accounting

In-Flows – crops & livestock sales, receipts, sale of capital assets, borrowed moneyOut-Flows – production, capital expenditures, loan payments, living expenses

Important on farms because of seasonalityProjected and Actual Cash Flow

Income StatementSummary of revenues and expenses for a specific time periodRevenue – Receipts from sales, government payments, dividendsExpenses – Production expenses, interest, taxes, insurance, loansInventory Changes – Accrual adjustment Depreciation and Capital Adjustments Revenue – Expenses = Net IncomeMain purpose is to determine how much income was generated by the farm operation

Projected Financial Statements

Lender, farm operation or other factors may require projected financial statementsTo do this review enterprise budgets and financial statements

Implementation Strategy

Research completed, finances in orderTime to implement

Production ManagementMarketingHuman resourcesFinance and accounting

Exit Strategy

Agriculture includes many risks. These should be considered What are your exit signals

Farm profitSet ageEstate plans and farm/business transferChange of marketsProperty value

Human Resource Plan

The people part of your planDoes not matter how large or small your businessParts of the Human Resource Plan

Position and dutiesOrganizational chartSkills and training

Position and Duties

IncludePosition or name of who is responsibleDuties and responsibilities of the positionSkills and talentsSalary and wagesWorks schedules

Seasonal, part time, full time

Organizational Chart

Skills and Training

Continuing education and advancement in technology is very importantIncludes

Skill NeededTraining availableWho in the farm business is responsible

Resource Inventory

Gathering resources whether physical or an expertise is very importantResource Inventory Includes

Building and facility requirementsBuilding and structure inventoryEquipment inventory

Building and Facility Requirements

Physical ResourcesLand, Livestock, Equipment, Facilities, Transportation

ExpertiseComputers, marketing, record keeping, production

Other

Building and Structure Inventory

BuildingPurposeSquare FeetRequired FeaturesLocation

Equipment InventoryEquipment NameModelSizeYear PurchasedAgeConditionOwnershipBook ValueMarket ValueThis keeps valuable information needed for your financial statements

Appendix

Can include mapsContact sheetsBudgets

Marketing and Sales

Direct Marketing

When a farmer sells commodities in a traditional marketplace the main concerns are producing the crop, selling it for a good price, and then getting paid.In direct marketing farmers have these same concerns plus the added responsibility of marketing.

Direct Marketing Responsibilities

You will have to prepare your product in a form that can be sold.You will have to find your customers either by going to them or having them come to you.You will have to choose a location for your marketing efforts.

Direct Marketing Responsibilities

You may have to advertise your products or operation to attract customers.You will have to deal with individual customers.Since you are selling food for human consumption you will need to address customer satisfaction and perhaps deal with a few customers who are not satisfied.

Direct Marketing

Profits: potentially higherCash flow: customer pays you directlyMarketing control: can produce what you want and set your own profitsDiversity: works well with small farms

Direct Marketing

Volume: less product is usually sold than with other marketing venturesTime: requires more of a time commitmentPeople skills: you are dealing directly with people (need to always wear a happy face)Marketing skills: its competitive, you are going to have to sell your product

Farmers MarketsForm of direct marketingPreparation: requires little preparation by producer; public enjoys convenienceStartup: minimal costs and marketing skills are neededDirect interaction: best feature is contact between customer and producerWeather: at its mercy for rain, heat, & cold

Farmers Market

Comfort: you are out in the weather all dayTime: you will spend the better part of a day at the marketDirect competition: competing producers are all together in a small areaRegulations/policies: you have to be able to follow rules set by market management

Pick-Your-Own

Has long been a successful direct marketing venture Customer pays to pick: if it was just that simple, everyone would be doing itCost reduction: biggest advantage (transportation, handling, storage), labor for harvesting is offset by the cost of people moversCustomers buy more: PYO pickers typically purchase more than other marketsLack of privacy: you are allowing the public on your farm

Pick-Your-Own

Liability Insurance: insurance companies get “twitchy” about PYO and having people roaming your farmDamaged crops: customers and their kids will pick-over and damage cropsBad weather: will chase away customers; this can be a problem with limited season cropsLabor costs: need cashiers and people moversPrice: PYO prices are often lower; customers expect compensation for their labors

Roadside Markets

Attracting repeat customers: this is key to the long term success of your marketSave costs: there is cost savings in transportation, packaging, and middlemen“Catchy” signs/displays: are necessary for attracting customers to stop at the standOverhead costs: are higher due to the facilities

Roadside Stands should look neat and clean with fresh, ripe

produce.

The appearance of your facilities and grounds reflect on your management skills.

Roadside Markets

Planning and Zoning: government red tape, signage etc…Location: key to success (needs to be near enough to main roads to attract customers and repeatersFacilities and buildings: first thing people see of your market (you want to put the best possible look on your stand)

Community Supported Agriculture

CSA’s are new, fast-growing direct marketing ventureMembers purchase shares of the farm’s harvest and accept production risksAs the crop matures, it is harvested and divided up among shareholdersShareholders get a fresh supply of produce and support local agriculture (urban-rural linkage)

Community Supported Agriculture

Shareholders have input into what is grown, varieties, and how it is grownFees are paid in advance, this guarantees the farmer a market for everything produced, the crop is sold before it is plantedAdvanced payment creates working capital for the farm operation

Community Supported Agriculture

CSA’s allow better off-season plantingCSA’s help to spread out risks, everyone shares in the good and bad timesShareholders sign a contract acknowledging the risks to anticipated yieldsCSA’s have reduced labor costs (customers help with production)

Wholesale Marketing

Profits: selling directly to the retailer, bypassing the middleman, is bestProduct identity: you can develop your own logo or packaging to enhance the productOpportunities: they are out there, if you are interested (specialty crops)Specialty crops: retailers are especially interested in crops not produced by the larger farms

Wholesale MarketingTransportation costs: you will have to deliver your product to the retailerSpecial handling and grading: some retailers have particular requirements and standards for products; these vary by retailerSpecial packaging: some retailers are very “picky”about how you deliver productPrices: wholesale is usually 50% lessLimited diversity: less diversity is riskyPooled production: small farmers will need to work together to meet production demands

Wholesale Marketing

Selling to RestaurantsComfortable Marketing: you will develop relationships with chefs and othersConsistent income: price is established for the seasonFrequent deliveries: lack of storage at restaurants may require more transportationLiability: a law suit on a restaurant could reach you if your product was involvedOut of business: the turnover is high in the restaurant business, so be careful

Wholesale Marketing

Producer responsibilities to retailerRetailer’s reputation: it’s on the line with

your productBe reliable: retailer needs to count on youConsistency: deliver a consistently high quality product for the retailer to sellTime: be on time with deliveries

Rules and Regulations

Zoning and covenants: check with the county Planning & Zoning Dept. Permits and licenses: county and state (private applicators license, nutrient management plan, farm plan, more)Sign limitations on roads: roads dept.Labor lawsHealth Department regs: affects some value added products

Rules and Regulations

Sales tax: you may be expected to collect taxes on salesLiability insurance: you will want to talk to your insurance agent about liability insurance“Certified Organic”: you can sell organic products, you can only use the “Certified”term when you are approved by the state

Customer Service

Farm Business: success will depend largely on how you treat your customersCustomer service: reduces loss of current customers, gains new ones, and makes current ones happierData: shows that caring about customers can reduce the number of lost customers by two-thirds

Customer ServiceDissatisfied Customers can ruin your business

Unhappy customers will relay their unhappiness to 9/10 of their friends

Usually 12% tell more than 20 people

30% will stop buying your product

Customer Service

Basic building blocks of customer service:Find out what customer wants or needsBuild a relationship with your customersAlways help your customersAlways keep work area neat and cleanRecognize customers at once

Customer Service

Some more customer building blocksTell customers what you can do, not what you cannot doAngry customers should always be handled with careThe owner/operator should always set the example for customer relationsAll employees should be familiar with the customer service policy of the businessRemember the customer is always right

REVIEW

Personal, Family and Farm Considerations

What are your business qualitiesWhat are your family needs and preferencesRisk TakingHopes for the futurePreferences

Where do you want to

be?

Identifying Alternatives

Look at resourcesPhysicalMarketingManagement and LaborFinancial

New Enterprise ideas

What are the possibilities?

Production

Production InformationBudgetsActual Production

ClimateSoilWaterBuilding and FacilityMachinery and equipmentLaborQuality and Production RateLegal, regulatory and liability factors

Can it be done?

Profitability

Income Statement Estimating ReceiptsEstimating ExpensesEnterprise Budgets are helpful

Will it make Money$$$$

Financial Feasibility

What is Cash FlowSeasonal

FinancingCapital and startup costs

Can you afford to

do it?

Making the Decision

YesNo

Will you start the new

enterprise?

Good Luck on your New Enterprise!

Resources

Poole, Terry: Ag Agent, Fredrick CountyFarming Alternatives, NRAESMDAUSDA