Do you believe in the power of planning in your business? You should! It’s perhaps the most common practice amongst successful businesses, large and small. Would you head out to the field with a new piece of equipment without so much as a minute invested into understanding how to run it? Would you strike off on a trip to a strange destination without even looking it up on a map? If so, turn the page my friend. You can choose to walk the wild side and let your gut be your GPS, but if skydiving with a pocket full of rocks doesn’t seem rational to you, read on. Here are a couple of examples of how planning paid dividends.
SCENARIO ONE: AL WORKNOPLAY
Al Worknoplay has just come through one of his worst years ever. He only sowed 30 per cent of his acres in 2010 and of those, only half were harvested. Crop insurance payments are trickling in, but the bills and loan payments are mounting and cash is beyond tight. Worknoplay’s Agri-stability margin was reasonably good headed into this year but that payment is a long way off and who knows how much it will be. To begin planning for another year is intimidating, overwhelming and seems impossible but it is more important now than ever.
PLAN FOR (LACK OF) CASH FLOW
Where should he start? Well, cash is king; he first needs to determine just how short of cash he is. A detailed production and financial plan will quickly indicate how much cash is needed and when. Aside from estimating Agristability, Worknoplay knows what his sources of cash for next year are, so we immediately identify any gaps. From here, he can choose to bridge those gaps with other sources of financing (cash advance, trade credit, increase in operating line, request interest only payments, liquidate assets, etc.).
Worknoplay may come to the realization that he cannot cash flow the farm as it existed prior to 2010 and in order to continue farming, he needs to downsize. This is a decision best made now instead of in May when he realizes he cannot purchase the required inputs.
BE PROACTIVE WITH CREDITORS
The only thing worse than weak numbers for a creditor is missed payments and no information about numbers at all. Worknoplay has the opportunity to plan proactively with creditors through deferred payments or interest only payments and he knows exactly where his creditors risk appetite sits prior to the season.
SCENARIO TWO: JOHNNY CASH
Johnny Cash, special crops farmer in southern Manitoba, has just come through yet another great year — his third one in a row. He has farmed for enough years to know that this won’t last forever and that others within just miles were not so fortunate, but he is also smart enough to know that if you see a $20 bill on the ground, you better bend over and pick it up. He accepts his recent good fortunes and wants to put it to good use in his business. We have worked with Cash for three years now starting with some strategic planning in a split between him and his brother three years ago and since then, we have helped him with his annual business planning. Where did planning benefit Johnny?
TAX SAVINGS THROUGH PLANNING
Two years ago, Cash took off a good crop and markets were cooperating in layering some extra icing on the cake. He had been pre-buying many of his inputs and deferring as much income as possible at the end of his fiscal year into the next. He was unable to expand his acres and as such, his strategy of deferring tax was coming to an end.
We worked closely with Cash and his accountant to facilitate a smooth transition into incorporating. This has allowed him to level out and control his personal drawings and also prevented tax from making management decisions.
PLANNING FOR CAPITAL PURCHASES
Cash is not running a brand new line of equipment but it is good, reliable and functional, and upgrading equipment on a regular basis keeps it that way. In the past, he has financed equipment only to leave himself sitting on cash or else purchased that piece at the spring auction with cash only to find that it leaves him short later in the year. A move to detailed monthly cash flow planning allows Cash to clearly understand how he will fund his capital purchases without jeopardizing cash flow.
Cash has a son, Spenzit Cash, who wants to farm, and is all too anxious to take over the controls. The annual planning has allowed Johnny to clearly understand the capacity of the farm, and he is easing Spenzit into the business without risking what has already been established. Johnny doesn’t want to sell the farm to the next generation potentially jeopardizing its viability but he also doesn’t want farming to be too easy, Spenzit may lose the edge that Johnny is working so hard to sharpen.
Cash has never prepaid significant debt in his farming career but after the last three years, we discovered that a good use of cash will be to prepay his higher interest-bearing debt. This decision can jeopardize cash flow the same way as his equipment purchases if not planned and well understood. Working capital and cash flow need to be analyzed very carefully prior to pulling the trigger on prepaying term debt.
You may ask yourself, “How do I know how much my crop will yield? How do I know what the markets will be? How do I know how much fertilizer or fuel will cost?” The doubts and uncertainties are endless. The value in planning is not being 100 per cent accurate or exact but rather understanding the impact when something deviates from the plan.
Ask yourself this, if a large company like Cargill or FCC or even a large potato producer can make a plan with the number of uncertainties and variables in their businesses, shouldn’t planning for my farm work the same? A well thought-out and communicated plan functions in uniting ownership and management teams to a common goal. Imagine what a hockey team would look like if nobody put any thought into strategy. Your farm business functions very similarly.
The opportunity in good business planning is to identify your main risks and mitigate these according to your risk appetite. For instance, if you are most concerned with the canola price then lock it in. If you are concerned about input prices, buy them now. If you are concerned about production risk, increase crop and hail insurance. Good luck and good planning.
AndrewDeRuyckandMarkSloanemanage twofarmingoperationsinsouthern ManitobaandarepartnersinRightChoice ManagementConsulting.Withover25years ofcumulativeexperience,theyoffersupport infarmmanagement,financialmanagement, strategicplanningandmediationservices. Theycanbereachedat [email protected] and [email protected] or204-825- 7392and204-825-8443.