How much time do you take to plan in the winter? There are varying degrees of planning and preparation in a business, and the effectiveness of that planning is directly correlated with long term success.
Let’s consider two scenarios. Peter Planzalot is a moderate to large grain farmer who doesn’t enjoy surprises. He starts planning as soon as the shed doors close in the fall. He begins with a production budget by estimating costs of production and potential contribution margins for each commodity. Based on these calculations and his rotations, he decides exactly where and how much of each crop he will grow. Often he will consider two potential yields: his long term crop insurance average, and the expected yield for which he fertilizes.
Then Planzalot projects his income and expenses. He knows he will sell most of his old crop and typically forward sells a portion of his new crop for fall cash flow and to turn his bins. Expenses are determined using historical expenses from past financial statements and minor adjustments. For instance, since Planzalot will be doing more tillage this next season and marketing his wheat further from home than he normally does, he’s increased his projected fuel expense from $20/ac. up to $24.50.
Planzalot is 58. Although he often talks about slowing down, he thinks one of his children may be interested in farming, and he loves what he does so he holds on to a desire to grow by five per cent each year. This year he plans on approaching a neighbour to see whether a rental agreement could be worked out.
Based on his anticipated growth, Planzalot works through a capital purchase plan. He plans to purchase more storage when the programs come on in January. Planzalaot also considers his human resources. He operates with one full time employee and up to three more seasonally. He needs to know how to encourage them to return, and to make sure he’ll have enough help given his expansion plans.
Then he rolls all of these plans into a projected monthly cash flow, and adds loan payments and income tax into the equation.
At this point, Planzalot needs to consider whether he can prepay long term debt, make sure he’s paying the lowest possible tax rate, and check that he has access to any financing he might need.
Now, let’s visit Fred Flibideseat-ofmypantz. Fred’s also a moderate to large farmer, but he lives by Sir John Harvey-Jones’s words, “Planning is an unnatural process; it is much more fun to do something. The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.”
Flibideseatofmypantz intuitively knows which crops make him more money. But his brother’s wife doesn’t, and she owns 25 per cent of the farm. He works hard to buy inputs as cheap as possible and sell crop as high as possible, which usually works out OK. Sometimes he holds off paying some bills if the pre-bought fertilizer bill is big, or he quickly sells some canola or corn to generate cash.
He’d like to take on more land, but last year was wet and he knows that he is further into his operating line that he normally is; expansion probably isn’t the best idea right now. Flibideseatofmypantz usually hires some part-time help at the last minute, and, if he can’t, he and his brother put their heads down and work harder and longer, another feature of his management that does not sit well with his sister-in-law. He’d like to bring in his son but really doesn’t understand where he might fit into their farm. His plan is to let his son use their machinery to get started, but Fred isn’t sure his son can afford it or if they can spare the time.
Flibideseatofmypantz has settled into buying most of his inputs before year-end and deferring grain tickets from October on but isn’t quite sure what to do next to manage tax. His brother trusts him and has enjoyed working with him but isn’t sure what Fred does in the financial management of the farm and his wife is starting to ask a lot of hard questions. The Flibideseatofmypantz farm may be headed for some heated discussion or hard feelings.
You may ask yourself, in a business such as farming how can I estimate yield when it is so largely dependent on weather? How can I guess where the market will be in my next production cycle given world markets and uncertainty? How do I know if I will be able to expand, or forced to contract? All valid questions and you are correct in your uncertainty, however the merit in planning isn’t being exact in your predictions but rather to clearly understand the expected outcome given a set of circumstances. This plan is a framework for effective communication within your ownership and management team as well as people integral to your operation such as accountants, creditors, landlords, and input dealers. This plan ensures that everyone is singing from the same songbook.
Imagine a hockey team where strategy and positioning was never discussed. How would that look compared to the team that knew what the plan and strategy was and was working together to achieve it, all with the same common goal in mind?
If you have a strong plan, when circumstances change, you and your management team will understand the implications of those changes and recognize whether the impact is something that needs to be dealt with immediately or something that will not significantly impact the plan. This process is not simple. If there are parts of it that you find difficult, utilize a consulting business such as ours, your accountant, or even your creditor. †