THREE STEPS TO A SOLID LONG-TERM PLAN FOR YOUR OPERATION
Ask the right questions and think like a lender when assessing your business’s viability.
Planning ahead is a critical component of any successful ag venture, from the smallest farm to the largest agribusiness. Though it’s important to think ahead in the short-term to help guide effective day-to-day work and decision-making, it’s even more imperative to plan for the long-term success of a farm or ag business.
Long-term planning starts with an assessment of where you stand today, where you want to be in the future and what is required to connect the two. Though it appears to be a simple equation, it requires accounting for many different variables. Here are three steps to take in planning for the long term on your operation.
- Start by asking the right questions.
It begins by answering a series of questions that can help guide your business and any preparations needed to ensure you achieve your desired results in the long run. Creating a comprehensive profile of your operation today, as well as clarifying your goals, creates a starting point for long-term planning. Start by answering these questions:
- What are my business goals? Many ag producers and business owners see expansion as a major goal. Also, diversification shouldn’t be overlooked as a way to evolve your business to remain competitive over time. A long-term plan should include goals for different steps along the way, especially intergenerational transfer or succession. Determine what will create the most opportunity in the future and plan ways to make it happen in a timeframe that’s manageable and feasible.
- Where do I stand today? You should not only know where you want to go, but where you stand right now. Think in terms of the total life cycle of a farm or agricultural business: Where are you on that continuum? If it’s early in the lifespan of your business, it’s best to include any potential growth or diversification in your long-term plan. If you’re further along and your business is more mature, planning for family transition, succession or retirement might be the primary objective.
- What trends might influence your business in the future? While it’s easy to get caught up in things like the grain marketplace as a major influence, it’s important to look at bigger issues that could influence your business in the long term. Will you have the workforce to meet your labor and management needs in the future? Could future demographic changes — like a general population decline — challenge your market opportunities? Look internally at your farm and externally to both agricultural and general factors that could affect your business viability in the future. And, consider your personal life; for example, having children can have a major influence on your long-term business plan, especially if you hope to integrate them into your business.
- Do you understand your financial statements? To be sustainable in the long term, a business plan should incorporate all financial records, including balance sheets, income and cash flow statements. Even more critical is your ability to understand what these statements mean to the overall long-term viability of your business. Staying attentive to your balance sheet, for example, will help determine any adjustments you need to make to remain on strong financial footing in the long run.
2. Use benchmarking to success.
Once you have answered key questions and have a firm grasp of where you stand and where you want your business to be in the long term, one way to measure your progress along that trajectory is by benchmarking. The process entails comparing your operation to those of similar size and scope to get a feel for how your performance measures up. Benchmarking can also entail an assessment of current business performance compared to that in the past.
To start the process, find a few key metrics. For example, if you’re a crop producer, benchmark recent crop yields and input costs with past years. Or consider your annual farmland costs as a percentage of your overall budget compared to operations similar in size. Make sure that whatever variables you measure, you’re able to access a large enough dataset to create a consistent comparison over time.
Once you’ve identified key metrics to measure in your benchmarking, it’s important to keep detailed records for your performance, as well as update the body of information to which you’re comparing your business.
3. Measure what lenders measure
When asking initial questions and starting the benchmarking process, it’s important to measure the right variables specific to your agriculture business. Farmers and ranchers can glean tangible benefits — like favorable interest rates and terms — from monitoring and taking efforts to improve specific aspects of their operation. They’re frequently the same things that lenders examine when assessing an operation’s viability and ability to meet financing requirements, and include:
- Ownership. Having at least a 50% ownership (equity) in your business, on a market value basis.
- Income. Net income that yields at least a 25% margin after all scheduled debt service and living expenses.
- Budget. Within your annual crop and livestock operating budget having at least 35% of your own money at play in the crop year.
- Liquidity. A measure of short-term assets against corresponding debt; should show you having at least 30% equity.
- Debt. Appropriately aligned with cash flow needs for your operation.
Understand how the unforeseen could affect you.
It’s virtually impossible for an operation to operate flawlessly and according to plan, even when every variable has been adequately accounted for. Unforeseen events — crop failures, cost spikes, abrupt business stakeholder changes — can throw a wrench in the most comprehensive long-term plan. That’s why it’s helpful to consider the variables that have the most influence on your operation’s potential performance.
One of those variables is farm policy. Whether it’s federal crop insurance, ag export policy or programs mandated by the latest farm bill, your operation’s financial viability is often influenced by the policy sector. Stay engaged with your legislators so they know what’s vital to your business and how their policy decisions affect you.
Also, while you can’t control consumer trends, you can control how you represent yourself as an ag producer. By telling stories, you can help inform consumers about how farms and ranches operate. That will go a long way to connecting consumers to the farm, thereby securing a strong, sustainable future for your operation.
There will always be unforeseen events that could adversely affect your operation. It’s important to control what you can and not worry about what you can’t, especially when it comes to long-term planning. At the farm level, working closely with your ag lender can help ensure your plan will keep your operation viable and sustainable for as long as you want it to be. Get in touch with a Conterra Ag Capital lending specialist today to chat about your operation’s future and how you can make it happen.
About Conterra Ag Capital
Conterra Ag Capital focuses exclusively on agriculture, loan servicing, alternative lending and asset management to institutional investors, banks and other agricultural lenders throughout the United States.
Conterra Ag has loan tools to help meet the challenges of today’s agricultural environment:
• Long-term fixed rate loans
• Flexibility through revolving line of credit loans
• Restructuring debts to improve cash flows
Conterra Ag’s staff of seasoned ag lending professionals will quickly respond to your inquiry. To learn more, contact Conterra Ag by phone at 855-888-1675 or by email at email@example.com.