E-492 RM3-1.0 10-08

Risk Management Business Plans for Agricultural Producers Dean McCorkle and Stan Bevers*

A business plan is a road map for a business. • to help sell the feasibility of the business It describes the key functions of the business— to bankers and other potential investors operations, finance, management and market- when requesting needed capital. ing. It should support the mission statement, The business plan should be tailored to the objectives and goals set by the owners. A busi- preferences and concerns of those who will use ness plan is a useful guide to the future of the it (either the management team or lenders). The business and a tool for acquiring capital from content of a business plan depends on factors banks or investors. such as the type of business and the way the The thoroughness of a business plan usually plan will be used. depends on how it will be used and the scope For example, if you are a new producer start- and situation of the business. A proposed new ing a production agriculture operation, your business that will produce a nontraditional banker or other investor will benefit greatly product and that is seeking outside investor from the business plan. And, the process of de- capital would need a much more comprehensive veloping the business plan will give you valu- business plan than an existing business that is able insight into the operation, help you identify making minor adjustments to its operation. some of the challenges that might lie ahead, Agricultural producers have largely ignored help you develop strategies for managing these business plans in the past. Few have had to find challenges, and improve your understanding investor capital for their operations. As mar- of the business side of the operation. If you feel gins continue to tighten, however, agricultural that obtaining financing will not be easy, a more producers will have to plan their businesses formal and detailed business plan can help con- many years into the future to survive. Business vince bankers or investors. plans will become standard components of their A business plan will also benefit an existing operations. operation, especially if major changes to the op- eration are proposed. In this case, the business Purpose of a Business Plan plan should spell out the proposed changes, A business plan has two purposes: the financial obligations, and the effect of the • to help the business management team changes on the operation. make decisions to meet the specified objectives and goals; and

*Extension Program Specialist III–Economic Accountability and Professor and Extension Economist–Management, The Texas A&M System.

1 Components of a Business Plan tion also should be included. Describe the duties, responsibilities and decision-making authority While the components of a business plan may of managers and other employees. If bankers or vary, complete business plans usually contain investors will see the business plan, they will be the following: interested in who is involved, who is doing what, • Business description and what their qualifications and responsibilities ‰‰ History and location are. ‰‰ Products and services Mission Statement, Objectives and Goals ‰‰ Organizational structure A business plan must define why the business ‰‰ Resource inventory exists and where the management wants it to be Z Z Human in the future. A mission statement is a broad ex- ZZ Land pression of the business’s purpose. Every mem- ZZ Equipment ber of the management team should be involved in writing the mission statement. ZZ capital An effective mission statement is the founda- ZZ Commodities tion for determining objectives and goals and Z Z Natural resources steering the business in the proper direction. ‰‰ Strengths, weaknesses, opportunities The objectives and goals can relate to produc- and threats (SWOT) tion, production costs, debt ratios, risk manage- • Mission statement ment, expansion, bringing a partner into the business, or any other aspect of the business. • Objectives and goals Objectives define what the operation will look • Production plan like in the future, while goals are targets to • Financial plan be met in order to achieve the objectives and • Market plan ultimately fulfill the mission statement. Many business planning publications recommend the • Legal and liability issues setting of SMART goals—goals that are specific, ‰‰ Insurance measurable, attainable, rewarding, and that are ‰‰ Succession and estate planning associated with a specific timeframe. The following diagram illustrates the relation- Business Description and Organization ships among the mission statement, objectives The first portion of the business plan is an and goals. Strategies and tactics, the top two lay- overview of the operation. It describes the his- ers, are the final steps to achieving your mission. tory and location of the business, the products Strategies make up your overall plan for achiev- produced and/or services provided, the organi- ing long-range objectives and goals, while tactics zational structure, and resources the business are the ways of accomplishing your strategies has and needs. It also summarizes the business’s through day-to-day operations. strengths, weaknesses and opportunities, and threats the business may face. Organizational structure explains: 1) whether the business is a sole proprietorship, limited or general partnership, corporation, or other form of organization; and 2) who comprises the management team. The management team should include the family members involved, any hired employees, the lender, and any hired consultants. Each should be listed in the plan. The number of employees and their compensa- 2 Production Plan • the length of the loan(s) and the interest The production plan conveys the type and rates; quantity of commodities to be produced, pro- • the financial risks associated with the jected for 3 years into the future. The produc- business; and tion plan should be easy for the reader to follow. • the strategies you will use to minimize These same figures are included in the financial these risks. plan. These are key issues the owners and/or Crop production plans should include the managers need to think about and that lenders estimated acreage for each crop each year (crop and investors will be looking for. One simple rotation), and an estimated yield for each crop. approach to analyzing risks and business feasi- Estimated production levels can then be com- bility is to look at the effect of varying levels of bined with estimated prices to generate some of income, such as a 10, 20 and 30 percent increase the figures needed for the financial component. or decrease in gross income. The income state- Livestock operations will include more variables, ment and balance sheet are usually projected on such as size of the herd, cull rates, weaning rates, an end-of-year, annual basis, while the cash flow weaning weights, rates of gain, purchase prices, statement is usually presented on a monthly ba- sales prices, etc. If there is a replacement herd sis. For in-depth information on these financial involved, as with a cow herd or swine farrowing statements, refer to the additional readings list. enterprise, the production assumptions for the replacement herd need to be spelled out sepa- Market Plan rately from the breeding herd. The market plan should not be confused with The production plan should be defined for a an annual marketing plan a producer uses to minimum of 3 years. Although changes will oc- market products or services. The business plan cur, these projections show where the business should contain a marketing plan for the first is going and whether it can reach its goals and year of the projection period. The market plan objectives. section should give information about the mar- ket structure for the commodities you plan to Financial Plan produce and describe how your product fits into The primary purpose of the financial plan is the market. to show whether or not the business is feasible. The structure and content of the market plan The financial plan typically includes 3 years of will depend somewhat on the commodity. The projected financial statements, including the plan should give some analysis of the current income statement, the cash flow statement and market situation and what you think the market the balance sheet. This information should be will be like in the next 3 to 5 years. This type of tied closely to the production plan figures. An long-range market analysis can address pro- existing business will have actual financial state- jected U.S. production, total supply and demand, ments for the past 2 years, which helps put the federal farm programs, cycles and other factors. projected financial statement into perspective by Researching what market analysts are saying showing how the business has performed in the about current and future market conditions can past. help in developing this portion of the market The financial plan also should include: plan. • the amount of money to be borrowed and If you produce commodities such as cotton the timing of loans; and feeder cattle that are marketed through ma- • the specific ways borrowed money jor market channels, the market plan also should will be used (operating expenses, land, explain the strategies you will use to minimize equipment, etc.); price risk. These strategies can involve futures, options, marketing pools, forward contracts or any combination of these. 3 Businesses that produce fruits or vegetables, Other areas to address are succession plan- specialty products, or other commodities not ning and estate planning. Succession planning marketed through major channels may have to is the means by which ownership and man- develop markets. In this case the market plan agement of the operation will be transferred should define potential buyers (target market), to someone else. The succession plan should distribution channels and middlemen. It should specify when this will occur, or what events discuss potential pricing mechanisms, such as (such as retirement or death) will trigger the contracts. Beef producers who produce specialty transfer. If the business will cease operations at beef products or participate in a beef alliance some point in the future, the business needs to should address this aspect of the market pro- have a liquidation plan. Planning ahead for this gram. important event will ease the transition. As mentioned above, the market plan section The estate plan is usually closely related to should include a detailed marketing plan for the the succession plan. It involves planning for the first year of the projection period. An annual transfer of property to your beneficiaries. Estate marketing plan, which uses information from planning can be a very involved process, but other parts of the business plan, involves deter- in the business plan you need only summarize mining marketing objectives and goals, develop- the objectives of your estate plan and the estate ing your personal market outlook for the year, planning vehicles you will use, such as wills identifying available marketing tools you feel and/or trusts. comfortable using, determining target price and date triggers, and identifying the strategies you References will use to accomplish the marketing objectives “Focus on Success: Strategies and Tactics.” and goals you have set. Doane’s Agricultural Report, Vol. 62, No. 2, January 8, 1999. Legal and Liability Issues This portion of the business plan should For Additional Reading define risks the business might face. The plan Small Business Administration. 1-800-827-5722. should outline insurance needs, legal liability, http://www.sba.gov/starting/ and the succession of the operation. Wilson, Troy D. and David M. Kohl. “Business The risks businesses face generally fall into Planning—A Road Map for Success.” Farm these broad categories: loss of key employees; Business Management Update. Virginia legal liability; and property loss. Risks are usu- Cooperative Extension Service. August 1997. ally managed through the use of insurance. Other publications in this Risk Management There are several types of insurance that provide Education series published by the Texas financial protection. The structure of a business AgriLife Extension Service. also can be used to manage risks. The business plan should address the strategies you use for http://agecoext.tamu.edu/resources/library/risk- managing risks. A bank or investor will have a management-curriculum-guide.html keen interest in this area.

4 Partial funding support has been provided by the Texas Corn Producers, Texas Farm Bureau, and Cotton Inc.–Texas State Support Committee.