A thorough business plan developed with careful thought provides a roadmap to follow, particularly during uncertain times.
How can the business planning process be useful in your specific farming situation.
Initially conducting a SWOT analysis to identify business Strengths, Weaknesses, Opportunities and Threats can be beneficial in your farming operation, particularly given the COVID-19 environment. This process can help to channel your energy and align with the markets that are consistent with your resources, talents and farm production.
Good business planning processes can jump-start family business transition. One result of the business planning processes is that you may be able to ask the senior generation in the family, sensitive questions that are normally avoided. This process can help you to embark on diversifying the farm business into new agricultural enterprises through the transition management.
Developing a detailed business plan can provide confidence in borrowing capital and repaying debt. Financial and economic scenario planning in the COVID-19 environment will be useful in monitoring financial progress as the economic environment can rapidly change.
In a family farming business with multiple members, business planning can assist in facilitating conversation and communication. It is unfortunately quite common in production agriculture to find that people don’t talk to each other enough in family businesses.
The goal setting process and the filling out of financial statements can help to close the communication gap between generations and partners.
The business planning process can be extremely useful in growth associated with local markets created by the COVID-19 pandemic. You can use the planning process to determine if outside revenue streams including off-farm employment that generate extra, diversified revenue are worthwhile.
The businesses that are going to be successful post-COVID demonstrate three key characteristics. They must be resilient, agile, and have the passion for innovative entrepreneurship.
Let’s expand on these three characteristics.
Financial resiliency is having a strong balance sheet with equity and while I agree, the balance sheet must also have productive assets that are fully deployed. In the future, the capital asset turnover ratio will be critical in measuring resilience. This ratio is calculated by dividing total revenue by total assets.
Income statement and cash flow resiliency may be measured by cost of production benchmarks. Another good ratio to measure resilience is the operating expense to revenue ratio, excluding interest and depreciation expenses. Being a low cost, efficient producer is one step to making a business competitive in the long-term. Marketing, risk management, production, and operations must also be part of an effective management strategy.
You can measure agility using financial liquidity and quickness to cash on the balance sheet and while I agree with this statement, let’s dig a little deeper.
Agility in both the income and cash flow statements may be measured by different sources of productive revenue streams utilizing assets, management, labour and capital resources. For some smaller farms, pre-COVID outside revenue streams included off-farm employment. However, this strategy will be impacted by high unemployment rates and demand destruction in the general economy.
Global and domestic consumer trends will change. The future of trade, globalization, government policy and regulation are anyone’s guess. Ultimately, the consumer in the marketplace will be the deciding factor, with involvement from government and society.
Is there a place for both?
Can agility and innovation, with some financial management and resiliency, compete with economic optimization and concentration of business? The NZ economy was built by small businesses and entrepreneurship; will a combination of both business models carry the economy into the future?
Only time will tell!