Many of us are scared of the business side of farming and drawing up a business plan. We feel good about our stock handling ability or our green fingers, but we would like to leave the business part to someone else. Someone who is used to the nuts and bolts of finance and who knows more than we do.
JUST DO IT
The bottom line is that farming is about doing business and if you are going to farm you must get to grips with the business part of your operation. If you really don’t want to engage with the finances, farm for someone else.
Once you’ve dealt with your reluctance to look at the finances and how the business side will work out, you’ll find it gets easier. Just keep doing it.
My personal experience taught me a hard lesson – I left the business side of things in hands I felt were more competent than my own. And I had so many good reasons. Finances weren’t my strength. I was better occupied looking after herd health than economic health.
I couldn’t have been more wrong. I lost a God-given opportunity to learn and to progress. And at the end of the day I lost my farm, not because I was a bad farmer, I wasn’t, but because I procrastinated and stalled when it came to learning the nuts and bolts of the financial side of the business.
‘You have to understand the direction in which your business is going. It isn’t only a document that will enable you to get financing.’
The wonderful thing about history is that it allows us to learn from other people’s mistakes: learn from mine and don’t ignore the business side of farming. “The business plan shouldn’t be something a consultant draws up for you,” says Dr Lange Simele, Zimbabwean animal scientist and economist. “You have to understand the direction in which your business is going. It isn’t only a document that will enable you to get financing.”
Whether you are farming crops, trees, fresh produce or livestock, there are a few basics that will fit every business plan.
This includes information about the background and history of the business, the ownership structure (proprietorship, partnership, closed corporation or company) and whether it is a new business or an expansion of an existing business.
Include the mission of your business and the long- and short-term growth and development aims. In the mission statement include who you are, what you do and why you do it. Work out whether you are happy with a smallish business that makes some profit but leaves you time for other things or whether you are a person who aspires towards building an empire and making a great deal of money, or whether you are somewhere in between.
Describe your market, how you reach it, and how you add value to what you offer that market. Describe the business activities, the products, the unique features of both, and the competitive edge.
Make a list of the raw materials you need to grow the product or run the stock and a list of product suppliers. For example: I need 5 sheets of corrugated iron (3m x 3m) and 30m of chicken mesh to set up shelters for the 25 pigs I am going to run free-range. I can buy the corrugated iron and the chicken mesh from The Farmers’ Supply Store about 25km away from my farm.
Include the estimated cost of buying materials.
Lange says farmers should show the level of support they would need from a financier for infrastructure. If you are planning to farm livestock, put in information about water availability, fencing, loading and handling facilities.
Farmers also need inputs to farm, and they should put in the daily costs of things like feed, fertiliser and vaccinations.
Livestock farmers should include the breed of cattle (or animal of choice) they intend to farm and how suited that breed is to the selected area. Put down the contribution (in actual monetary value: rand, kwacha, pula etc) you will make to the project, and whether it will be in the form of cash or assets.
Describe the farm, its location and its production facilities. And identify the constraints and possible problems.
Describe your skills and experience and that of your partners, and include the financial contribution of each partner.
“Farmers should be honest about the limitations of their farm or product, and also state how they intend to overcome these challenges. If the farm doesn’t have a reliable water source, for example, mention this and how you are going to overcome it,” says Lange. It helps to show that you are looking at all the aspects and planning with insight, she says.
Write a SWOT (strengths, weaknesses, opportunities and threats) analysis.
The bank wants to know that you have a market for your product. Obviously – it’s the key to your cash flow and a deciding factor in your ability to pay back your loan. So give some detail on the market and how you are going to compete in your target sector.
Project the supply (from you) and demand (to the market) of your product into the future. It makes your case a lot stronger if you can show the bank that you have off-take agreements.
Example: I want to plant 10ha of cabbages with an expansion programme of 1ha per season. I predict this market will grow with an increase in population as cabbage is a popular food in my area. I have an off-take agreement for 5 seasons with Fresh Fruit and Veg a leading produce retailer in my area.
THE FINANCIAL PLAN
Banks and investors want a summary of the financial statements and projections in the business plan, and a detailed analysis as a supporting document. Into this document you will have to write operating budgets, cash flow projections, income statements and pro forma balance sheets for at least three years.
If you don’t understand financial statements, it’s perfectly acceptable to get help. You should ask the accountant or bookkeeper who helps you to explain how the financials work. It’s vital that you know this.
The Pro Forma is a balance sheet that summarises the projected future status of a company after a planned transaction, based on the current financial statements. Make sure that your financial projections agree with other statements in the business plan. Formulate and motivate your capital requirements.
Use the plan to strengthen the business’s case. Part of this is to supply documentation that proves you comply with the government and tax requirements of your country. In this would be the company certificates, copies of shareholders/owners identity documents, proof of addresses of owners and shareholders and tax clearances.
At the end of the plan make a short summary of the main point in each section.