Scotland’s Farm Advisory Service has come up with four questions it suggests farmers should work their way through in order to improve their strategic planning.
The service, funded by the Scottish government and the EU, says many farmers get trapped into reacting to immediate operational problems, and as a result, opportunities are missed to develop their business.
Strategic management involves stepping back from the everyday “buzz” of farming and answering four key questions, it says.
- Where am I now?
- Where do I want to go?
- Which is the best way to get there?
- How do I keep on track?
Coming up with the answers may take months, the service says, and will probably involve input from the wider family, the bank, consultants and solicitors.
On each of the questions it has offered some pointers for getting the most out of the process.
It has also made available a number of free downloadable tools and templates to help farmers assess their businesses more critically.
Where am I now?
The starting point is to draw up a checklist about your existing business, which captures in one place facts and figures about the land, building, ownership and management structures, plant and machinery, natural environment, infrastructure and labour force.
Next, take the time to pinpoint the financial position of the business.
This can be done by looking at the tax accounts of the business over the past few years and benchmarking them against similar businesses.
Another useful step is to create an up-to-date balance sheet to establish the net worth of the business.
This process should involve looking at some key ratios such as debt to gross assets and percentage of equity possessed.
Where do I want to go?
Answering this questions involves covering two key areas – establishing your long-term goals and completing a market analysis.
It’s important not to confuse goals with objectives.
Goals are typically descriptive and are best kept to three or fewer – such as: “To diversify away from pure farming.”
Objectives are more specific, often relate to the coming year and involve numbers – for example: “To achieve an average lamb weaning weight of 30kg at 90 days.”
Most farm businesses do not undertake a market and competitor analysis unless they are considering diversifying, yet thinking through what consumers want is just as applicable to farming operations.
Once the goals and market analysis have been completed, the Farm Advisory Service suggests using a SWOT (strengths, weaknesses, opportunities, threats) analysis to summarise what you have gleaned about your current situation and the opportunities you have.
What’s the best way to get there?
Businesses that take the time to go through a rigorous budgeting process tend to be the ones that make choices that give them the best chance of long-term success.
Key questions you are seeking to answer are: when will profit be high enough to consistently cover cash need, how tight will cashflow be during the establishment stages, how vulnerable is the business to a bad harvest or price collapse, and are all partners agreed on the way forward?
Farmers can choose between a whole-farm budget or partial budget at this stage.
Always do a “what-if” analysis, which tests the impact on profitability of changes in the big assumptions.
How to stay on track
Two means of keeping a strategic plan on track are recommended.
The first is an action plan which breaks down what needs to happen to achieve each objective, by whom and when.
The second tool is an annual cashflow budget which forces you to think through everything that needs to be done – and spent – during the course of the year.
Links to a variety of templates which will help you to carry out strategic business planning are available via the FAS website.