This presentation was produced and is copyrighted by Stewart- Peterson®, Inc. 2006. Permission is granted for use by active AgEdNet.com® subscribers. All other use is prohibited.

STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.

FM153 Deciding When To Expand an Enterprise

Farm Management Library

MAIN IDEA:

• How can I decide when to grow my farm into a bigger business?

Photo © 2005 Nancy Crombie, used by permission.

U.S. trend to fewer and larger farms …

• U.S. trend to larger farms underway for over 50 years

• Is bigger better?

• Can the small farm survive?

• Some farmers who expanded were winners; some were not.

Why do some large farms succeed while others fail?

• Those who succeeded made the best possible use of their available resources.

• Those who failed made poor use of resources – underusing some resources and/or overusing others.

• The four basic resources should be evaluated for how each can be used to produce a net return.

Four basic resources:

1. Management holds ultimate responsibility.

2. Labor includes owner and employees.

3. Land can be purchased or rented.

4. Capital resources are used to purchase other resources.

Staff photo/Nancy Crombie.

Will bigger be better?

• Expanding a farming operation usually means increasing risk. There should be a good reason to expand.

• Make budget projections comparing expansion vs. no expansion.

• Budgets should include worst-case and best-case scenarios.

• Most successful expansion plans make better use of an underused resource.

Expanding to make better use of underused resources:

• Underused management skill is one good reason to expand. It may be best to expand in smaller steps.

• Underemployed labor may be available from younger family members.

• Underused capital resources may be invested in assets that are not being used productively, such as underused farm equipment.

• Underused land resources could be more productive by applying more management and capital.

Some questions when making expansion decisions:

• Have you proven your management ability in your current operation?

• Do you feel confident that you can handle a larger business and are you willing and able to take additional risk?

• Do you have a supply of underemployed family labor and/or a reliable source of labor that could be hired at reasonable wage rates in your area?

• Is land available in your area that you could buy or rent for an expansion plan?

More questions when making expansion decisions:

• Could your land be more productive with a different mix of crops or by using more capital for land improvements, fertilizers or other yield-increasing inputs?

• Do you have the capital resources to afford the expansion you are planning?

• Can you borrow the needed funds and make the needed investments without putting your current successful business at risk?

Bottom line:

• Farm expansions must be carefully planned and based upon sound management reasons and objectives.

• Expansion can be a way to make better use of existing resources.

• The manager must consider the resources available, including management skills and then make productive use of those resources.

USDA photo/Gene Alexander.

This presentation was produced and is copyrighted by Stewart- Peterson®, Inc. 2006. Permission is granted for use by active AgEdNet.com® subscribers. All other use is prohibited.

STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.

www.agednet.com

800-236-7862