strategic business planning for commercial producers farm size: am i big enough?

Strategic Business Planning for Commercial Producers

Farm Size: Am I Big Enough?


Objectives

• Establish criteria for how big a business should be

• Estimate minimum viable size by assessing owner’s need for income

• Understand relationship between financial growth and earned income


How Big Should the Business Be?

The business is big enough when:– Internal Dimension

1. It is low cost – economies of size


Economies of SizeCost

$

Units of Output The Farmer


How Big Should the Business Be?The business is big enough when:

– Internal Dimension1. It is low cost – economies of size 2. It meets its operator’s needs for income –

minimum viable size from family income needs perspective

– External Dimension3. Its size permits access to markets, information,

and competitive technologies – minimum viable size from industry perspective


Income Needs Analysis

• What is the minimum amount of net income that will satisfy operator’s needs?

• What gross income would normally be required to produce this much net income?

• How much investment (financial assets) would normally be required to produce this much gross income?

Strategic Business Planning for Commercial ProducersPart I. Income Needs AnalysisSpendable Income Needs Forecas

t

A. Family living expense

B. Term debt service (principal only)

C. Carryover debts (principal only)

D. Income and self employment taxes

E. Reinvestment in the farm business

F. Saving for retirement, college, etc.

G. Other wants/needs

H. Total income needed

I. Less non-farm income available

J. Income needed from the farm


Part I. Income Needs AnalysisSpendable Income Needs Forecas

t

A. Family living expense 150,000

B. Term debt service (principal only)

91,648

C. Carryover debts (principal only) 0

D. Income and self employment taxes

0

E. Reinvestment in the farm business

71,234

F. Saving for retirement, college, etc.

30,000

G. Other wants/needs 0

H. Total income needed 342,882

I. Less non-farm income available 20,000

J. Income needed from the farm 322,882


Part II: Income Needs Analysis: Historical Performance

K. Net Farm Income from Operations Ratio

Net Farm Income

divided by Gross Farm Revenues

= NFIFO

L. Asset Turnover Ratio

Gross Farm Revenues

divided by Total Farm Assets

= Asset Turnover Ratio


Part II: Income Needs Analysis: Historical Performance

K. Net Farm Income from Operations Ratio

Net Farm Income 280,519

divided by Gross Farm Revenues 1,796,651

= NFIFO 0.156

L. Asset Turnover Ratio

Gross Farm Revenues 1,796,651

divided by Total Farm Assets 4,655,476

= Asset Turnover Ratio 0.386


Part II: Income Needs Analysis: Results

M. Gross farm revenues required to generate needed spendable income

Total Income Needed (J)

divided by NFIFO (K)

=

N. Assets required to generate gross revenue

Required Gross Revenues (M)

divided by Asset Turnover Ratio (L)

=


Part II: Income Needs Analysis: Results

M. Gross farm revenues required to generate needed spendable income

Total Income needed (J) (from Part I.)

322,882

divided by NFIFO (K) 0.156

= 2,069,756

N. Assets required to generate gross revenue

Required Gross Revenues (M) 2,069,756

divided by Asset Turnover Ratio (L)

0.386

= 5,362,062


More Spendable Income From the Farm Without Getting Bigger

• Increase NFIFO Ratio– Reduce costs– Outsource

• Increase Asset Turnover Ratio– Increase prices or output– Reduce investment


Can the Business Grow?

Growth is dependent on: 1) Identifying opportunities for

profitable expansion2) Acquiring resources to implement

expansion


Two Behaviors Critical to Internally Funded Growth• Earnings behavior• Savings behavior


Leverage and Growth• In the short run, a farm can growing by

borrowing, the potential to grow with debt capital is limited by earnings and assets

• Earnings leverage growth, as well as fuel it directly

• Appreciation in capital asset values may increase borrowing ability, but won’t increase the ability to service debt

• Financial performance should be monitored annually using cost value ROA versus ROE (ROE should exceed ROA) and SGR trend


Profitability, Size, and Growth are Interdependent

Profitability

Size Growth

Which button do we push to achieve competitiveness?

A. Profitability

B. Size

C. Growth

D. All of the above

Business Control Panel


How Would You Respond?

First scenario – The farm’s asset turnover ratio is 18%, when 38% would be typical for average competitors. The operating profit margin ratio is 12%. The farm has no debt and substantial equity, but little cash.

A. Improve performanceB. Expand operation


How Would You Respond?Second Scenario – The farm’s asset

turnover ratio is a remarkable 50%. The farm’s operating profit margin ratio is 5%. The farm has little or no debt, but little cash.

A. Improve performanceB. Expand operation

Should a manager ever consider expanding an unprofitable business?


Summary - Keys to Achieving a High Sustainable Growth Rate• High profit • Retention of income as opposed

to distributing income to owners• Optimum leverage• Outside equity capital• Strategic fit with industry scale

strategic business planning for commercial producers farm size: am i big enough?

Documents

income slide

gross income

net income

farm slide

strategic business planning

nonfarm income available20

commercial producers

total income needed342