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Three overlooked but essential business plan elements

Greg Squires Published on 21 September 2011
The Cambridge Dictionary defines a “business plan” as a detailed plan describing the future aims of a business. Have you heard the phrase “the devil is in the details”?

A great number of talented advisers exist who might offer their opinions regarding important elements to be included in a comprehensive business plan.

If you surveyed 10 such people, you would probably see 10 lists with different combinations of suggested categories. I believe three categories are among the most overlooked.

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Risk
Two dynamics work in tandem to provide a dangerous source of business risk to dairy producers: Dairy farms do not tend to retain much cash on their balance sheets, and extreme volatility of milk and feed prices significantly impact a dairy’s ability to generate cash over intermittent periods of time.

It is always prudent for a business to manage cash and available lines of credit to ensure the operation has access to enough working capital to cover cash operating expenses.

Within the context of our more recent economic climate, $500 per cow of reserve working capital (either in the form of cash or approved and immediately available borrowing that is not part of already planned working capital needs) is not an excessive amount to consider. In order to plan what is needed, an annual operating budget can help shed light on those projected needs.

I encourage all of my clients to prepare an annual operating budget for several reasons, not the least of which is that it is a tool that will facilitate an owner’s understanding of how cash flows through his or her operation. The more dairy producers understand what it costs them to produce milk, the more aggressively they can manage those costs.

Succession
This function is comprised of two separate and very distinctive elements: asset transfer and managerial succession. Too often neither of these elements is properly planned, but managerial succession is the most often neglected.

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Typically, when succession planning is mentioned, we tend to think about estate planning, which is a part of the asset transfer process.

Succession planning is much more comprehensive and proactive than simple estate planning. How many multi-generational farms can you think of where Mom and Dad are in their 60s or 70s and still control the checkbook and general ledger?

Family businesses need to purposely plan how management skills and responsibilities will be most effectively transferred to subsequent generations of owners.

Marketing
Market volatility is becoming an almost tiresome subject; however, volatility is real and destroys hundreds of dairy operations every year. Many market traders and advisers admit that, over the long run, a dairy operation may likely maximize income by not hedging and simply riding the cash market, and I tend to accept this possibility.

However, in order to regain income previously lost in a down market, the operation has to live long enough to make it to the next up market. With the extreme trading ranges we have experienced in the commodity sector over the past four to five years, living through the down market to see the next high is becoming increasingly difficult, especially in more highly leveraged businesses.

If your balance sheet shows a debt-to-equity ratio of greater than 1.25-to-1, it might be wise to consider developing a consulting relationship with a market adviser and working with them weekly to check when the windows of opportunity are open to lock an appropriate milk income-over-feed margin.

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It is also interesting to note that several of our industry’s seasoned lenders have begun to adjust funding levels with some of their customers based on hedged milk-over-feed-cost margins. PD

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Greg Squires
Dairy Enterprise Services

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