Strategic Planning and Evaluation - What Routes Can You Take to Get Where You Want to Go?

Strategy is defined as a “careful plan or method for achieving an end.” That’s your challenge in this Planning Task. You’ve envisioned your future, based on your goals and values, so you know what you want the “end” to look like. Now you need to take the time to carefully think through the steps you can take to get there. Think about planning a trip. You know your destination—but what’s the best way to get there? You could fly, take a train, or drive. You might sketch out the trip for each possibility, by researching the plane and train schedules and consulting roadmaps. You develop a “careful plan.” Then you evaluate. You weigh many factors—the cost of each, your enjoyment using each of those means, possible problems such as road construction, delays at airports, and so forth. Then you choose the best option for you. Essentially, that is what you will be doing in the five steps of this Planning Task: Developing a plan to achieve your envisioned business, weighing it against other options, considering how the situation might change (market, interest rates, labor, etc.), and how those changes would affect your plan.

As you research and develop your business strategies, you will consider many of the same marketing, operations, human resources and finance questions that you first considered when you assessed your current situation in Planning Task Two. This time around involves more research. You will answer these same questions, using educated guesses rather than actual experience.

Once you have identified a set of feasible strategic alternatives for each functional area of the business through research and evaluation, you will link them together into a system-wide, whole farm business strategy complete with contingency and implementation plans. When you are done with this Planning Task you should be ready to draft your business plan.

This is a very involved Planning Task—take your time. Most importantly, consult planning team members and get outside help when you need it. Don’t

expect to be an expert on everything (marketing, operations, people management, legal issues, financial analysis), particularly when researching a new idea. The Minars created a board of advisors, in addition to planning team members, to help them identify and evaluate strategic marketing and operations alternatives. Their advisors included a local banker, farm business management consultant, meat processor, clients, and other farmers. Consult the “Resources” section at the end of this Guide for assistance in locating outside help whenever and wherever you need it.

Because each business is unique, every strategic need cannot be addressed in this Guide. Clearly, most of your strategy work will take place in person with your planning team members. Worksheets are provided to help you flesh out and record the details of your business strategy alternatives.

Develop a Business Strategy

This first step in your strategic plan, Develop a Business Strategy, is where you’ll spend the majority of your time and effort for this Planning Task. You will consider all four functional areas, and you’ll consider many variables within each of those areas. We’ll remind you of where you are in the process from time to time. In the sections that follow, you will have the opportunity to identify and research alternative strategies for each functional area of the business—marketing, operations, human resources and finances. Begin by returning to your Whole Farm SWOT Analysis (Worksheet 2.18) to review the internal strengths of your present business and any perceived industry opportunities, as well as the internal weaknesses and external business threats you and your planning team identified. Good business strategies always take advantage of current business strengths and market opportunities. At the same time, a solid business strategy will address current weaknesses and perceived threats. With your SWOT Analysis in hand, you are ready to begin developing specific marketing, operations, human resources and finance strategies for the business.

Marketing Strategy

The marketing component of your business strategy will determine, in large part, the success of your business. As marketing consultant Barbara Findlay Schenck said: “Without customers, a business is out of business.”Your marketing strategy is about defining your customer or target market and tailoring your product, pricing, distribution and promotion strategies to satisfy that target market. Marketing experts warn that businesses that are product oriented—those that try to sell what they can produce without first looking at customers’ needs—risk developing a product that won’t sell. Instead, most successful businesses are customer oriented—they design marketing strategies around the needs of their customers.

At the end of this step, you should be able to confidently answer the following questions:

• Markets: Who are our target customers and what do they value?
• Product: What product will we offer and how is it unique?
• Competition: Who are our competitors and how will we position ourselves?
• Distribution and packaging: How and when will we move our product to market?
• Prices: How will we price our product?
• Promotion: How and what will we communicate with buyers or customers?

To complete the Marketing segment of the Develop a Business Strategy step, you will address the issues shown at right.
As you begin your research, track any expenses associated with the marketing strategies that you develop. You will be asked to record this information in your Marketing Strategy Summary (Worksheet 4.9).

markets: Who are our target customers and what do they value?

Most marketing plans begin with a description of the business’ target market, or its potential customers. Your first task in building a customer strategy is to identify your target market. Target markets are most commonly characterized as either individual households or businesses.

Direct marketing to individual households or customers can be performed on a small scale. This form of marketing tends to be more profitable than business-to-business marketing because of value-added opportunities and the lack of middlemen. Most direct market products are consumer goods or services. Popular direct market opportunities include Community Supported Agriculture (CSA), Pick Your Own (PYO) and farmers’ markets.

Business-to-business marketing typically involves sales of a raw commodity or product that will be used as an input. Traditional commodity producers almost always practice business-to-business marketing where customers include grain companies, processors, packers and millers. Today’s specialty or differentiated commodity producers, however, are learning to build in more profit by responding directly to market demand for unique products, such as tofu grade soybeans, high oil corn, grass-fed livestock, organic feed, and heirloom vegetables. Don’t overlook today’s business-to-business opportunities to contract and market specialty commodities.

Segmentation. Dave and Florence Minar identified. “individuals” (as opposed to other businesses) as their target market for Cedar Summit Farm dairy products. This target market was very different from their customer at the time, Davisco, which acted as a distribution intermediary by purchasing bulk milk for further processing. Consequently, when the Minars began the planning process, they had to conduct substantial research to learn about their new target market size, geographic location, purchasing patterns and preferences.

This process of identifying customers’ preferences and dividing the large target market into submarkets is called market segmentation. By identifying and targeting specific market segments you should be able to develop more effective packaging, price and promotion strategies.16 Markets can be segmented in a variety of ways. The most common forms of segmentation are by demographic, geographic, psychographic and product-use characteristics.

For instance, a market can be segmented into domestic and international subgroups if you are planning to market organic soybeans like Mabel Brelje; or into on-farm and off-farm buyer groups for gourmet cheese like Dancing Winds Farm owner Mary Doerr. Your market can also be segmented by the frequency of customer purchases, as considered by Riverbend Farm owner Greg Reynolds for weekly versus monthly vegetable customers.

Dave and Florence Minar divided their target market for bottled milk into two major groups by distribution channel, home delivery and retail customers (see Worksheet 4.1). In an effort to learn about their potential home delivery customers, the Minars surveyed 75 New Prague residents about their preferences for flavored milk, weekly milk consumption, and overall interest in home delivery. Based on this research, they developed a customer profile for New Prague home delivery customers.

Like the Minars, begin your target market research by developing a customer profile. Customer profiles can help you determine if a market segment is large enough to be profitable. Break your target market up into segments based on differences in their geographic location, demographic characteristics, social class, personality, buying behavior or benefits sought. Use Worksheet 4.1: Customer Segmentation (download worksheets for task 4) to help you develop and research customer profiles.

Sales potential. If you plan to produce and market a traditional bulk commodity, you won’t have much trouble calculating sales potential. The market for undifferentiated commodities is fluid and can typically absorb all that you produce (albeit at a lower price sometimes). Estimating sales potential becomes more challenging and important when tapping into a specialty commodity market (such as lentils) that may have limited demand, or when your target market is highly sought after and made up of individual households.

As a specialty commodity producer, your customer (usually another business) will make known how much they are willing to buy short-term (one to two years either through a written contract or verbal agreement. Projecting long-term sales potential may prove more difficult as these markets are usually immature and untested. Similarly, your task of projecting sales potential can be tricky when marketing to individual households. You will need to conduct careful research and be honest with yourself about the market’s growth potential. As mentioned earlier, Dave and Florence Minar of Cedar Summit Farm surveyed their local community about milk usage and demand for home delivery services. From this research, they were able to project sales of up to 798 gallons of home delivered bottle milk per week.

Alternatively, if the Minars did not have the luxury of time or funds to survey their target market, they might develop conservative sales estimates based on the number of households/residents within 25-50 miles of their farm.17 This is how far customers typically travel to purchase something. Cooperative Development Services representative Kevin Edberg says that as a general rule, 75 percent of direct market customers will live within 20 miles of your business.

Using this rule of thumb, Edberg and author Ron Macher suggest a simple way to project direct market sales potential. Begin by locating your farm on a county map and draw 25 and 50 mile radius circles around your farm. Count how many towns or cities fall within the circles. Using this map, add up the number of potential households that live in the nearby cities. These households represent your core potential business customers. Then, with a feel for the number of potential customers, estimate
the potential value of sales per household. This is your sales potential. Begin by estimating the number of customers in each segment and projecting their weekly, monthly or annual purchases. You can develop sales estimates from household or county purchasing records (available at your public library), from your own surveys, in person interviews, or from secondary sources, such as published purchasing pattern data. Excellent sources for consumer demographic and purchasing pattern data are CACI Market System Group Sourcebook, SRDS Lifestyle Market Analyst, and New Strategist Publications’ Household Spending: Who Spends How Much on What. These are available in the reference section of your public library.

Use the space in Worksheet 4.2: Potential Sales Volume (download worksheets for task 4) to begin developing sales estimates for each product that you plan to produce.

Although much of the market research needed for a business plan can begin with your own impressions and a little footwork at the library, you may reach a point where professional help is needed. Many businesses find it useful to hire a marketing consultant to develop proper surveys, lead focus groups, or to conduct telephone interviews. Representatives from your local Extension service or your state Department of Agriculture may be able to assist you in locating qualitative and quantitative information for a customer profile. The Minnesota Department of Agriculture (MDA), for instance, conducted its own surveys of farmers’ market, u-pick, and Christmas tree farm customers about spending patterns. Survey results are available from MDA’s Minnesota Grown Program. MDA also offers a comprehensive listing of more than 65 regional businesses that buy or process certified organic grains, oilseeds, fruits, vegetables, herbs and maple syrup.

Financial assistance may also be available to help cover some of the costs associated with your marketing research. You should check with your state Department of Agriculture, your local county Extension service (these phone numbers should be listed in your telephone book), as well as the United States Department of Agriculture (USDA), to see what programs are available in your area. The USDA Service Center locations give you access to the services and programs provided by the Farm Service Agency, Natural Resources Conservation Service, and the Rural Development agencies. You might also contact the Sustainable Agriculture Research and Education (SARE) Program in your region to see if they know of any programs available to fund market research for farmers (www.sare.org/). In Minnesota, the Minnesota Department of Agriculture and the Agricultural Utilization and Research Institute (AURI) both provide some financial assistance for marketing research. AURI provides grants to individual business owners and cooperatives for the development of logos, labels and marketing plans.

product: What product will we offer and how is it unique?

Although customer research is the single most important component in building a marketing strategy, it is often the product itself that inspires and excites many business owners. Here’s your chance to develop a thorough product description. Recall that a “product” is any commodity, final consumer good, or service.

As you think about the products your business will offer, try to describe them in terms of the value they will bring to your customers. What is it that customers are actually buying? Dave and Florence Minar described their bottle milk products as “non-homogenized, cream-top milk from grass-fed cows.” In the Minars’ case, customers will be buying old-fashioned taste (non-homogenized milk) and perceived health benefits (associated with milk from grass-fed cows). Moreover, New Prague families will also be purchasing a service: home delivery. This service required research and a pricing strategy just like all of the other products offered by Cedar Summit Farm.

Another way to look at your product is in terms of its uniqueness. What makes your product truly unique? Why would customers prefer your product to another farmer’s? Are there differences in the production process that make it more wholesome and fresh? Can you appeal to the environmentally conscious? Try to look down the road a bit as you profile your product. Will there be new opportunities to add value through processing, packaging, and customer service? How might your product line or services change over time? Use Worksheet 4.3: Product and Uniqueness (download worksheets for task 4) to describe each of the products that you plan to offer, why they are unique, and how they may change in the future.

competition: who are our competitors and how will we position ourselves?

Nearly every business or product has competition of some kind. Find out who your competitors are and what they offer to customers. A trip to the local grocery store, farmers’ market, or even a bit of time on the Internet to research how many growers offer organic asparagus or specialty grains may be all that is needed. Is anyone else serving your target market? If so, find out everything you can about their business or their buyers. You might even consider contacting them. Try to find out how they market and price, and, if possible, get a feeling for their cost structure. You need to determine what share of the market you can realistically capture.

Dave and Florence Minar made phone calls to other home delivery services and visited local retailers when beginning their research. They found that “No farmer in our area is processing and selling his own dairy products. Sources of competition for home-delivered milk into New Prague are Meyer Bros. and Schwans. Meyer Bros. buys milk off the open market and resells it—they do not purchase milk locally or offer non-homogenized products. Schwans will affect us only with ice cream. Some of our competitors in the metro area cooperative groceries are Schroeders, Organic Valley
and MOM’s.”

Use Worksheet 4.4: Competition (download worksheets for task 4) to analyze the competition that exists for each of the products you plan to offer. List your competitors. Then, consider where you have an advantage over them. Can you produce at a lower cost? Do you have access to markets that they cannot reach? Are you better at working with people—at attracting and keeping customers? Do you have better business skills? In other words, what’s your niche? You may want to return to Worksheet 4.3 (Product Uniqueness) where you described your product to ask again, is our product truly unique?

Distribution and packaging: how and when will we move our product to market?

Now that you have a customer and product in mind, your next task is to identify how to move or distribute products from your farm to the customer’s dinner table, store shelves, elevator or barn. Distribution strategies typically describe scope (market reach), movement, packaging and scheduling/handling.

Scope. The first component in your distribution strategy is scope - how widely you plan to distribute your product. Will you pursue an intensive, selective or exclusive distribution strategy?

Intensive product distribution typically involves widespread placement of your product at low prices. Your aim is to saturate the entire market for your goods. This strategy can be expensive and very competitive. Large-scale manufacturers or businesses that market nationwide often employ this method.

Selective product distribution involves selecting a small number of intermediaries, usually retailers, to handle your product. For example, if you plan to produce an upscale product, such as gourmet cheese, you may want to be selective about the stores that stock your product (choosing only those retailers who offer other gourmet, high-quality products). Selective distribution offers the advantages of lower marketing costs and the ability to establish better working relationships with customers and intermediaries.

District Marketing Distribution Alternatives	Intermediary Distribution Alternatives
Community Supported Agriculture (CSA) Farmers' markets Home delivery service Internet sales Pick Your Own (PYO) Mail Order Roadside Stands	Retailers Wholesalers Distributors Brokers Cooperatives

Exclusive distribution is, in effect, an extreme version of selective distribution. In this case, you grant exclusive stocking rights to a wholesaler or retailer. You agree not to sell to another buyer. In exchange, you might demand that the retailer stock only your farm’s salad greens, milk, meat or cheese. You may work closely with a retailer to set market prices, develop promotion strategies, and establish delivery schedules. Exclusive distribution carries promotional advantages, such as the creation of a prestige image for your product, and often involves reduced marketing costs. On the other hand, exclusive distribution may mean that you sacrifice some market share for your product.

If your distribution strategy includes sales to retailers or wholesalers, you will need to conduct substantial research. A recent study by the Center for Integrated Agricultural Systems indicated that Minnesota and Wisconsin retailers are very interested in purchasing and stocking local produce. However, they are often unwilling to do so because of inconsistent product quality. “Consistent quality means a predictable product for customers. . . When it comes to quality, many buyers want it all—produce that is shaped and sized consistently and of uniform ripeness and flavor; something they can get from California growers.” The study also identified six basic tips for approaching or selling to retail buyers, listed in Figure 45.

As a producer of bulk commodities, your packaging strategy may seem fairly straightforward since little or no packaging may be involved. However, if you are planning to produce specialty commodities, such as organic grains, be aware that strict industry “packaging” standards may exist.

Packaging final consumer goods for the retail market, on the other hand, can be a daunting yet exciting task. Examples of product packaging include individual product cartons, boxes and containers; bulk shipping containers; delivery vehicles; and even retail display cases for mass product packaging.

Service packaging examples include business cards, invoices, landscaping, building design, signage, brochures and vehicles.

As a producer of consumer products, you may want to begin your research at the supermarket or grocery store. Make note of how similar products are packaged and labeled. There are many rules and regulations governing food packaging and labeling. In general, any product packaged for the retail market must include a description of the common product name, net weight, nutrition facts, ingredients and your business address. All products must meet federal regulations. However, you should also contact your state’s food inspection department for more details, since state guidelines may be stricter than federal guidelines. [In Minnesota, see the MDA’s Food Labeling Fact Sheet. The Agricultural Utilization Research Institute (AURI) also provides technical assistance for the development of nutrition labels (see “Resources”, p. 249)].

Finally, as a service provider, think about what your customers will see, hear and smell when visiting your farm or communicating with you and your staff. Northwind Nursery and Orchard owner Frank Foltz laid out the following plan for “packaging” the service component of his business:

“The sales room for nursery stock and fruit will be decorated with a country theme and include locally crafted items useful for gardening, orcharding and homesteading purposes. We will avoid all but the very highest quality products. Staff will be friendly and knowledgeable in all aspects of fruit growing and orcharding. The property will be developed in a free-flowing, park-like fashion with an interspersion of fruit trees and edible landscaping plants that will elevate our customers from the simple act of buying fruit or nursery stock to that of experiencing our natural environment at its best. This arboretum-type setting will provide customers with the opportunity to take a ‘fruit walk’ to sample many different fruit cultivars in season and subsequently purchase more fruit, or the nursery stock to grow their own.”

As you think about what type of packaging is best suited to your product, don’t overlook customer needs, such as convenience, and intermediary requirements. Restaurant owners and cooperative grocery managers will likely have minimal packaging requirements that affect how you clean, bundle and grade your product. Lakewinds Natural Foods General Manager Kris Nelson says produce farmers, in particular, must compete with major distributors and therefore deliver a professionally packaged product. “Kale and other greens come to us from farmers already cleaned and bundled,” Nelson says. “They are dropped off at the store in packaging that is similar to what we see from commercial distributors.” 25 If you plan to market to retailers and other intermediaries, research their packaging requirements and think realistically about your ability to meet industry standards.

Your values and goals, as well as target market preferences, will also affect packaging choices. The Minars, for instance, envisioned marketing to customers “who value old-fashioned taste.” As a result, one of their distribution strategies was to package their milk in old-fashioned, returnable, glass bottles. “It is a common perception that milk in glass bottles stays colder, tastes better, is of higher quality, and has a nostalgic appeal to many customers,” they say in their business plan. By packaging in glass bottles, the Minars were also able to satisfy one of their environmental values—namely, to minimize their impact on the land through reuseable packaging.

Delivery scheduling and handling.

Your distribution strategy should also take into account how often you will need to make deliveries, either to satisfy customer demand or to fill intermediary requirements. What type of delivery schedule will be necessary? If you offer a perishable product, delivery schedules will be critical. The Minars spoke with retailers to research delivery conditions, such as the handling of returnable bottles, and a delivery schedule. Moreover, if you are marketing through an intermediary, your ability to meet delivery commitments may determine their continued business. “Retail buyers rely on delivery at the promised time so they know how much may need to be supplemented to meet demand and so they can schedule workers to handle delivery and display.” As you develop a delivery schedule, be aware of peak production periods (if your business is seasonal) as well as industry handling requirements. Organic producers are required, in most cases, to verify that organic grains were handled (cleaned, stored and transported) in accordance with organic standards.

Use Worksheet 4.5: Distribution and Packaging (download worksheets for task 4) to develop and describe your overall distribution strategy or strategies. The decisions you make here will affect your future workload and consequently, your human resources strategy.

Pricing: how will we price our product?

Farmers are all too familiar with the challenges of pricing bulk commodities for profit. As price takers, low market prices are often the number one reason traditional commodity producers find themselves sitting down to develop a business plan. Today’s producers, whether they are adding value or marketing a specialty commodity, have a greater ability to influence price in these highly defined markets. Depending on your goals, vision, target market, and product strategy, you may want to consider one or more pricing strategies for undifferentiated (traditional) commodities and differentiated (value-added, specialty) products.

In general, pricing strategies are based on two factors: prevailing market prices and your costs. In the long run, your price has to cover your full costs—including production, marketing and promotion—as well as a return for your time and investment. You will have the opportunity to crunch these numbers later when you evaluate the strategy you are currently developing.

For now, begin developing a pricing strategy around prevailing market prices for similar products if they exist. Learn about what customers are willing to pay and what prices your competitors charge. Begin your research by listing competitor prices for similar products—note any seasonal pricing changes, premiums and discounts offered by intermediaries (brokers, grain companies, processors, retail groceries, etc.). Check with your state Department of Agriculture, or your University Extension Service for a list of current market prices for traditional commodities, such as livestock and forages. Specialty commodity prices may be difficult to locate or only available for a fairly substantial fee. Markets for organics, non-GMOs, and other specialty commodities, such as lentils, are relatively immature and little information is available. Therefore, you will have to do a little digging when searching for historic, current, and projected market prices. In general, a good source for alternative product prices, including organics, is the Internet. Food cooperatives, like Blooming Prairie, list weekly wholesale prices for produce. Retail prices for a range of processed dairy and grain products, fresh produce, flowers, herbs and spices often are available on individual company Web sites. Moreover, the Appropriate Technology Transfer for Rural Areas (ATTRA) has compiled a listing of relatively low-cost organic market price and industry research called Resources for Organic Marketing (see “Resources”). If you have Internet access or are willing to make a few phone calls, your market price research needn’t take long.

Once you are familiar with prevailing market prices and your costs of production, you are ready to begin developing a pricing strategy. There are a variety of strategies to consider depending on your ability to set prices. Common pricing strategies for differentiated (value-added or specialty) commodities including consumer goods and services (with relatively high price setting ability) are discussed in Figure 48.

If you are a small or mid-sized producer selling in a local market, be careful not to place too much emphasis on price competition. You will likely have better results competing based on quality, value added and communications. Still, you need to think about how to price your commodity or product.

One common product pricing approach, skim pricing, is to establish a relatively high market entry price to recover costs before lowering the price to expand the customer base. This practice, however, can attract more competition if your prices remain too high for too long. The alternative is penetration pricing. Similar to promotional pricing, you initially set a product price below your intended long-term price to secure market acceptance of your product. The advantage of penetration pricing is that it will not attract competition. When selecting a pricing strategy for differentiated commodities, products or services, take a peek at the options listed in Figure 48.

Common pricing strategies for undifferentiated (raw) commodities (with low price setting ability) are discussed in Figure 49. Traditional commodity pricing strategies also have their advantages and disadvantages as described in Figure 49. When considering each of the commodity pricing strategies, remember that there are many factors that can affect your overall market price strategy, such as storage capacity, cash flow and taxes. Whatever type of pricing strategy you choose, think through your rationale. Are you trying to undermine the competition by offering a lower price? Set a high price that reflects your quality image or market demand as is the present case with organic products? Are you simply looking to cover costs and reduce volatility?

The Minars identified two pricing strategies for bottled milk (relative and cost-based pricing) to help place their product in retail and wholesale markets. By introducing new customers to Cedar Summit Creamery’s “old fashioned” bottled milk at a price well below that of organic milk, the Minars hoped to encourage quality and health conscious shoppers to try their product. The Minars’ break-even analysis in the evaluation step of this Planning Task helped them determine whether or not a relative or cost-oriented pricing strategy would be financially feasible.

Use Worksheet 4.6: Pricing (download worksheets for task 4) to develop your pricing strategy for each product. Begin by recording research about competitor’s prices.

promotion: How and what will we communicate to our buyers or customers?

Promotion is a must if you are going to gain product recognition among customers. Promotional strategies often are built around a “message.” The message that you deliver about your product or business is just as important as the product itself. Equally important is how and when you deliver that message through the use of advertising tools and media.

Image or product. Before beginning detailed promotions research, think about an overall strategy approach. Will you concentrate promotions on your business image, the product, or both (total approach)?

Businesses use brand or image advertising to build awareness and interest in their products. A brand is represented by a name, term, sign, symbol, design or some combination. A brand or logo is used to identify the products of your business and to distinguish them from other competitors. Although the establishment of a brand can be expensive, particularly for small businesses, many of today’s alternative farm businesses are concentrating their promotional efforts on image advertising—promoting the concept of “healthy” or “locally produced” or “eco-friendly” products.

The Minars plan to promote Cedar Summit Farm products through the use of a new label and logo design that will appear on all products and in their brochure. They hired a family artist to develop a variety of logos that would communicate their overriding values and new business mission statement.

Product advertising aims to create immediate sales through some type of special product offer, such as seasonal discounts, frequent buyer clubs, and in-store samples. For instance, Northwind Nursery and Orchard owner Frank Foltz developed a three-pronged product strategy to: “(1) Make use of excess products by distributing them as advertising samples—we will give it to customers who can use it. They will repay us many times over in ‘word of mouth’ advertising; (2) Give our customer discounts for bringing in other customers or distributing our literature, etc. . . . Give those who organize group orders a bonus; and (3) Reward loyal customers with extra services that will help them succeed.”

Product promotion aims to increase sales directly and immediately for an advertised product. Here are several low-cost product promotion alternatives.

• Coupons and rebates
• Tasting and cooking demonstrations
• Frequent buyer clubs
• Publicity
• Samples
• Recipes

While most small businesses opt for product advertising because it offers more immediate returns, marketing consultant Barbara Findlay Schenck recommends combining both image and product promotion strategies. She calls this promotional strategy total approach advertising. Total approach advertising offers direct farm marketers a chance to build a long-term image of their business and its values while encouraging timely product purchases.

Dancing Winds Farm owner Mary Doerr, for example, promotes the image of her business with flyers that read “Dancing Winds Farm is a small farm enterprise using sustainable agriculture practices” as well as her business’ product by offering free cheese samples and recipes at the St. Paul Farmers’ market every other weekend.

Use Worksheet 4.7: Promotion (download worksheets for task 4) to describe your general promotions strategy. Next, with a broad strategy approach in mind, begin sketching out the particulars of your advertising message, tools, delivery and schedule.

Message. Advertising messages can be fun, serious, or factual. They can describe business values, the product itself, production practices, prices, or the volume available for sale.

If you intend to use a product promotion strategy, your message can describe the unique characteristics of your product or a special offer. On the other hand, if your
strategy is centered on image promotion, your message should paint a clear picture of what you want your business to be known for among customers. Return to your Business Mission Statement (Worksheet 3.2), in which you first answered this
question; it is a good place to start formulating your promotional message. Either way, if you plan to produce a retail product, try to keep your messages short so that it can be incorporated into product packaging.

Take a look at the following image and product-related messages advertised by several well-known Midwest retail food suppliers:

“Our organic products are not only good for the earth, but for you and your family too! Together we can change the world—one organic acre at a time” —Horizon Organic

“Bob’s Red Mill is dedicated to the manufacturing of natural foods in the
natural way . . . We stone grind all common and most uncommon grains into
flours and meals on our one-hundred-year-old mills . . . Our product line of natural
whole grain foods [is]the most complete in the industry” —Bob’s Red Mill

“Applegate Farms is working to improve the meat Americans eat . . . All of our products are gluten-free, contain low or no carbohydrates, are lower in fat than other major brands and free of all taste or texture enhancers” —Applegate Farms

Research other business messages online, in advertisements, or at the grocery store.

Tools and delivery. Frank Foltz, owner of Northwind Nursery and Orchards, promotes his business’ products using a range of promotional tools, including fact sheets that are distributed at farmers’ markets and educational on-farm displays. “Quality products and knowledgeable, personal service along with a series of informative fact sheets on fruit growing culture and problems are an integral part of our catalog sales strategy,” says Frank. “Those, along with on-farm learning opportunities, community activities and cultural events are the back-bone of our local promotions efforts.”

The Foltzes’ experience suggests that educational fact sheets are one of the best ways to reach their target market customer—individuals interested in learning more about backyard orcharding and edible landscaping.

Promotion or advertising tools typically include display ads, billboards, yellow pages, mailings, flyers and catalogues. Your state Department of

Agriculture likely has a program promoting locally grown products. The Minnesota Grown Directory is an excellent advertising resource for farmers in Minnesota and Wisconsin who have seasonal and year-round products to sell. Minnesota Grown program participants, like the Minars, are listed in an annual directory and receive permission to use the trademarked Minnesota Grown logo.

Every advertising tool has its advantages and disadvantages. Think about which tools will help you best reach your target market. Once you’ve developed a list of potential advertising tools, think about where you will deliver or distribute your promotional message. Trade shows, farmers’ markets, county fairs, radio, television, and the Internet are just a few promotional delivery options. Be sure to brainstorm with your planning team. Identify creative, low-cost, effective ways to get the word out. You might consider a word-of-mouth campaign or a strategic alliance with another farmer.

Mary Doerr of Dancing Winds Farm linked up with a nearby Community Supported Agriculture (CSA) business owner to offer “cheese shares” in its CSA brochure. The Minars negotiated a verbal agreement with a meat producer in West Central Minnesota to market Cedar Summit Farm milk products to that producer’s existing direct market customers. That agreement would allow the Minars to promote their milk products beyond South Central Minnesota and gradually increase the size of their target market.

Timing and frequency. Promotional strategies should include a plan for timed delivery or an advertising schedule that describes how often you will communicate with customers to follow- up on a sale, inform them of holiday specials (see Figure 56), or let them know about new products and prices. Regular communication is a way to build and preserve your market.

Frank Foltz of Northwind Nursery and Orchards maintains regular contact with customers by informing them about new orchard research and varieties. How will you advertise and maintain contact with your customers? Through regular personal contact, periodic promotional mailings, or a holiday mailer? It may be helpful to develop a calendar for promotional “events” to help time promotions with seasonal demand or peak production periods. This will also help you plan for advertising expense outlays when developing your cash flow plan as you evaluate your proposed strategy later in this Planning Task.

A series of interviews with Minnesota and Wisconsin retail buyers found that farmers who communicated regularly with buyers regarding deliveries and product availability were more successful at maintaining these customers. When communicating with intermediaries, it is a good idea to appoint a single representative to deal with the buyers so that a personal relationship can be built. This person should be knowledgeable about your business’ products and able to negotiate with buyers.

Your communication strategy might also incorporate feedback elements to obtain information from customers. Frank Foltz describes this strategy
approach best in his business plan: “We will treat our customers as an extension of our research and development departments. Their problems and complaints about our products can help us eliminate future production problems and their suggestions may be as helpful as any hired consultant. We will listen attentively to their concerns, dealing with problems immediately and always give the customer the benefit of the doubt.”

Regardless of the promotional strategy you pursue, you and your planning team will need to be creative to catch the attention of your customers and stretch your advertising dollars. Promotion, though seemingly overwhelming, should be fun.

Return to Worksheet 4.7: Promotion (download worksheets for task 4) to sketch a promotional strategy and advertising plan for each of your products. Think about your values and goals as well as your target market, product and potential competition. Like the Minars, be sure to detail your overall promotional strategy, message, advertising tools, delivery ideas and communication plans.

inventory and storage management: How will we store inventory and maintain product quality?

Storage and inventory management are integral and important parts any business strategy, affecting product quality, marketing opportunities, and the business’ legal standing. While this may seem to be more of an operations issue, many marketing strategies may depend on whether or how long you can store your product.

What role will inventory and storage management play in your business? Like traditional grain producers who use storage as a way to mitigate seasonal price declines, Riverbend Farm owner Greg Reynolds devoted a substantial portion of his operations research toward the development of a low-cost storage system for organic vegetables. He sought to preserve his produce and prolong his marketing season.

You might shape your storage strategy around marketing or to satisfy regulatory considerations. Certified organic producers, for example, must maintain detailed storage and harvest records in order to market their crops. Similarly, in accordance with the USDA Pasteurized Milk Ordinance and the Minnesota Department of Agriculture Food Handlers License/Processing Plant Permit, the Minars are required to test all milk transported to Cedar Summit Creamery for traces of antibiotics, bacteria and proper pasteurization once it has undergone this process. According to Worksheet 4.8, Cedar Summit Creamery will house a testing lab and storage cooler on-site to assure the quality of milk and preserve bottled milk, cheese, sour cream, butter and ice-cream products.

Think about your storage and inventory management objectives, then research your options and use Worksheet 4.8: Storage and Inventory (download worksheets for task 4) to describe this piece of your marketing strategy.

Develop a Strategic Marketing Plan.

Think about how all of your individual product marketing ideas (product, distribution, pricing and promotion) can fit together into one or more general marketing strategies for the whole farm. Use Worksheet 4.9: Marketing Strategy Summary (download worksheets for task 4)to summarize your marketing research and strategies for each product and to note how these strategies and external conditions (such as competition) may change throughout your transition or start-up period. Then think about how individual product strategies fit together into one, whole-farm marketing plan. This is the time to refine your initial product strategies if necessary to incorporate new information.

The Minars completed the Marketing Strategy Summary Worksheet 4.9 for each product in their proposed cream-top product line. An excerpt from their Worksheet for bottled milk—in which they identified several pricing, distribution and packaging strategy alternative —is shown above. Note that they still had a lot of details to work out, such as expenses associated with glass versus plastic milk cartons and the economic feasibility of on-farm sales and collaborative marketing efforts. But the beginnings of a very strong marketing plan were in place.

If you haven’t already done so, take time now to complete Worksheets 4.1—4.8 for each product that you plan to market. Refine your target market, if necessary, based on your research. Do this together with your planning team. Next, using Worksheet 4.9: Marketing Strategy Summary, briefly describe your distribution, packaging, pricing, and promotion strategies for each product and begin gathering expense estimates. Then summarize your product strategies into a whole farm strategic plan. Note any strengths, weaknesses, opportunities and threats (SWOT) associated with each general marketing plan, listing supporting evidence from your research.

Operations Strategy

With a clear idea of who will buy your product and why, the next planning question you must answer is: How will we produce it? A detailed operations strategy—one that is clear to all involved in the operation—is necessaryfor sound management and is sometimes an institutional necessity. Organic producers, for example, are required to submit a detailed farm management plan when seeking certification each year. According to certification guidelines, the plan must describe all resource management strategies directed at improving soil fertility; controlling weeds, pests and disease; managing manure; and limiting erosion.

In this section you will have the chance to develop a production management and operations strategy by answering questions about:

• Production Management: What production/management alternatives will we
  consider? How will we produce?
• Regulation and Policy: What institutional requirements exist?
• Resource Needs: What are our future physical resource needs?
• Gaps: How will we fill physical resource gaps?
• Size and capacity: How much can we produce?
• Storage and Inventory Management: How will we store inventory and maintain product quality?

production and management: How will we produce?

All operations strategies begin with a detailed description of the business’ production (management) system and a production schedule. As a current producer, you may have very clear ideas about how you would like to produce, what management system to use and resource requirements. If so, this portion of the planning process may be a welcome break from the research that was necessary to learn about your customers and competition in the previous section. If you
are a beginning farmer, however, you may find that this component of the planning process is just as research-intensive. Take your time, and, most importantly, talk with other experienced farmers when fleshing out the details of your production system and production schedule.

Production system. Before making their decision to process, the Minars traveled thousands of miles to Maryland, Virginia and West Virginia to visit four other farmer-owned milk processing plants. Each of the plants was similar in size to the Minars’ proposed operation. They processed with “Mini- Dairy” equipment from an Israeli-based company called Pladot. By visiting the plants, observing production, and talking first-hand with plant owners, Dave and Florence feel they gained invaluable insights that helped them with decisions about plant construction, equipment purchases and marketing.

Your choice of production system will be heavily influenced by your social, environmental and community values. This might be a good time to revisit your values and goals, and to recall your objectives for the whole farm. Each production system carries with it different resource requirements, production outcomes, labor demands and natural resource implications.

As you define one or more production system strategies, try to be specific
about how the system will work on your farm. If your vision includes a major

change in production, think about the resource requirements and the trade- offs between labor, productivity, conservation and profitability that may be associated with different production management systems. Use the space in Worksheet 4.10: Production System and Schedule (download worksheets for task 4) to describe your production system strategies for each farm enterprise. If you plan to produce crops or livestock, for instance, detail your plans for: weed, pest and disease control, soil fertility, rotation, tillage, irrigation, water quality, seed selection, breed selection, fencing, feed, housing, stocking, and waste and quality control

Similarly, if you plan to process or offer a service, the systems component of your plan might address your business’ strategy for workshops or on-farm consultations. Northwind Nursery and Orchard owner Frank Foltz, for instance, took time to describe his operation management plans for farm tours and pruning demonstrations.

There are many resources that describe traditional and, increasingly, alternative production systems. Most universities have published research studies on reduced input, organic and livestock grazing systems. Two excellent publications are the Grazing Systems Planning Guide and Making the Transition to Sustainable Farming. Most importantly, talk with other farmers—learn from their mistakes and their successes.

Production schedule. Once you have identified one or more production system strategies, think about how management within each system may change over time (e.g., from season to season or from year to year. For instance, how might your livestock management change as you transition from a system of confined farrowing to pasture farrowing for hogs, or from summer grazing to winter feeding for cattle if you plan to seasonally graze? Similarly, think about your annual crop rotation schedule, weekly vegetable harvesting schedule, or daily farm tour schedule. This type of detailed operations planning is critical for any business—it can help you estimate physical and labor resource needs and production potential, as well as cash flow projections. And in many cases, detailed production schedules may be necessary for institutional compliance. Crop producer Mabel Brelje, for example, is required to submit a crop rotation plan annually in order to obtain organic certification. For this reason, she included a rotation map in her final business plan (Figure 60).

regulations and policy: What institutional requirements exist

Like it or not, if you are going to operate a retail business, process on your farm, or greatly expand livestock production, you will run into local zoning, permitting, licensing and regulatory issues. Regulations can have a major impact on your production and operations plans as well as on start-up costs. Dave and Florence Minar, for example, had to obtain seven permits to build a plant and process their own milk (Figure 61). The type of permits or licenses required for your business will depend on where you are in the business life-cycle (whether you are just starting up or growing your business), where you live, what type of product you offer, and the overall size of your operation. Therefore, before going too far with your operations research, it’s a good idea to check with your state’s Small Business Association as well as your local or county regulators to learn about environmental, construction, finance, bonding and product safety regulations. In Minnesota, A Guide to Starting a Business in Minnesota 38 lists all necessary state permits and licenses as well as informational contacts. Some examples of the agriculture-related licenses and permits required by the State of Minnesota are listed in Figure 62.

resource Needs: what are our physical resource needs?

Traditional resource management plans address land, labor and capital. Here you will identify needs in all of these areas, but limit your strategy development to land, buildings, breeding livestock, equipment and variable inputs or supplies. Labor-related strategies are discussed separately in the Human Resources Strategy section.

Take stock of your operation’s future resource needs for each enterprise and ultimately, the whole farm. Think about how much land you will need, what type of equipment you will use, and any other physical inputs necessary to produce your product. The choices that you make regarding resource use, acquisition and ownership can have a big impact on the overall profitability of your business. The costs of owning and operating farm machinery in Minnesota, for example, account for 20 to 30 percent of the annual per acre production costs for corn and soybeans.

If you are new to the business or industry and uncertain about resource requirements, try talking with experienced producers or your local Extension educator to begin brainstorming a realistic list of land, livestock, machinery, equipment, labor and other input needs. If you plan to produce a specialty commodity or use an alternative management system, accurate production input records may not be readily available. In this case, your research may take you to the Internet or some of the alternative experiment stations located at universities across the country. Your regional SARE office (see “Resources”) may be able to help you locate information sources in your area.

If you are new to the business or industry and uncertain about resource requirements, try talking with experienced producers or your local Extension educator to begin brainstorming a realistic list of land, livestock, machinery, equipment, labor and other input needs. If you plan to produce a specialty commodity or use an alternative management system, accurate production input records may not be readily available. In this case, your research may take you to the Internet or some of he alternative experiment stations located at universities across the country. Your regional SARE office (see “Resources”) may be able to help you locate information sources in your area.

Dave and Florence Minar developed a list of processing resource needs by visiting other on-farm dairy processing plants and from business plans shared by these same business operators. Using this information, the Minars were able to generate a fairly detailed list of needed machinery, equipment and start-up inputs (Figure 63).

Referring to your completed Worksheets 2.5 and 2.6, use Worksheet 4.12: Describing Potential Crop Production Systems and Worksheet 4.13: Describing Potential Livestock Production Systems to record future resource needs for crop and livestock enterprises, respectively. Think about how your operating schedule and corresponding resource needs will change as you transition into a new management system over a period of seasons or years.

resource gaps: how will we fill physical resource gaps?

Another critical component of your operations strategy involves your plan for filling resource gaps. Return to your crop and livestock production schedules (Worksheets 2.5 and 2.6) from Planning Task Two in which you described current crop and livestock input needs and equipment use. Compare these lists to those that you completed for future operations (Worksheets 4.12 and 4.13). Are there any gaps? Or perhaps you now have underutilized resources?

Consider some of your strategy alternatives for filling or eliminating gaps between current land, building, machinery and equipment availability and future physical resource needs. Will you:

• Make better use of existing machinery and equipment?
• Acquire additional (new or used) resources?
• Gain access to additional resources through business arrangements
  (formal and informal)?

Making changes in your current resource use may mean making “better” use of underutilized resources. Based on your evaluation of current resource availability and future needs, are there any resources that are underutilized or that will become underutilized as you move toward your future vision? If so, one of your resource management strategies might be to “make better use of underutilized resources.” How you define “better” will depend on your values and goals. For example, it may mean sharing or renting out equipment with another family member or neighbor.

If the gap between current resource availability and future resource needs is significant, you may need to look at acquiring additional physical resources. This can be a financially risky alternative. You will need to carefully evaluate cash flow in the next section before implementing your plans. For now, however, consider the following acquisition options if you think additional capital will be needed to meet future operating needs.

Land and buildings. Land and buildings can be purchased, rented or leased (Figure 64). Each of these acquisition options has financial advantages and disadvantages, which will be discussed further later, when you address finance strategies. For now, though, you should realize that land acquisition options should be weighed carefully. Land purchase decisions can make or break your business. They often require a large amount of capital and a long-term commitment. In a video presentation, Gayle Willett says “Purchasing real estate is one of the most important decisions a business may make . . . It is important not to let emotion overrule sound business judgment . . . .Consider both what the land is worth to the business and what you can pay for the land and still have cash flow.”40 If purchasing land is a part of your operations strategy, you’ll evaluate the feasibility of that strategy carefully in the finance sections. You’ll need to discuss cash flow, tax and equity implications with an accountant.

Machinery and equipment. If additional machinery and equipment will be needed—either to replace old equipment or to meet new resource requirements—you have several acquisition options, such as purchasing, renting, leasing, custom hiring, or exchanging labor for access to equipment (Figure 64).

If you plan to purchase additional equipment, you should also consider the advantages of buying new versus used equipment. The financial, labor, and production-related advantages and disadvantages of new versus used equipment are outlined in Figure 65. Think about these issues as well as your ability or willingness to perform equipment repairs and to finance large capital purchases.

As you brainstorm machinery and equipment acquisition options, it’s a good idea to talk with other farmers, equipment dealers and competitors about their experiences. The Minars conducted research about equipment alternatives by visiting with other farmers in person and on the phone. They traveled around the state of Minnesota and as far as West Virginia to visit other on-farm dairy processing operations.

Based on their conversations with other on-farm processors, the Minars decided to pursue the use of new equipment from Pladot, an equipment manufacturer located in Israel. The Pladot Mini-Dairy system can be sized according to the Minar’s milk production capacity. Moreover, Pladot provides training, technical support and product recipes as part of the Mini-Dairy equipment package. They felt that by purchasing the turn-key processing system from Pladot, they would be able to produce a range of quality products from their first batch of processed milk. They were concerned that their other alternative, purchasing used equipment, would risk difficulties in locating and fitting equipment, in getting the system up and running efficiently, and in developing their own recipes.

“Without recipes we would have to experiment one product at a time in order to develop quality milk, cheese, sour cream and yogurt,” explains Florence Minar. “With the Pladot recipes, we wouldn’t waste any time or money developing our product line, which means that we could begin marketing a wide range of products almost immediately.”

Return to Worksheets 2.5 and 2.6 where you described current crop and livestock resource use. Combine this information with the list of current tangible working assets (Worksheet 2.3) to identify any gaps between current and future resource needs. Look at the status of current buildings and equipment to realistically determine what can be used. Ask yourself whether there will be any overlapping demand for building space, equipment and machinery or whether replacements may be needed.

Size and Capacity: HOw much can we produce?

Your goals for growing or contracting the business as well as upper and lower limits on size will affect your choice of business organization (discussed next in the Finance Operation Strategy section) and your operations schedule. Farm size refers to the amount of land in production (number of acres), the number of animals you raise, and the value of gross income from the business. Someone who is planning to convert from a traditional cattle finishing operation to management-intensive grazing, for instance, may be limited in size during the transition period while pastures are developed and management techniques fine-tuned.

How will you size the business and plan for any growth? Begin your research with a little number crunching to determine realistic production estimates for each future enterprise and production schedule. Use information about the future carrying capacity of your land, the processing capacity of your equipment, boarding capacity of your Bed and Breakfast, or harvesting capacity of your family and staff to develop output projections. Use Worksheet 4.15: Institutional Considerations to help you think through any legal or regulatory agreements or policies that will affect the use and management of physical resources under your new operations strategies.

Figure 67. Excerpt from Mabel Brelje's Business Plan - Crop Yield Prediction

Crop	Yield/Acre
	High	Low
Alfalfa	Six Tons	Three Tons
Soybeans	55 bushels	30 bushels
Wheat	50 bushels	30 bushels
Corn	150 bushels	100 bushels

Historical information about yield performance and productivity are available for traditional enterprises from a number of resources. Check with your local Extension office or your state Department of Agriculture. In the Upper Midwest, check out FINBIN43 and Farm Business Management’s Annual Report.44 Again, alternative production system information might be a little harder to find, but your local Extension office or state Department of Agriculture should be able to give you some ideas of who to contact in your area if they don’t have that information. Check also with sustainable agriculture organizations in your area or your regional SARE office. One of your most useful resources may be other farmers—those who are on the cutting edge—using a new production system or technology.

As you develop output/production estimates, particularly for alternative enterprises with little recorded performance history, you may want to estimate “best” and “worst” case production scenarios, or high and low output projections. Organic crop producer, Mabel Brelje chose to develop high and low yield projections for her oilseed and grain crops as shown in Figure 67. She used these projections in her financial analysis to evaluate profitability and risk.

Dave and Florence Minar developed an upper limit for bottled milk production based on pasture acreage, herd productivity, and equipment capacity. At current productivity levels and herd size, the Minars’ cows produce 166,913 pounds of milk per month. The Pladot Mini-Dairy equipment can process between 148,333—207,667 pounds of milk per month. Should market demand increase for their products, the Minars could increase their herd (and output) to 187 cows and process at the plant’s full capacity. They have the acreage to support more cows. However, this would necessitate converting some of their hay fields to pasture or acquiring access to additional land resources. These are issues that the Minars will need to evaluate in their contingency plan should future opportunities arise.

Use Worksheet 4.16: Estimating Output and Capacity to estimate production/output potential and begin shaping a size-related strategy for the business. If appropriate, describe your growth or contraction strategy for the whole farm and for each future enterprise.

Develop a Strategic Operations Plan

You’re ready to develop a whole farm operations plan! Use Worksheet 4.17: Operations Strategy Summary to briefly describe the management system you intend to implement for each enterprise. Detail crop rotations, pasture layout and rotation, milking schedules, etc. Think about how these might change throughout your start-up or transition period. Next, list new resource needs and your strategy for acquiring them. Then record all operating expenses associated with each enterprise or the whole farm (if appropriate). Finally, you’re ready to pull your enterprise-specific operations strategies together into one, whole-farm production and operations strategy.

The Minars summarized their operations strategy on Worksheet 4.17, as shown in Figure 69. As you draft a whole-farm operations summary, be sure to include supporting research and note the strengths, weaknesses, opportunities and threats (SWOT) associated with each strategy alternative. You will use this information in the next section to evaluate the feasibility of each strategy alternative and to settle on a final course of action for the business. It’s also a good idea to have each planning team member summarize a whole farm operations strategy and work through a SWOT analysis on their own. Then you can compare notes and brainstorm about internal and external threats, and make sure everyone agrees on which overall operations plan you will pursue.

Human Resources Strategy

As you draft a whole-farm operations summary, be sure to include supporting
research and note the strengths, weaknesses, opportunities and threats
(SWOT) associated with each strategy alternative. You will use this information in the next section to evaluate the feasibility of each strategy alternative and to settle on a final course of action for the business. It’s also a good idea to have each planning team member summarize a whole farm operations strategy and work through a SWOT analysis on their own. Then you can compare notes and brainstorm about internal and external threats, and make sure everyone agrees on which overall operations plan you will pursue.

In this section, you and your planning team will begin to build a human resources strategy to address your changing management and work force needs. This strategy should embrace your family goals while meeting new business needs.

You will begin your strategic planning by answering questions about:

• Labor needs: What are our future workforce needs?
• Skills: What skills will be required to fill workforce needs?
• Gaps: How will we fill workforce gaps?
• Compensation: How will we pay family and members of our workforce?
• Management and communication: Who will manage the business and how?

You’ll work through this Human Resources section of Developing a Business Strategy by working through the following aspects of Human Resources in the order shown below.

You will begin your research by determining projected labor needs for each enterprise (product). Next, you will compare your projected labor needs against current labor resources to identify any gaps, as you did in the operations section for physical resources. You and your planning team will then need to consider how to fill those gaps and to identify one or more strategies for doing so. Finally, you will develop a strategy for managing labor and the business. This is perhaps one of the most critical components of your business strategy. Without an effective management plan or business manager, even the best of business plans can fall apart. Take your time developing a human resources management strategy—it will be one of your keys to success.

Labor needs: What are our future workforce needs?

Begin building your human resources strategy with some critical thinking about the type of work and accompanying workloads that will be necessary to reach your future vision and to carry out the marketing-, operations- and finance-related work within the business.

Tasks. What new marketing-, operations- and finance-related tasks will be required to produce and market a new product or to implement and manage a new production system? Be realistic about your labor needs and consider the not-so-obvious elements of business ownership and management, such as ttime required to communicate with staff, make equipment repairs, and handle administrative needs. For example, if you are considering organic production, be sure to plan ample time for record keeping. The paperwork necessary to track inputs, harvest and storage in an organic system can be tedious and time consuming.

“Many organic producers consider the organic premium to be primarily a payment for the extra administrative efforts required by credible certification agencies,” notes certification specialist Lisa Gulbranson. “The audit trail for a certified organic product must be maintained with great detail.”

Workload. Once you and your planning team have brainstormed a list of new tasks, try to estimate how much time each task will require and note any seasonal bottlenecks. This will help you to visualize the peaks and valleys of work demands, which in turn will help determine how to fill workforce needs or reduce workloads.
Be sure to include work involved in producing and marketing products, maintaining equipment and facilities, and in managing the business when calculating your labor needs. If you are uncertain about how much time will be needed for each task, talk with other farmers, like the Minars did, or consult Appendix D for a list of traditional enterprise-related labor requirements. If you haven’t already done so, return to Worksheets 2.8 and 2.9, in which you described the labor requirements for current tasks. You could also begin this research by tracking your own current hours (if you are already in business) to get a sense of just how much time is involved in seemingly routine tasks. You may be surprised by the results. Then use these actual recorded hours as a basis for developing realistic projections for your future labor and staff needs.

In Worksheet 4.18, shown in Figure 70, the Minars summarized their labor needs for processed products. Dave and Florence anticipated some seasonal bursts of marketing activity during winter and spring holidays. Preceding each holiday season, the Minars budgeted extra staff time to handle on-farm customer sales. Similarly, their financial staff needs are expected to increase at yearend and prior to tax reporting. Product promotion and delivery workloads are expected to remain fairly constant throughout the year, as will time needed to process products. Staff needs may increase as the Minars reach full processing capacity in 2004. Labor estimates for plant staff are based on conversations with other on-farm processors and a Pladot equipment representative. Look at the Minars’ completed Worksheet 4.18: Tasks and Workload for Cedar Summit Creamery’s processing enterprise and begin to develop your own labor and staff estimates.

skills: What skills will be required to fill workforce needs?

Before you begin to develop a strategy for filling workforce needs, you should get a good feel for the type of skills required for each new task or position. This information, combined with workload estimates, should help you better decide how to fill your human resources needs.

Begin your research by learning more about any new work that you and others will be required to do. Ohio State University economist Chris Zoller recommends developing “well thought-out job descriptions” that are compatible with the business’ mission and goals for each new position that will be created. Job descriptions—even for those positions that will be filled internally with family labor—can help make your human resources strategy a positive one by clearly identifying desired skills, expectations, responsibilities and compensation. A sample job description form is included in Appendix C to help you with this task.

As part of their “skills” research, Dave and Florence Minar pitched in at Minnesota Organic Milk (MOM’s)—an on-farm processing plant located in Gibbon, Minnesota (Figure 71). They worked on the MOM’s processing line one afternoon to help with butter production and packaging. Based on this experience and their visits to other on-farm dairy processing plants around the country, the Minars developed a good feel for future workloads and tasks. Conse quently, they felt confident developing a realistic strategy for meeting some of their future labor needs. Explore similar opportunities as you begin identifying tasks. Try to get a feel for skills that may be required for each task.

Use Worksheet 4.19: Filling Workforce Needs to begin describing the skills that are required for each new task or position.

gaps: how will we fill workforce gaps?

According to their workforce strategy in Worksheet 4.17, the Minars could fill nearly all of their workforce needs through the creation of permanent jobs for several family members. Their daughter, Laura Ganske, would become the business’ new distribution manager. She would coordinate and staff home deliveries and on-farm sales. Mike Minar and his wife, Merrisue, would also both join the business as permanent employees. Mike would become the processing plant manager. He would oversee production, testing, and packaging. Merrisue would work part-time as the business’ office manager. She would handle bookkeeping and payroll. The Minars’ youngest child, Dan Minar, also will join the business full-time as a marketing manager once he has completed his university degree. Dave, Florence, and their current partner, Paul Kajer, would be reassigned to new tasks. Dave and Florence would work full-time in the plant while Paul would take over Dave’s current work as livestock manager, performing all pasture and dairy production-related management tasks. This shift would create a new gap—the need for a full-time milker—that the Minars planed to fill with external hired labor.

Ultimately, your labor strategy—your decision to hire workers, purchase equipment or reorganize the business—will depend on your financial goals and personal values. For instance, there is clearly more than one way for the Minars to staff their processing plant and to fill distribution and production positions. In addition to family labor, they could have considered hired labor and employees for processing and crop production. However, because their values and planning purpose are rooted in the idea of creating jobs and income for family members, they limited their strategy options to hiring family members and redefining family member roles as a way to fill most new jobs/tasks. As you develop a workforce strategy, revisit your values and goals for human resources. Think about your willingness to perform fieldwork, communicate with customers, work with livestock, or maintain financial records, among other things.

Use Worksheet 4.19: Filling Workforce Needs (download worksheets for task 4) to describe your strategy for addressing workforce gaps or acquiring and training labor.

Compensation: how will we pay family and members of our workforce?

Wages and other benefits that you offer family, employees, hired labor, interns and contracted labor will vary with industry rates and standards as well as the type of work involved and, of course, your values. You and your planning team will need to consider all of these factors when developing a labor compensation package as part of your overall human resources strategy.

A good place to begin developing your benefits strategy is by looking at industry standards. Find out what salary and other benefits are typical for your business (check with your state Department of Agriculture or talk to other farmers) and adjust them according to your own values and goals. The Minars, for instance, decided to pay their son a salary that was comparable to what he earned as a production supervisor at a high-tech medical supply manufacturer. Although this salary may be well above dairy industry standards, Dave and Florence agreed to offer their son a comparable salary because of his commitment to the business, family needs, and their own vision of a “fair” wage. Of course, the Minars’ plan to pay an above-average salary must be balanced against their financial objectives for cash flow, profitability, and net equity growth—something they had to consider when evaluating their strategic plan.

In addition to a cash wage or salary, common forms of labor compensation include housing (room and board), products (milk, meat, nursery stock, cheese), automobile, insurance (health, accident), stocks or shares of the business, and retirement investments, such as a Simplified Employeed Pension (SEP) Plan or 401K.49 You may want to review business organization alternative strategies (addressed as you develop a Finance Strategy in the next section) to explore tax and other institutional requirements before settling on a labor compensation strategy. An accountant or attorney will be able to help you work out the details of human resources compensation.

Use Worksheet 4.20: Compensation (download worksheets for task 4) to research and draft a compensation plan for each new position or worker. Then use this information to develop monthly and hourly labor input expense estimates for each position in Worksheet 4.21: Human Resources Expense Estimates (download worksheets for task 4). These will be used as you evaluate the profitability and cash flow of your alternative strategies.

management and communication: who will manage the business and how?

Good management and communication are pivotal and often intangible qualities of a successful business. No matter how well a business strategy has been researched and evaluated, it will not help accomplish your goals unless there is an effective manager behind it— one who knows how to communicate. Therefore, spend a little time fleshing out a management and communication plan for the business.

Management. Farm business managers, like most independent small business owners, are responsible for a range of tasks that include planning, organization, decision-making and control of resources.50 They are responsible for the long-term development and success of the business—implementing the business plan, monitoring performance, and facilitating change.

Use Worksheet 4.22: Management Strategy (download worksheets for task 4) to identify your management strategy for the business. Think hard about your willingness to perform the duties of an effective communicator. Your management strategy should include a short- and long-term back-up plan to arrange for management in the case of an emergency due to illness or shift in goals on the part of management team members. A written management plan can be particularly useful, and may become a final part of your business plan if you decide to manage as a team. Management teams and boards often use written management plans to clearly specify management responsibilities, check-in meeting dates, and a description of grievance procedure.

Develop a Strategic Human Resources Plan

Briefly summarize your human resources strategy for each enterprise or the whole farm (if appropriate) using the space in Worksheet 4.23: Human Resources Strategy Summary (download worksheets for task 4). Carefully review your research, and describe workforce needs and plans for filling them. Note the strengths, weaknesses, opportunities and threats (SWOT) associated with each strategy. This also is a good time to list human resources expense estimates for each enterprise. You will use this information when you evaluate the feasibility of each strategy alternative.

Financial Strategy

Financially successful businesses are usually built around strategies that incorporate risk management, tax-efficient organization, and careful use of financing. In this section you will build a financial strategy by looking at:

• Risk: What does our future business environment look like and how will we manage for risk?

• Organization: How will we legally organize and structure the business?
• Financing: How will we finance capital requirements?

When you evaluate your strategic plan, you will have the opportunity to evaluate enterprise and whole farm strategies from a financial perspective by looking at projected profitability, liquidity and solvency. For now, however, concentrate on the development of risk management, organization and finance strategies.

As you do so, recall your financial values and goals. What is important to you? Paying down debt? Putting money away for the future? Being able to save for “down times”? Reducing overall financial risk? Generating most or all of your income from the farm business? Use your values and goals along with your SWOT assessment to guide the development of one or more whole farm financial strategies.

risk management: how will we manage risk?

In today’s farm economy, risk management has become an important topic, particularly for those producers who have traditionally relied on government intervention to mitigate price and production-related uncertainties. Regardless of whether you produce corn, soybeans, grass-based milk, organic vegetables or specialty fruit trees, risk management will be an important component of your business plan. Without it, uncontrolled risk and uncertainty reduce the reliability of financial projections and make investment analysis difficult. Unmanaged risk and uncertainty also carry with them a high degree of stress for farm managers and their families. In this section, you and your planning team will first research the potential business risks that stem from new marketing, operations and human resources strategies. Then you will be ready to develop a whole farm risk management strategy (or combination of strategies) to minimize and protect against future uncertainty.

As described in Planning Task Two, farm businesses, particularly family farm businesses, often are exposed to many forms of risk: personal risk, production risk, market risk, institutional risk and financial risk.Production- and market-related risk management alternatives include enterprise diversification, cultural production practices (irrigation, short season crop varieties), hedging with futures and options, and storage. What type of risk will your business be exposed to in the future as you look at new products, farm management systems, and labor strategies? How will you manage this new risk? Common risk management strategies are to: minimize production- and market-related risk; transfer risk outside of the business; and build internal capacity to bear risk financially.

Production- and market-related risk management alternatives include enterprise diversification, cultural production practices (irrigation, short season crop varieties), hedging with futures and options, and storage.

Risk transfer outside the business can be done by purchasing insurance (crop, property, health, home, liability), signing production or sales contracts, and participating in government programs.

Building internal capacity to bear financial risk can be accomplished by adjusting household consumption, diversifying income sources within and outside the business and investments (farm and nonfarm), increasing liquidity (holding cash, establishing credit reserves), leasing short- and long-term assets, and spreading out asset sales and purchases.

You may already be familiar with many of these risk management alternatives. Each alternative has its own advantages, disadvantages and resource requirements. Some of these risk management alternatives are described in Figure 76. The appropriate alternatives and overall risk management strategy for your business will depend, in large part, on your willingness to adjust production practices, spend time on the phone or in front of the computer, and to take on more management responsibilities.

Use Worksheet 4.24: Risk Management (download worksheets for task 4) to develop a risk management strategy for your business and identify future sources of risk. Begin by returning to Worksheet 2.17 (Risk Management) where you identified current sources of risk. Ask yourself how these will change in the future as you pursue new marketing, operations and human resources strategies. Then identify a plan for coping with and managing this future risk. Your lender and financial planner are excellent resources for analyzing risk potential.

Organizational structure: How will we legally organize and structure our business?

The legal organization that you choose for your business will have risk, finance, tax and estate planning ramifications. Legal organization is typically one of the first decisions made when structuring a new business.

As a current business owner you might consider re-evaluating your organization strategy here to determine if one of the alternatives provide legal or financial benefits. As a new or potential business owner who is at the beginning of the business life-cycle, however, you have a range of organizational strategy alternatives to consider.

Traditionally, most farm businesses have legally organized as sole proprietorships or partnerships. This is still a common legal structure, but a growing number of today’s farms are incorporating as Limited Liability Corporations (LLCs) or Cooperatives. These structures offer some financial protection, tax advantages, and other benefits. The Minars, for instance, considered three organizational alternatives: LLC, S-Corporation (a corporation in which the owner holds 100% of the shares), and Partnership. After researching each alternative and weighing the advantages and disadvantages of each, they decided to organize the processing business as an LLC. This structure enables them to gradually pass shares and ownership of the business on to their children in advance of retirement. “We also hope that by making our children shareholders, they will have more of a long-term, vested interest in the business,” explains Florence Minar.

Finance: how will we finance capital requirements?

The financial strategy you develop will depend on your choice of business organization and your values as they relate to risk, control, costs and maturity.

Historically, farm businesses have financed themselves internally through family equity—relying on debt only when internal equity was not adequate to finance growth of the business. Today, however, external financing through debt, leasing, and outside equity is common.

As you consider financial alternatives, be creative. Regardless of whether you are a beginning or experienced business owner, you may be able to identify and employ several alternatives to meet your goals, limit risk, and increase financial flexibility. The Minars identified two finance strategies for needed equipment—lease agreements with Ag Star and debt financing from their local bank.

Use Worksheet 4.27: Finance to identify one or more financing strategies for your business. You may not be able to answer all the finance questions until after you’ve completed your business plan— particularly if your purpose for planning is to secure outside financing. Still, you should begin this research and identify the most plausible strategy alternatives for your business.

Develop a Strategic Financial Plan

You’ve done a lot of research and brainstorming in this section about risk management, business organization, and capital financing strategies. Use Worksheet 4.28: Financial Strategy Summary (download worksheets for task 4) to summarize your financial strategies for each enterprise into one strategic financial plan for the whole farm. If you are considering more than one whole-farm financial strategy at this point, describe both in the space provided. You may not be able to narrow down your alternatives until after completing a whole-farm evaluation.

Dave and Florence Minar initially recorded two external capital financing options—leasing and debt financing. In Worksheet 4.27, they described the advantages and disadvantages of each alternative. However, it wasn’t until they had consulted with a financial advisor that they made their final decision to finance the business through a lease agreement with Ag Star.

The Minars then went back and summarized their financial strategy, highlighting their legal organization and borrowing components.

Whole Farm Strategy

Throughout this Guide, we’ve asked you to break out your business into marketing, operations, human resources and finance components. Now, it’s time to pull all of these components together—to make sure that the strategies you’ve chosen for each functional area are compatible as an integrated system.

If you’ve identified more than one strategy for each functional area, then think about how each strategic alternative might impact the business and other strategies. Dave and Florence Minar considered two operations strategies— the use of new versus used processing equipment. By evaluating how each of these equipment alternatives would affect the marketing, human resources, and finance components of their business, they temporarily ruled out used equipment as an operations strategy and pursued on-farm processing with the use of a new Mini-Dairy equipment package. They reasoned that although the new equipment package was more expensive, it was also more compatible with their overall vision. The new equipment package (which included training and product recipes) would enable them to begin processing and marketing a full line of products from the start, while creating immediate jobs for all of their children who wanted to return to the farm. In contrast, the used equipment alternative would cost the Minars time, sales, and potentially more money in the long-run as they searched for and fit the equipment to their operation, learned how to use the equipment, and experimented with inputs to develop their own products and recipes.

Think about these types of system-wide connections before you move on to the evaluation section. Then use Worksheet 4.29: Summarize a Whole Farm Strategic Plan of Action (download worksheets for task 4) to shape one or more whole farm strategies for your business. If you’ve completed the Summary Worksheets throughout the Planning Tasks (Worksheets 4.9, 4.17, 4.23 and 4.28) this final task should be relatively easy. With a whole farm strategy you will be ready to analyze your business for long-term profitability and cash flow.

If you haven’t already researched product and enterprise expenses for each of the individual strategies you’ve developed (marketing, operations, human resources, finance), do so now. Secure “certified bids” for all equipment and machinery from manufacturers, dealers or representatives. Certified bids come directly from the equipment representative and are often required by lenders when applying for a loan. When certified bids are unavailable, look for published cost estimates (available for the Upper Midwest through the Center for Farm Financial Management) or talk with other producers who purchased similar inputs or who have initiated a similar business strategy.

Dave and Florence Minar obtained certified bids for new processing equipment directly from the Israeli manufacturer, Pladot. Start-up and annual operating expense estimates for items like bottles, crates, flavorings, labor and labels came from business plans shared by other on-farm processors and regional suppliers. The Minars also spoke with local processor Mike Hartman, owner of Minnesota’s Organic Milk (MOM’s) about the cost and availability of local processing supplies.

Once you’ve secured realistic cost estimates, you can properly allocate direct (variable) and overhead (fixed) expenses for the whole farm. Knowing your costs and your cost structure will improve your overall knowledge of the operation and will prove invaluable as you make decisions over time. The difference between direct and overhead expenses as well as a method for allocating overhead expenses among enterprises is explained in Figure 86.

Try to break down your costs between annual direct or variable expenses (those costs that vary with production volume) and annual overhead or fixed expenses (those costs that will be incurred no matter how much you produce). One time start-up costs may be prorated as fixed expenses when developing long-term income projections and as intermediate expenses in your first-year cash flow.

Use Worksheet 4.30: Annual Operating Expenses for the Whole Farm to record and total your annual variable costs and fixed expenses for each whole-farm strategy alternative.

Evaluate Strategic Alternatives

You know what you’re going to market, who’s going to buy it and why, how you’re going to produce it, and where your finances will come from. The next question is, will your business actually make it? Will you accomplish your personal and environmental goals, cover costs, generate the income needed to cover family living expenses, service debt, and build equity in the long run?

Long-Term Outlook

Market expansion, operational transitions, and human resources shifts likely will impact output and expenses, and consequently income levels, for more than one year. A long-term evaluation is therefore critical to help you decide whether or not to adopt a new marketing, operations, human resources, finance or whole farm strategy.

You will analyze the financial impact of your potential business change using the same financial criteria or performance measurements that you used when assessing your current financial situation in Planning Task Two (see “Glossary” for definitions).

• Profitability: Will this new strategy significantly increase net income from the farm? —Enterprise Evaluation: Net returns and break-evens —Whole Farm Evaluation: Partial budgeting and long-range planning
• Liquidity: Will this new strategy help generate cash flow sufficient to pay back debts in a timely fashion?
• Solvency: Will this new strategy facilitate continued growth in net worth?
• Risk: Will this new strategy affect the risks faced by the farm business and family?

profitability: will this new strategy significantly increase net income from the farm?

Before you can begin to address this question on a whole-farm basis, you may need to do some preliminary evaluation. If your new strategy includes the addition of a new product enterprise, you should begin by analyzing each enterprise separately, using the net return and break-even calculations.

Enterprise Evaluation for Profitability: Net returns and breakevens.

Most financial planning and evaluation begins at the enterprise level. Whether you are considering the addition of one or more products (enterprises) to your business, an evaluation at this level can help you settle on profitable pricing strategies, crop and livestock mixes, and risk management tactics. Moreover, if you intend to seek outside debt financing for a traditional or specialty operation, farm lenders will request an enterprise budget to evaluate the relative credit worthiness of the enterprise.

An enterprise budget is simply a look at the net returns contributed to the business by each enterprise. It often includes an estimate of the enterprise’s break-even sales price and volume.

Net return. The net return to an enterprise represents returns to (unpaid) operator labor, management and equity capital. It is a measure of profitability, which over the long run should be large enough to justify using unpaid labor and equity capital.

Net returns are easily calculated, particularly if you have already estimated sales revenue, output and expenses (marketing, operations, human resources and finance) in previous Worksheets. Your net return to the enterprise is calculated by subtracting total expenses from gross returns. Worksheet 4.31: Enterprise Budget Breakeven Analysis can be used to calculate enterprise returns.

Break-evens. A break-even analysis is probably one of the most useful calculations that you will perform when considering alternative business strategies. Break-even numbers can be used to instantly identify those enterprises that don’t cover variable and fixed costs of production.

If you intend to sign a market contract or lock in a future price for your product, crunch some numbers to determine what level of production is necessary at that price to break even. Make sure you can cover your variable and fixed costs of production. On the flip side, if your output or production volume is fixed, try calculating a break-even value to determine what product price is necessary to break even on production and marketing-related costs. If neither your price nor output is fixed, these calculations can be used to develop production and price floors for each enterprise—something that will be useful for future monitoring and decision-making.

Calculating a break-even volume. Break-even volumes will tell you the minimum production volume necessary to cover your costs of production. You might consider this a lower size limit for your business. The break-even volume is calculated by dividing total annual fixed costs for the enterprise by the difference between your estimated market value and variable costs for each enterprise. Substitute the DIRTI costs of capital ownership (depreciation, interest, repairs, taxes, and insurance) for the actual cost when estimating the ownership costs of annual fixed expenses. Use the cost estimates that you developed in Worksheet 4.28 along with market values developed in Worksheet 4.9 to calculate break-even volumes. Try experimenting with a range of market prices to see how they affect your break-even production levels.

Calculating a break-even value. If your production volume is fixed—either because of production capacity or sales contracts—calculate a break-even value for your product; in other words, determine what market price is needed to cover your variable and fixed costs. Break-even values are calculated by dividing your total costs for the product or enterprise by the total quantity you expect to produce or sell. Again, your total costs are the sum of your direct and overhead expenses for the enterprise.

Worksheet 4.31 will walk you through a break-even analysis. The Worksheet is not reproduced for the Minars’ bottled milk enterprise for confidentiality reasons. Instead, an example is presented in Figure 88 for an imaginary bed and breakfast business whose annual direct and overhead expenses average $800 and $4,000, respectively. Both a break-even volume and a break-even value are calculated to determine what level of sales and market price would be necessary for the business to cover its full operating costs. In the first example, where the owner expects to charge $75/room, he or she must sell a minimum of 62 rooms each year before breaking even on direct and overhead expenses. In the second example, where the owner’s sales volume is fixed at 80 rooms per year, he or she must charge a minimum of $60/room in order to cover costs.

There are two types of financial planning tools available to analyze whole farm profitability: partial budgeting and long-range planning. Both the partial budgeting and long-range planning approaches allow you to compare the outlook of your present farm operation with that of one or more proposed strategic alternatives.

The first tool, partial budgeting, is most useful if your current business is financially sound and the change that you are considering is relatively simple. For instance, Greg Reynolds’ plan to add a staff member and a walk-in cooler would be best analyzed using the partial budget approach since his strategy to relieve seasonal labor constraints does not involve a major change in business operations.

The second tool, long-range planning, is used to project whole farm profitability and cash flow when you are considering substantial reorganization of the business or operations. Long-range planning is different from partial budgeting in that you project the financial status of the business after the change is in place instead of just the financial impact of the change. This planning approach is recommended if your whole farm strategy involves a major change in operations (like the Minars’ addition of an on-farm processing plant and home delivery service) or if you are a beginning farmer with no business history. Long-range planning generally takes more effort than partial budgeting, but there are many advantages to using this tool. After completing a longrange planning analysis you gain a complete financial picture of the farm after implementation and determine if your alternative plans are likely to put your operation on a sound financial course.

Partial budgeting. The partial budget approach uses annual income and expense changes to simultaneously study the impact of a new business idea on your present business’ profitability and cash flow.

The real-life example in Figure 89 illustrates how partial budgeting can be used to evaluate the financial impact of hoop house and farrowing livestock purchases on a small-scale hog enterprise.66 In this example, the farmer currently purchases and finishes 620 pigs—this is considered her base plan. Alternatively, she would like to farrow and finish 388 pigs in a hoop house (and continue purchasing and finishing out another 230 pigs). With the hoop house and livestock purchases, total costs or outflows for the whole farm increase by $13,026 per year. At the same time, the owner can expect an annual increase in cash inflows equal to $1,875 worth of culled breeding livestock.

The net result shows that the hog operation’s owner will generate $4,369 additional profits from the addition of hoop-house farrowing. The farm owner has captured the ownership cost of the hoop house and breeding livestock by including depreciation and interest on the new investment under the “profit” or long-range income projection. In the cash flow projection depreciation was left out and instead the full value of debt repayment (principal and interest) is added. Dividing the additional income by the $28,750 of new capital, this investment is projected to generate a 21.2 percent annual return on investment.

Worksheet 4.32: Partial Budget (download worksheets for task 4) provides a partial budget format that will help you project the changes in both income and cash flow for relatively minor business changes in marketing, operations, human resources, or finance.

Long-Range planning. The long-range planning approach suggested here is based on the FINPACK software longrange planning module (known as FINLRB). It is designed to project the average expected net farm income for each wholefarm strategy you are considering. Since, in an average year, there will be no inventory change, the format is reasonably simple. Total expenses (variable and fixed) are subtracted from total farm revenue to arrive at net farm income. Cash flow is considered separately and discussed later, when you are measuring liquidity.

If you choose the long-range planning evaluation method use Worksheet 4.33: Long-Range Projected Income Statement (download worksheets for task 4) to project income and cash flow. Figure 90 shows this Worksheet filled out for the same hog enterprise analyzed in Figure 89.

The base plan projects income and cash flow should the owner continue to purchase and finish out 620 feeder pigs. Strategy 1 reflects the projected income and expenses from farrowing 388 pigs in the hoop house and finishing up to 620 hogs.

Strategy 1 looks slightly more profitable when compared to the base plan. But, there are two other questions that this producer must ask before making a final decision about whether or not to go ahead with plans to farrow and finish in the hoop.

First, will the additional return justify the added investment? While the methodology is not shown here, the hog producer’s FINLRB result shows that the projected rate of return on the added investment is 19.6 percent and that their whole farm rate of return will increase from 6.8 percent to 7.4 percent.

Second, does the projected income and profit from the business satisfy goals for business income? Profitability estimates from the income statement can be compared to the income and quality of life goals (Worksheet 3.3). At a minimum, will the alternative cover a portion or all estimated family living expenses?

Liquidity: Will this new strategy help generate cash flow sufficient to pay back debts in a timely fashion?

Your next task is to look at cash flow for each strategy alternative as well as your base plan. Just because an investment or idea is profitable does not mean that it will generate cash flow to meet debt repayment. The cash flow analysis takes into account owner withdrawals and projected income taxes that were not included in profitability projections.

If you used the partial budget evaluation, return again to Worksheet 4.32 (Partial Budget) and complete the cash flow columns. On the other hand, if you used Worksheet 4.33 (LongRange Projected Income Statement) work through this section using Worksheet 4.34 (Long-Range Projected Cash Flow). Figure 91 shows the projected cash flow for our real-life hog finishing operation and the farrowing alternative.

As you complete Worksheet 4.34: LongRange Projected Cash Flow (download worksheets for task 4), be sure to add depreciation expenses and term debt interest payments to net farm income—this will get you back to a starting cash position. You will have the opportunity to subtract out the full value of principal and interest payments further down on the Worksheet.

Solvency: Will this new strategy lead to growth in the net worth?

When implementing alternative plans you will frequently need to plan for the purchase of additional equipment, machinery, buildings or land. You may plan to sell machinery, land or breeding livestock. Alternative plans that involve these types of capital investments and sales will change the balance sheet and, therefore, the solvency position of the business when they have been implemented.

As discussed in Planning Task Two (History and Current Situation), the balance sheet is a summary of the business’ assets and liabilities at a specific point in time. Your assets, liabilities and possibly net worth as reported on the balance sheet will change significantly with major investment changes (purchases, expansions and reorganizations).

Preparing Worksheet 4.35: Projected Balance Sheet (download worksheets for task 4) will help you work out the impact of your alternative business strategies on equity or future net worth growth. Complete Worksheet 4.35 using either cost or market asset valuation (whichever you used in Planning Task Two). Record “new investments,” “capital sales,” and “liabilities” for your base plan and each whole farm alternative. When doing so, include only the “one-time” changes necessary to move from the base plan to the alternative under consideration. These onetime changes may include the purchase or sale of machinery, buildings and land as well as new investments67 in breeding stock beyond current numbers (including herd sires and additional replacements). Do not include machinery and equipment replacements that are necessary to maintain the existing operation. Moreover, do not include purchases of breeding livestock used to replace cull animals. This Worksheet is only for one-time purchases that are necessary to implement an alternative business plan.

How much equity will your strategy alternative generate in the future compared to your base plan? If your business strategy does not return the level of profit and equity desired or if it cannot service debt, return to your expense estimates, output projections and price forecasts. Is there another alternative you previously ruled out that may be worth reconsidering? The Minars, for instance, could have re-evaluated their plan substituting used equipment for the more expensive, new equipment package had their initial plan failed to cash flow. Is there something you can do differently?

On the other hand, if your strategy appears financially healthy—it yields the profit and equity that you desire and can service debt in a timely manner—then you are ready to shock the analysis. See what happens to your financial picture when market prices decline or input expenses increase. In other words, run through a quick risk analysis of your proposed strategy.

risk: will this new strategy affect the risks faced by the farm business and family?

Like it or not, despite all of your planning, certain aspects of your business are not in your control. Crop yields are subject to weather and disease conditions and other unknowns. Therefore, it’s a good idea to analyze business performance under a range of uncertainties. One way to do this is to project your income and cash flow under the best and worst case scenarios—varying those elements of your business that seem the most vulnerable to uncertainty.

Mabel Brelje, the organic grain farmer, projected income for the four crops in her rotation under best and worst case scenarios. She varied market prices and yields based on her own experience and on conversations with other organic producers. Figure 92 shows how her income for each enterprise will vary with yields (her high and low yield estimates from Worksheet 4.16). Mabel planned for the worst-case yield scenario in her analysis, since she was relatively new to organic production. She also looked for market price contracts, where possible, to secure a profitable market price.

Another way to judge the feasibility of your plan under conditions of uncertainty is to shock the plan. See how sensitive it is to fluctuations in market prices, interest rates, and expenses. Worksheet 4.36 (Risk Analysis) provides a format recommended by Dr. David Kohl of Virginia Tech University.68 His ap proach is to ask what will happen to the financial results if you experience: a five percent reduction in prices; a five percent increase in expenses; or a three percent increase in interest rates?

Figure 93 shows the Risk Analysis Worksheet 4.36 for our example hog enterprise. Note that the base plan and alternative strategy do not cash flow with any of the proposed changes in market price and input expense conditions. The owners of this business would need to consider which plan is more likely to experience a financial shock and make adjustments to reduce their risk.

Figure 92. Income Sensitivity Analysis Prepared by Mabel Brelje

	Yield/Acre	Avg. Projected Market Price/Unit	Gross Income/Acre	Input Cost/Acre	Net Profit/Acre
Best Case Yield Alfalfa Soybeans Wheat Corn	6 tons 55 bushels 50 bushels 150 bushels	90 10 3.5 3	142 68 73 94	142 68 73 94	398 482 102 356
Worst Case Yield Alfafa Soybeans Wheat Corn	3 tons 30 bushels 30 bushels 100 bushels	90 10 3.5 3	270 300 105 300	142 68 73 94	128 232 32 206

In the Minars’ case, the dairy processing alternative was financially superior to their base plan. But which plan is more uncertain? Most would probably agree that the un-established markets assumed in the dairy processing alternative make it more uncertain. So, that uncertainty was something they had to consider in their final decision about whether or not to pursue the milk processing strategy.

Use Worksheet 4.36: Risk Analysis (download worksheets for task 4) to analyze the financial risk associated with each whole farm strategy that you are considering. If you develop best and worst case scenarios, vary whatever factor seems least controllable—input costs, output, market prices? Likewise, if you choose to shock your original plan, adjust the recommended shocking rate (five percent) based on your own research. Organic producers, for example, have experienced dramatic and steady increases in organic market prices over the past five years as a result of fast growing demand. Conversely, as organic supplies begin to catch up with demand, organic growers could face an equally dramatic decline in prices. What do you think is a reasonable shock based on your own experience?

Transition Period Evaluation

Almost any strategy that you consider will take time to implement and may involve some trade-offs. Sustainable Agriculture author John Mason advises new and existing business owners to expect disruption, even some losses, when transitioning into a new business or management strategy. As you move along the learning curve, things may get worse before they get better. Low yields, high debt payments, unusually high family living expenses, or unexpected machinery replacement needs may cause the cash flow for a profitable farm to be insufficient in a given year.

If you are putting together a loan proposal, your lender will probably be more interested in your transitional plans than your long-range plans. The best long-range strategy can be undermined by short-term roadblocks. You need to convince yourself and your external business partners that you can get from here to there.

Your transition plan will be different than the long-range plans that you have already completed.

First, you will prepare a projected cash flow plan for a specific year or years rather than a “typical” or average year in the future. Second, you will use your best estimates of shortterm prices and costs instead of long-range averages. Finally, your transition plans will be affected by your current inventories of crops for sale, feed, market livestock and other products. In your long-range plans, this Guide assumed that you would sell an average year’s production. In transitional planning, you need to work through your projected inventory changes.

Including the change in current inventories is an essential part of developing an accurate cash flow plan. A cash flow plan, which only considers cash transactions without inventory changes, can grossly misrepresent the actual farm financial situation. For example, if two years of crop production are sold in one year, the cash flow will look excellent but the change in current inventories would adjust for the reduction in crop held in storage. Another example might be livestock expansion where the inventories are being built up during the first year but no cash sales occur.

Use Worksheet 4.37: Transitional Cash Flow (download worksheets for task 4) to record your income and expenses during the transition period. You’ll find some of this information on Worksheet 4.31 (Enterprise Budget) where you first recorded expenses.

Figure 95, on the preceding page, shows a summary of the hog producer’s transitional cash flow plan for the first three years of on-farm farrowing. Note that this plan projects that it will take three years before the business will begin to show a positive cash flow. If the hog producer decides to go ahead with her hoop house purchase and farrowing enterprise, she will have to subsidize the business through cash reserves or operating credit during the transition.

There is software available to help you develop transitional cash flow information. The Center for Farm Financial Management’s FINFLO component of FINPACK and most similar software will walk you through a monthly cash flow projection for the next year and then, if need be, push that forward for one or two more years .

Choose the Best Whole Farm Strategy

After all of the brainstorming, analysis and discussion, the final component of strategy formulation is to make a decision—choose a future direction and then implement it. At the end of this section, you will need to make a decision to:

• Stay with the business base plan (make no changes in business).
• Adopt the alternative strategy (implement your new plan).
• Reconsider or brainstorm new alternatives.

If you have done a complete job of laying the foundation and evaluating strategic alternatives, this may be the easiest part. If, for example, you identified a strategic direction that is in tune with your values, moves you toward your personal and family goals, and is technically and financially feasible, it will probably be easy to make this final decision and to get everyone in your family or business on board.

If your decision about which business strategy to pursue is not so clear, you may want to do some more research or explore additional strategy alternatives. Without clarity, each management decision will require a round of agonizing debate and it will be difficult for everyone in your organization to see where the business is headed. These are the types of situations that breed conflict between family members and partners. Your strategic plan should be something that you, your family, and any other stakeholders, can embrace and move toward decisively.

Minnesota economist Kent Olson recommends testing your business strategy or strategies from several perspectives before making the final decision to implement it. Olson outlines a series of subjective “tests” that can be used to rank each of the major strategy alternatives that you are considering (including your base plan) and help you choose the best strategy for your business (Figure 96). He suggests giving each strategy a subjective score, from one to five (five being the highest) for each test. The strategy with the highest score is apparently the best for the farm and for you and your family. You will need to be brutally honest. Take into account the research and evaluation that you have conducted as a team thus far when scoring each whole farm business strategy.

The Minars used the tests to score their base plan and the alternative milk processing strategy (on Worksheet 4.38 as shown in Figure 97). They gave a high score to the processing alternative. It appeared to offer the most promise for future business stability and job creation—objectives that the Minars, as a family, place great importance on. Conversely, the base plan, which reflected their present business, received low scores in all areas related to the family’s future vision. Only those tests related to feasibility and resources (those factors that are known to the Minars) ranked well. Based on this final series of tests, the Minars were very ready to move ahead with their idea to process milk products on the farm.

Use Worksheet 4.38: Scoring and Deciding on a Final Business Strategy (download worksheets for task 4) to score your base plan and wholefarm business strategies. How does your new strategy rank? If more than one strategy ranks similarly, then spend more time researching and evaluating the remaining strategies before making a final decision about what direction to take your business. Conversely, if your new strategy is a clear “winner,” move on and begin developing a brief contingency plan for the business.

Develop a Contingency Plan and Exit Strategy

You have confidently chosen a final whole farm strategy based on your thorough research and evaluation. Now, one of your last steps in the planning process is to develop a contingency plan—an action plan for how to respond should conditions within and outside the business change. They will. Contingency planning is important to assure that your business plan will be implemented smoothly.

Throughout the planning process you’ve used your research to inform and make a number of realistic assumptions about the industry, prices, productivity and labor. Assumptions, however, are just that—best guesses that can change. No matter how carefully you plan, the likelihood of everything working out precisely as planned is small. A contingency plan can help you prepare for those situations when things don’t go as planned—when market or economic conditions that are out of your control change. A contingency plan can also help you know when it’s time to exit the business if it is not successful.

Consider how the following problems, for example, could change your cash flow during the transition period:

• New construction costs 20 percent more than planned.
• Funds are borrowed but income flows are delayed for six months.
• Construction is stopped because of a missing regulatory permit.
• Livestock productivity is stunted due to dry pasture conditions.
• The person you hire to manage operations is incompetent or untrustworthy.
• You do not obtain a sales contract for your first year’s production.
• Market prices sink to 15 percent below average historical values. A sound business plan will lay out what needs to be done to avoid or address these delays, inefficiencies, and bottlenecks in the form of a contingency or control plan.

Contingency plans need not be long or complicated. If you intend to share your written business plan with lenders or other external business partners, contingency plans simply need to convince readers that you’ve done a thorough job of planning and that the business is prepared to respond successfully should internal and external conditions change. If your business plan is strictly for family or internal planning purposes, a contingency plan can be used as something to fall back on should marketing prices, labor supplies, family goals, and institutional requirements change unexpectedly. It can also be used to guide discussions about when best to “get out” of the business if too many strategies fail.

Authors of Planning for Contingencies note that there are several ways to incorporate contingency plans into your final business plan: “For example, your financial statements can incorporate a footnote explaining that the projected interest rate can go up by as much as three percent before your profit margin is seriously affected. Or, your discussion of how many employees you’ll need can state that an additional production person will be hired when sales of $X are achieved.”

Begin your contingency planning by identifying events that may throw your strategy off track and necessitate a major change in your business plan—like a change in government policy, market prices, organic certification rules. The Minars, for instance, identified new competition—other farmers or businesses that begin offering non-homogenized or glass-bottled milk—as a source of uncertainty. Their contingency plan could include a number of ideas, such as “frequent customer” discounts, for coping with increased competition. Conversely, the Minars’ contingency plan might include plans to cope with labor and production constraints should home delivery sales exceed their expectations. If for example, 150 customers—rather than the projected 75—sign up for home delivery during the Minars’ first three months of processing, how would they respond? Additional milk would be available for processing, but Dave and Florence might need to hire and train new staff to fill orders or risk losing potential customers.

As stated earlier, your contingency plan need not be complicated. You simply need to show that you have thought through and planned for a range of future scenarios. Take a look at the contingency plan prepared by Greg Reynolds, owner of Riverbend Farm:

“If CSA sales do not materialize, I will sell the produce to restaurants and co-ops. The lack of up-front money will delay the plans to build a root cellar. The need for help and a cooler are crucial to expanding the business. Without the CSAs, weekly sales [to restaurants and co-ops] will have to reach $1,000/week [in order to meet financial goals]. That is about 40 cases per week, harvesting two cases per hour per person or 20 hours of additional labor.”

oreover, your contingency plan should include some parameters that define when it may be time to exit the busines or “cut your losses” should market or personal conditions change dramatically. In this case you should have some idea how to repay investors, for example, and address tax consequences. Lenders, lawyers and business partners may be able to help prepare this section of your contingency plan. What are your contingency plans for the business? Take some time to discuss with your planning team how internal and external conditions may change in the future. Then use Worksheet 4.39: Contingency Statement (download worksheets for task 4) to develop a brief contingency plan for the business.

Prepare the Strategy Section of Your Business Plan

The work that you’ve done in this Planning Task is very much about the planning process. But the culmination of all of your work is the development of a very specific business strategy. This strategy, along with the research that supports it, will become the crux of your written business plan. Take time now to summarize your business strategy for the whole farm.

One way to do this is to draft the Executive Summary for your business plan—to summarize your principal business planning objective, goals, and your strategy (or strategies) for reaching them. Authors of The Executive Summary say “The executive summary is, perhaps, the most important section of your written business plan since many readers, including lenders, will not look beyond the executive summary if it does not communicate careful planning and promise.”

An Executive Summary typically includes information about the business:

• Identity: Who you are (and the name of your business).

• Location: Where the business is located.
• History: How long the business has been in operation.
• Ownership: Current ownership structure.
• Industry and Competition: Brief description of the business’ competitive position.
• Product: What type of product you now offer and plan to market in the future.
• Marketing: Who your potential customers are and what they will value.
• Operations: How you will produce.
• Human Resources: Who will manage and staff the business.
• Finances: How much profit and equity the business will generate, how you intend to finance the business and how you will cope with and manage risk.

The Executive Summary is a snapshot of your business and its strategy. It can be as short as you like but generally no longer than two pages. Most importantly, your Executive Summary should convey credibility and excitement, particularly if you are seeking external financing or new business partners. As an example, the Executive Summary prepared by Dave and Florence Minar for Cedar Summit Farm is reproduced in Figure 98. Look at how they incorporated information about their values, vision, research, and financial analysis into a concise, positive and realistic summary of their strategy to process milk on the farm.

Use Worksheet 4.40: Executive Summary (download worksheets for task 4) to draft an executive summary for your business plan. With an executive summary in hand, you’re ready to write the rest of your plan! Move on to Planning Task Five—Present, Implement, and Monitor Your Business Plan!