Case made for business plan
PONOKA, Alta. — About a quarter of Canadian farmers lack a written business plan even though it could increase profitability.
A 2015 Ipsos Agriculture study called Dollars and Sense conducted in 2015 showed those with a written plan had a five times higher return on assets than those who do not, said Herman Simons of Alberta Agriculture.
This research involved 600 farmers and was the first poll to establish a link between agriculture management and financial success“In general, we are not doing all that well as far as how well we manage our business,” he said at the recent Bison Producers of Alberta annual meeting in Ponoka, Alta.
“When you talk about planning, budgeting, risk management, there is only about a third of the farms that are applying those activities,” he said.
There are seven business practices that drive performance but the study found less than half of farmers adhered to them:
- Continuing education and applying what was learned.
- Business decisions made using accurate financial data. Those farmers that have a good grasp of their financial situation are up to date and they know what impact the decision will have on their bottom lines. They tend to be more profitable.
- Seek help of business advisers and consultants.
- Have a written business plan and follow it.
- Know cost of production and understand what it means for profits.
- Assess risk and have a plan to deal with it. Many fail to assess risk and when they encounter divorce, death, disaster, disagreement or disability they are not prepared.
- Use a budget and financial plan to monitor financial position and options.
A business plan is a vision for the farm and it needs to be tailored to the individual operation. It can help those top operators understand their return on investment and cost of production.
A business plan will tie all the key seven points together and leave room for a succession strategy.
Within the plan, the first thing to consider is gross revenue. This is revenue generated by the enterprise minus the cost of production. The top 25 percent of producers realize for every dollar of revenue they generated, they had 50 cents to pay bills. The very top farms are even higher.
The bottom half had 20 cents left.
Return on assets is where the profit is and the top 25 percent have 10 percent return on their investment while the bottom 25 have 1.6 percent.
“If you have a million dollars invested, the bottom gets to take home $16,000 and in the top 25 percent take home $100,000. That is a significant difference,” he said.
Less than a third of farms have a succession plan even though three-quarters of them will change hands in the next 10 years. More than half do not have an identified successor. There are tremendous amount of assets to transfer to the next generation so succession plans are needed.
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Original article published by The Western Producer, find it Here