Ranch Business Planning and Management

1. Ranch Business Planning and Management

2. Why Plan?

3. The Business Plan • Mission or vision statement and goals • Key planning assumptions • Market analysis and marketing plan • Operations, organization, and management • Financial plan

4. Mission and Goals Mission Statement • Should reflect your values • Describe what you want the business to be and accomplish • Provides the basis for long-run plans Goals • Tangible and intangible • Short run and long run • Monetary and non-monetary • Used to anticipate problems and plan strategies to overcome them

5. Key Planning Assumptions • List the family and ranch resources – land, labor, financial capital, other capital assets, management • Identify planning restrictions and constraints • Name expected products or services • Identify market outlets

6. Operations, Organization, and Management • Define each individual’s role in the business • Develop an organizational chart for large operations

7. Dan Small May Not Be Simple! Nancy Dan or Nancy or Dan Nancy

8. My Way Terry Judy ME Sam Jane Randy

9. No Way Mom Dad Sam Son Daughter- in-law “Hired man”

10. Our Way Bob Terry Judy Jane Sam Randy

11. Who Reports To Whom and Why May Not Be Apparent Grandma Son Grandson’s Wife Grandson Wife Employee 3 Employee 1 Employee 2

12. Operations, Organization, and Management • Identify most appropriate legal arrangement: sole proprietorship, partnership, corporation, etc. • Develop plans for allocation of profits

13. The Financial Plan • Initial financial requirements • Enterprise analysis • Historical and projected financial statements • Risk assessment • Break-even analysis

14. Agecon.okstate.edu/oklandvalues

15. Farm and Ranch Realities Annual per acre payments: 20 year loan, 20% down

16. Cow/Calf Investment Costs

17. Enterprise Budgets Receipts Production, price Operating costs Input quantity, price Fixed costs Depreciation, interest, taxes, insurance www.agecon.okstate.edu/budgets

20. Importance of Personalized, Up-to-date Enterprise Budgets Need to know cost of production to • Calculate break-even price • Develop marketing goals • Identify appropriate risk management strategies. Costs vary from farm to farm and year to year.

21. Whole Farm Budgets and Financial Statements • Summarize information from enterprise budgets • Provides a more complete picture of farm operations • Liquidity • Solvency • Profitability • Repayment capacity • Efficiency

22. Financial Statements for a Business • Balance Sheet • Income Statement • Statement of Cash Flow • Statement of Owner Equity

23. Financial Statements Cash flow statement • Cash income • Cash expenses Balance sheet • Assets • Liabilities • Net worth (owner equity) Income statement • Cash income • Cash expenses • Changes in assets • Changes in liabilities • Net farm income, accrual adjusted (profit) AGEC- 751 AGEC- 753 AGEC-791 792 752 http://pods.dasnr.okstate.edu/docushare/

24. Balance Sheet • An indicator of: • The ability to bear financial losses (risk) • Business wealth or equity • The collateral for lenders if the business were liquidated • Information to address issues of estate planning, deferred tax obligation, generation transfer and retirement

25. Statement of Cash Flow • Cash provided by or used • Cash from operation • Cash from investing • Cash from financing • Other cash flow activities • Cash flow check • Reconcile • Unaccounted withdrawals

26. Income Statement • Measures the extent to which a business generates a profit from the use of land, labor, management, and capital. • Remember, cash accounting or IRS tax records do not measure net income

27. Statement of Owner Equity • Reconcile change in equity • Retained earnings • Valuation • Deferred tax • Shows components of change in equity • Contributions • Distributions

28. Financial Performance Measures • Liquidity • Ability to pay bills as they come due and cover unanticipated events • Solvency • Ability to cover all debts if the business were sold • Profitability • Returns to labor and management generated by the operation • Financial efficiency • Efficiency with which assets generate income • Repayment capacity • Ability to repay term debt in a timely fashion

29. Measuring Liquidity Current ratio = Total current farm assets Total current farm liabilities Low stress High stress

30. Measuring Solvency Debt/asset ratio = Total farm liabilities Total farm assets Low stress High stress

31. Measuring Profitability Net Farm Income = Gross farm revenue - all farm operating expenses incurred to create those revenues +/- gains/losses on sale of capital assets Low stress High stress

32. Measuring Profitability Rate of Return on Farm Assets = (Net farm income from operations + farm interest expense - value of unpaid labor & management) (Average total farm assets) Low stress High stress

33. Measuring Profitability Rate of Return on Farm Equity = (Net farm income from operations - value of unpaid labor & management) (Average total farm equity) Low stress High stress

34. Measuring Efficiency and Repayment Capacity Interest Expense Ratio = Total farm interest expense Gross farm revenues Low stress High stress

35. Measuring Efficiency Asset Turnover Ratio = Gross farm revenues Average total farm assets Low stress High stress

36. IFMAPS • A confidential service assisting Oklahoma farmers and ranchers with financial planning since 1985 • Trained financial specialists work with families one-on-one to develop financial statements and evaluate alternative plans • Contact the local Extension office, an area Agricultural Economics specialist, or call the IFMAPS office in Stillwater at 1-800-522-3755

37. Records • Provide facts about the business • Include both financial and production records • Measure business performance • Allow producers to meet legal obligations, support loan applications, and arrange for insurance coverage

38. Maintain Cash Records on an Ongoing Basis • Hand record books • agecon.okstate.edu/farmbook • Quicken • Categories, classes • Cash flow reports • Step-by-step instructions for farm adaptation • http://agecon.okstate.edu, Departmental Websites, Quicken • “Hands on” workshops

39. Asset and Liability Inventories • Pad of paper • Online farm account book pages • agecon.okstate.edu/farmbook • OSU AGEC-791 and 792 • Spreadsheet • Integrated Farm Financial Statement (IFFS) software • Cow/calf production records • Hand record books, e.g. Redbook • Software • OSU CR-3279

40. Measure then manage… • Develop measures annually • Be consistent in how the measures are developed • Note reasons for “unusual” measures • Use information to identify areas for improvement • Ask for help if you need it.

41. Ten Commandments for Farmers/Ranchers • Focus on financial management as much as production performance. • Count your cows (and other assets) at least annually. • Keep your lender happy. • Code your checks, sort your expenses for enterprise accounting. • Develop a record-keeping and information system that supports your decisions.

42. Ten Commandments for Farmers/Ranchers • Pay taxes as often as possible. • Don’t expect too much from your cows. • Never stop learning. • Go slowly when attempting new things. • Match the livestock and crop enterprises to the land resource.

43. Options for Additional Business Planning Credit

44. Other Farm Management Resources • Budget templates agecon.okstate.edu/budgets/ • Livestock lease agreement spreadsheets Aglease101.org (or osufacts.okstate.edu) • Publications www.osufacts.okstate.edu