When the economy took a turn for the worse a few years ago, one Mississippi farmer faced a serious dilemma: make some changes or lose the farm.
He pulled out his adding machine, pencil and paper and got to work. He thought through all of his options - leasing land, selling equipment and deferring loan payments, for example. With each idea, he ran the numbers. Would it bring in enough to put him back into the black?
Finally he came up with a plan that would work. With a few major changes, he could save the farm. Now he had to convince his lender.
This farmer and his story are real. His lenders at the Land Bank were impressed when he came to talk with them about his difficult loan situation.
"It was the best business plan I've ever seen - written on a yellow pad with a pencil," says Jessie Purvis, Land Bank South chief executive officer. "He came to tell us he couldn't make his next payment, and he already had a plan for how he would turn it around. It was a good plan, too. It convinced us, as a lender, to do something we wouldn't normally do."
Increase Your Chances of Success
Joe Bob Huddleston, regional vice president of lending services for AgTexas Farm Credit Services in Stephenville, lectures occasionally at Tarleton State University. He requires students to write a mission statement, and he encourages his customers to do the same.
"Studies show that 80 percent of people in production agriculture don't have a mission statement or business plan," Huddleston says. "Sixteen percent have a plan, but it isn't written down, and only 4 percent have thought about mission statements and business plans and actually write them down.
"According to the research, the people in the 4 percent category have higher success rates than those in the 80 percent group who have no plan. If you're focused and have a path for your life, you are more likely to be successful and happy," Huddleston says.
A mission statement outlines your personal goals and philoso-phy about life and business; it is usually only about a paragraph long. The goals and strategies you employ to fulfill that mission become key elements in your business plan.
The Basics of a Business Plan
At its essence, a business plan is simply proof that you have thought through all of your options, planned for contingencies and feel confident that you have a plan that will help your business be successful. It also is a roadmap to help you keep your business moving in the right direction. It can be a beneficial exercise for business owners who are just starting out and for those who need to make changes to their operation.
"You say 'business plan' and it scares a lot of people," Purvis says. "But it doesn't have to be formal. Just get your ideas on paper in some form: This is what I want to do, this is what I think it will cost, this is what I'll have to buy to make it work, etc."
If you are looking for financing, it helps to ask yourself the tough questions about the feasibility of your idea beforehand, because your lender will certainly be asking questions of you. Are you going to have to incur other debt? Are you realistic in your expectations? Did you overestimate or underestimate any aspect of it?
John Logdson, senior vice president of Ag New Mexico, says, "Sometimes people have an idea in their head of what they want to do, and we ask quite a few questions to make sure we understand their plan, too."
Huddleston agrees. "Having a plan will help your lender because it helps us understand how you think, your philosophy," Huddleston says.
The Larger the Business, the More Formal the Plan
The need for a more formal plan increases the larger or more complex your business becomes. Also, if you have a start-up business and are looking for equity financing, you will need a formal business plan.
"A lot of our customers don't have formal written plans, but every one of our successful customers has a plan of some sort," says Mark Miller, chief credit officer of Texas AgFinance. "In a small operation, you can sometimes get away without a formal plan because everyone talks to each other every day. But the more employees you have, the more important it becomes to have a written plan so you can keep everyone singing from the same page."
For example, Miller says, Texas AgFinance has a written plan, which is reviewed quarterly, to make sure the management team and employees are staying on track with the direction that the board of directors has set for the association.
Cover All Contingencies
For many, it can be hard to develop a cash-flow statement making predictions for the year, much less focusing on the big picture and making plans 10, 20, even 30 years out. However, it is important to have a game plan, and a good mission statement and business plan will keep you focused on the long haul.
"In a plan, it's important to have contingencies covered in case things don't go exactly as planned," says Miller. "Maintain flexibility. Be able to adapt the plan as you see the market is moving in a different direction."
Huddleston adds, "If you have a family operation, factor in children, education and other family needs. You should also think about the need for future expansion."
Another component a lender will look for in a plan is the operation's management ability. "Just because someone else made this idea work doesn't mean everyone will," Purvis says. "We're looking for background and experience to show they can implement their plan."
Other items your lender will want to see in a business plan include:
- Management and succession
- Financial goals
- Employee issues (If you employ other people, how will you handle related issues?)
- Production - output in terms of yields or other measurements
- Risk management Once the plan is written, it is important to revisit it on a regular basis.
"Your business plan needs to be kept up to date," Huddleston says. "It's the same as an estate plan; you need to put some thought into it to start with, and when changes occur, you need to update it to stay on track."
Help for Writing a Business Plan
- Ask your family or business partner to be a part of the process. Everyone involved in the business should have a say in its future direction.
- Use your accountant's knowledge and services. A good accountant can assist you in preparing a good business plan.
- Get outside help. Sources include your state's Cooperative Extension Service, Small Business Administration, and other regional small business centers.
- Consider specialized computer software. Several programs are available for developing business plans, but be aware that they have limited flexibility.