Advanced Business Planning

Jeffrey Hyde The Pennsylvania State University Penn State is committed to affirmative action and the diversity of its workforce

Business Planning Skills & Tools

 Information Gathering 

Record

keeping  Research  Information Processing  Enterprise & cash flow budgets  Financial statements and

ratios

Without Records…

Planning Process Integrate Changes Explain Deviation

Mission Situation Objectives & Goals Strategies & Tactics

Take Action Get Results Compare Actual vs. Plan Measure & Record Results

Record Keeping

 Production records  Production data  Sales data (

revenues

)  Cost data (expenses)

Record Keeping

 Investment records  Purchase and sale of long-lived assets 

Depreciation

Records should include 1. Purchase date & price 2. Annual depreciation 3. Book & market value 4. Sale date & price 5. Gain or loss on sale

Record Keeping

 Financing records  Money borrowed (new investments, working capital, accounts payable) 

Interest

paid  Principal paid

Necessary Research

 Industry analysis  Market analysis  Competitive analysis Who are the industry players?

•Input suppliers •Growers •

Processors

•Wholesalers •Retailers What are the industry trends?

 SWOT analysis

Necessary Research

 Industry analysis Who and where are your customers?

 Market analysis What do they

need

?

What is their purchasing behavior?

 Competitive analysis How can you reach them?

 SWOT analysis

Necessary Research

 Industry analysis  Market analysis  Competitive analysis Who are your competitors?

What are they like?

What

products

do they have?

How have they grown?

 SWOT analysis

Necessary Research

 Industry analysis  Market analysis  Competitive analysis Strengths and Weaknesses are internal to the business

Opportunities

and Threats are external to the business SWOT should be easy after performing the other analyses  SWOT analysis

Research Methods

Hire a

consultant

1. Review your records and provide summary reports 2. Develop a market analysis 3. Develop a competitive analysis 4. Develop an industry analysis Consultants are expensive, but may be worth it; especially if they know your industry

Research Methods

Find publicly available data 1. US Census 2. Consumption data 3. Websites (competitors,

associations

, suppliers, customers Searching for specific data may become frustrating, particularly if you’re not an Internet whiz. However, doing this once will prepare you to easily update your plan over time.

Research Methods

Buy data and reports There may be third parties who have collected market or industry data. The data may be for sale in raw form or as a report. These don’t tend to be available for small, specific industries like local cheese-making.

Research Methods

Publications/Media 1. Television 2. Radio 3. Newspapers (Wall Street Journal) 4. Trade magazines

5. Extension

publications and newsletters These may help you learn about the economic environment, your competitors, the industry, and your markets.

Research Methods

Personal

interaction

1.

Talk with friends, family, neighbors, … 2. Visit your competitors and buy stuff; talk with owners 3. Talk with customers 4. Watch what people do or buy 5. Talk with industry leaders 6. Attend conferences and workshops

Enterprise Budgets

What is an enterprise?

Also called a “cost center” or “profit center,” an enterprise is a user-defined production and sales unit.

Enterprise Examples 1. Cheese 2. Cheddar cheese 3. Sharp cheddar cheese 4. Milk production 5. Crops 6. Hay 7. Corn silage

Enterprise Budgets

 Three major sections to the budget  Revenues  Variable expenses (aka; direct expenses)  Fixed expenses (aka; indirect expenses,

overhead

)

Cash Flow Budgets

Budgets help you see if the enterprise is

profitable

You need to know when cash flows occur.

For most ventures, you’ll have lots of cash out before you get any cash in.

Cash Flow Budgets

Develop a monthly cash flow budget similar in form to the enterprise budget For each month, indicate which categories have cash in or cash out.

Where cash out exceeds cash in, must have a plan to

manage

shortfall.

Income Statement & Balance Sheet

You will need

three

years of historical financial statements and

three

years of pro forma statements Work closely with an accountant to develop these.

Financial Ratios

Ratios are used to summarize your

financial

situation Let’s look at three… 1.

Return on assets 2.

3.

Current ratio Debt-to-asset ratio

Return on Assets

Rate of return on the farm’s average total investment on assets ROA = (net income + interest expense – value of operator labor and management) / average total farm assets An ROA of 5% means that every dollar invested in business assets generated a return of five cents.

•Compare ROA to your

profit

goals.

•Compare to returns elsewhere (stock market, bank account…)

Current Ratio

Measures ability to pay current debt with current assets -

Liquidity

Current Ratio = (value of current assets) / (value of current liabilities) A CR greater than one means the value of current assets is greater than the value of current debt > You are “liquid” •Current assets are those that can be converted to cash or used up within one year •Current liabilities are payable within one year •Shoot for a number significantly greater than one

Debt-to-Asset Ratio

Measures the percentage of total assets owned by

creditors

DA Ratio = (value of total debt) / (value of total assets) A DA ratio of 0.4 means that creditors own 40% of the assets of your business.

•Many lenders like to see a strong equity commitment •Shoot for DA < 0.5

Business Planning Skills & Tools

 Information Gathering  Record keeping  Research  Information Processing  Enterprise & cash flow budgets  Financial statements and ratios

Business Planning Skills & Tools

Well-honed record keeping, research, and

analytical

skills make the business planning process less cumbersome.

Resources

 Accountant  Attorney  Extension educator  Small Business Development Center  Lender  Business consultants  FAMILY!

Conclusion

 Planning is

fun

damental to success  Planning is continual  Lenders and granting agencies increasingly requiring written plans  Access help where you can

Advanced Business Planning

Jeffrey Hyde The Pennsylvania State University Penn State is committed to affirmative action and the diversity of its workforce