Sustainable Agriculture in cooperation with the Center for Farm Example from Cedar Summit Farm—Worksheet 2.1: A Brief History of Our Farm Operation .
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Building a Sustainable BusinessA Guide to Developing a Business Plan for Farms and Rural Businesses Developed by:the Minnesota Institute for Sustainable AgricultureSaint Paul, MNPublished by:Sustainable Agriculture Research and Education (SARE)College Park, MDHandbook Series Book 6
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Project CoordinatorsGigi DiGiacomo, Economic Consultant Debra Elias Morse, Consultant Robert King, University of Minnesota AuthorsGigi DiGiacomo, Economic Consultant Robert King, University of Minnesota Dale Nordquist, University of Minnesota ContributorsVern Eidman, University of Minnesota Debra Elias Morse, Consultant Susan McAllister, Marketing Consultant Kenneth Thomas, Professor Emeritus, University of MinnesotaFarmer Business Plan Participants and ReviewersNancy Aspelund Mabel Brelje Mary Doerr, Dancing Winds Farms Frank Foltz, Northwind Nursery and Orchards Dave and Florence Minar, Cedar Summit Farm Greg Reynolds, Riverbend Farm Technical ReviewerDamona Doye, Oklahoma State University EditorBeth Nelson, Minnesota Institute for Sustainable Agriculture ProductionNancy Goodman, copy editor Andy Zieminski, cover design Jim Kiehne, layout Valerie Berton, SARE Outreach Front cover photos by (clockwise from upper right): Jerry DeWitt; Jerry DeWitt; courtesy Florence Minar; Neil Michel. Back cover photos by (from left to right): courtesy John Mayne; courtesy Karl Kupers; Jerry DeWitt; Jerry DeWitt; Mac Martin2BUILDING A SUSTAINABLE BUSINESSThis publication was developed by the Minnesota Institute for Sustainable Agriculture in cooperation with the Center for Farm Financial Management, with funding from the Minnesota State Legislature.This publication was co-published by the Sustainable Agriculture Research and Education (SARE) program, under a coopera -tive agreement with USDA™s National Institute of Food and Agriculture (NIFA).To order copies of this book ($17.00 plus $6.95 shipping and handling), contact: (301) 779-1007, sarepubs@sare.org or visit the SARE WebStore at www.sare.org/WebStore; or contact (800) 909-6472, or misamail@umn.edu. This publication can be viewed online at www.misa.umn.edu or at www.sare.org/business. Copyright © 2003, Minnesota Institute for Sustainable Agriculture Second printing 2006Third printing 2010Fourth printing 2013Fifth printing 2018Library of Congress Cataloging In Publication DataBuilding a sustainable business : a guide to developing a business plan for farms and rural businesses / by the Minnesota Institute for Sustainable Agriculture. p. cm. Œ (Sustainable Agriculture Network handbook series ; bk. 6) Includes bibliographical references. ISBN 1-888626-07-0 (pbk.) 1. Farm management. I. Minnesota Institute for Sustainable Agriculture. II. Sustainable Agriculture Network. III. Series.S561.B84 2003630™.68Œdc21 2003005514The SARE program provides information to everyone, without regard to race, religion, national origin, sex, age, disability, familial or veteran status. Every effort has been made to make this publication as complete and as accurate as possible. It is only a guide, however, and should be used in conjunction with other infor-mation sources and in consultation with other financial and production experts. The editors/authors and publisher disclaim any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this publication. Mention, visual repre-sentation or inferred reference of a product, service, manufacturer or organization in this publication does not imply endorsement by the USDA, the SARE program, MISA or the authors. Exclusion does not imply a negative evaluation.
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3BUILDING A SUSTAINABLE BUSINESSMinnesota Institute for Sustainable AgricultureThis publication was developed through the Minnesota Institute for Sustainable Agriculture™s (MISA) Sustainable Agriculture Information Exchange program, a clearinghouse of sustainable agriculture information and materials in Minnesota. MISA is a partnership between the University of Minnesota Extension and College of Food, Agricultural and Natural Resource Sciences and the Sustainers™ Coalition, a group of individuals and community-based, nonprofit organizations. MISA™s purpose is to bring together the agricultural community and the University community in a cooperative effort to develop and promote sustainable agriculture in Minnesota and beyond.Other publications in the Sustainable Agriculture Information Exchange series include:Collaborative Marketing: A Roadmap & Resource Guide for Farmers Dairy Your Way: A Guide to Management Alternatives for the Upper MidwestDiscovering Profits in Unlikely Places: Agroforestry Opportunities for Added Income Hogs Your Way: Choosing a Hog Production System in the Upper Midwest Local Food: Where to Find It, How to Buy ItMarketing Local FoodMinnesota Guide to Organic CertificationMinnesota Soil Management Series Poultry Your Way: A Guide to Management Alternatives for the Upper MidwestResources for Beginning Farmers: Building a Sustainable Future Whole Farm Planning: Combining Family, Profit, and Environment For more information on this series, the Information Exchange, or MISA, contact: Minnesota Institute for Sustainable Agriculture, 411 Borlaug Hall, 1991 Buford Circle, St. Paul, MN 55108-1013; (612) 625-8235, or toll-free (800) 909-MISA (6472); Fax (612) 625-1268; misamail@umn.edu; www.misa.umn.edu.Sustainable Agriculture Research and Education (SARE)SARE is a national grants and outreach program working to advance sustainable innovation to the whole of American agriculture. SARE is part of USDA™s National Institute of Food and Agriculture (NIFA). For more information about SARE™s grant opportunities and library of books, bulletins and online resources, contact: SARE Outreach, 1122 Patapsco Building, University of Maryland, College Park, MD 20742-6715; phone (301) 405-7955; fax (301) 405-7711; info@sare.org; www.sare.org. Funding for this project was approved by the Minnesota State Legislature and the Energy and Sustainable Agriculture Program of the Minnesota Department of Agriculture.Center for Farm Financial ManagementThe Center for Farm Financial Management at the University of Minnesota cooperated in the development of this publication. The Center™s mission is to improve the farm financial management abilities of agricultural producers and the professionals who serve them through educational software and training programs. Contact: Center for Farm Financial Management, University of Minnesota, 130 Ruttan Hall, 1994 Buford Avenue, St. Paul, MN 55108; (612) 625-1964 or toll-free (800) 234-1111; cffm@umn.edu; www.cffm.umn.edu.
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Preface4BUILDING A SUSTAINABLE BUSINESSBusiness planning is an important part of owning and managing a farm. Producers traditionally go through the business planning process to:Ł Evaluate production alternatives;Ł Identify new market opportunities; andŁ Communicate their ideas to lenders, business partners and family.As agricultural entrepreneurs define and create themselves away from more ficonventionalfl farming models, business planning has become more important than ever. Producers considering innovative management practices and immature markets use business plans to map out strategies for taking advantage of new opportunities such as organic farming, on-farm processing, direct marketing and rural tourism. A business plan helps producers demonstrate that they have fully researched their proposed alternative; they know how to produce their product, how to sell what they produce, and how to manage financial risk.fiBuilding a Sustainable Business: A Guide to Developing a Business Plan for Farms and Rural Businessesfl was conceived in 1996 by a planning team for the Minnesota Institute for Sustainable Agriculture (MISA), to address the evolving business planning needs of beginning and experienced rural entrepre neurs. From the onset, the planning team envisioned a truly useful guidebook that would be relevant to the alternative farm operations and rural businesses of today. There are certainly more detailed business planning, strategy building, succession planning, marketing and financial planning resources available. It was not our intention to replace these materials. Many of these existing resources are listed in an extensive fiResourcesfl section at the end of this Guide. Instead, our objective was to compile information from all available resources, including farmers and other business experts, that could be used to create a business planning primerŠa guide that will help today™s alternative agriculture entrepreneurs work through the planning process and to begin developing their business plans. This Guide was developed over a period of seven years by a team of University of Minnesota faculty and staff, individual farmers and consultants. Six farmers developed business plans using the draft materials. This Guide incorporates recommendations on content, language and organization from
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the farmers as well as examples from five of the review team™s business plans. We are grateful to them for their willingness to share their business planning efforts. This Guide was originally targeted toward Upper Midwest producers and entrepreneurs, hence the fiResourcesfl section is weighted toward Midwest organizations. As the project evolved, we realized that the material is applicable to a variety of operations throughout the United States; the basic business planning process is universal. The Sustainable Agricultural Research and Education (SARE) Outreach agreed that this information should reach a national audience and graciously agreed to co-publish this material. This Guide benefited greatly from a careful review by Damona Doye, Extension Economist, Oklahoma State University, and we are grateful for her suggested revisions. Parallel to the development of this Guidebook, a business planning software package was developed by the Center for Farm Financial Management at the University of Minnesota. This Guide and software are complementary. Ultimately, this Guide is as much about the planning process as it is about the creation of a final business plan. MISA followed one of the farm reviewer families, Cedar Summit Farm owners Dave and Florence Minar and their family, throughout their planning process. The Minars™ planning experienceŠtheir initial exploration of values, brainstorming of goals, and research into on-farm milk processing, markets and financingŠis incorporated throughout this Guide™s text and Worksheets. A completed business plan for the Minars™ Cedar Summit Creamery is attached in Appendix A. This enabled us to fiput a facefl on the business planning process, and we thank the Minars for their openness in sharing so much of their story. Armed with their business plan, the Minars were able to obtain financing. We are happy to report that as we go to press, Cedar Summit Creamery is up and running. We hope this Business Planning Guide will assist today™s alternative and traditional business owners alike with the creation of a holistic business plan rooted firmly in personal, community, economic and environmental values. With a business plan in hand, today™s farmers and rural entrepreneurs will be able to take that first step toward the creation of a successful and sustainable business. 2010 Update. Prior to a 2010 reprinting of the Guide, we updated the Resources section. We also caught up with the Minars and provide an update on Cedar Summit Creamery on page 243.5BUILDING A SUSTAINABLE BUSINESS
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Write Out Goals. . 94 Identify Common Goals. . 94 Prioritize Goals. 95Prepare the Vision, Mission and Goals Section of Your Business Plan 96Blank Worksheets . 97-101Task Four: Strategic Planning and EvaluationŒWhat Routes Can You Take to Get Where You Want to Go? . 103Develop a Business Strategy . 106 Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Markets: Who are our target customers and what do they value? . 108 ŠSegmentation ŠSales potential Product: What product will we offer and how is it unique? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Competition: Who are our competitors and how will we position ourselves? 114 Distribution and Packaging: How and when will we move our product to market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 ŠScope ŠMovement ŠPackaging ŠDelivery scheduling and handling Pricing: How will we price our product? .. 121 Promotion: How and what will we communicate to our buyers or customers? .. 126 ŠImage or product ŠMessage ŠTools and delivery ŠTiming and frequency ŠCosts Inventory and Storage Management: How will we store inventory and maintain product quality? .. 131 Develop a Strategic Marketing Plan . 132 Operations Strategy .. 134 Production and Management: How will we produce? 134 ŠProduction system ŠProduction schedule Regulations and Policy: What institutional requirements exist? .. 137 Resource Needs: What are our physical resource needs? 138 Resource Gaps: How will we fill physical resource gaps? . 139 ŠLand and buildings ŠMachinery and equipment Size and Capacity: How much can we produce? .. 143 Develop a Strategic Operations Plan 144 Human Resources Strategy .. 145 Labor Needs: What are our future workforce needs? 146 ŠTasks ŠWorkload Skills: What skills will be required to fill workforce needs? .. 148 Gaps: How will we fill workforce gaps? 149 Compensation: How will we pay family and members of our workforce? . 151 Management and Communication: Who will manage the business and how? . 152 ŠManagement ŠCommunication Develop a Strategic Human Resource Plan 154 Financial Strategy .. 154 Risk Management: How will we manage risk? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Organizational Structure: How will we legally organize and structure our business? .. 158 Finance: How will we finance capital requirements? .. 1607BUILDING A SUSTAINABLE BUSINESS
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Develop a Strategic Financial Plan .. 163 Whole Farm Strategy . 164Evaluate Strategic Alternatives 166 Long-Term Outlook .. 167 Profitability: Will this new strategy significantly increase net income from the farm? .. 168 ŠEnterprise Evaluation for Profitability: Net return and break-evens ŠWhole Farm Evaluation for Profitability: Partial budgeting and long-range planning Liquidity: Will this new strategy help generate cash flow sufficient to pay back debts in a timely fashion? . 174 Solvency: Will this new strategy lead to growth in net worth? .. 175 Risk: Will this new strategy affect the risks faced by the farm business and family? .. 176 Transition Period Evaluation . 177Choose the Best Whole Farm Strategy . 179Develop a Contingency Plan . 182Prepare the Strategy Section of Your Business Plan .. 184Blank Worksheets 186-231Task Five: Present, Implement and Monitor Your Business PlanŒWhich Route Will You Take and How Will You Check Your Progress Along the Way? .. 233Organizing and Writing Your Business Plan 233 Implementation and Monitoring . 238 Develop an Implementation fiTo-dofl List .. 238 Establish Monitoring Checkpoints. .. 240 Maintain Records . 241 Review Progress .. 242Blank worksheets 245-247List of Footnote References .. 248Resources 249Glossary .. 257Appendices . 263Appendix A: Business Plan: Cedar Summit Farm .. 265Appendix B: Farm Financial Standards Council Business Performance Measures (Sweet Sixteen) .. 273Appendix C: Sample Job Description .. 275Appendix D: Direct Labor Requirements for Traditional Crop and Livestock Enterprises .. 276List of FiguresFigure 1. The Business Life Cycle . 15Figure 2. Example from Cedar Summit FarmŠIntroduction Worksheet: Why Are You Developing A Business Plan? . 17Figure 3. Example from Dancing Winds FarmŠWorksheet 1.1: My Values . 21Figure 4. Example from Cedar Summit FarmŠWorksheet 1.2: Common Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Figure 5. Example from Cedar Summit FarmŠWorksheet 2.1: A Brief History of Our Farm Operation 29Figure 6. Example from Cedar Summit FarmŠWorksheet 2.2: Current Market Assessment (side 1) 31Figure 7. fiNorthwind Notes-Apple Growingfl from Northwind Nursery Catalogue 32Figure 6. Example from Cedar Summit FarmŠWorksheet 2.2: Current Market Assessment (side 2) 37Figure 8. Farm map: the Foltzes™ Northwind Nursery and Orchards .. 39Figure 9. Example from Cedar Summit FarmŠWorksheet 2.3: Tangible Working Assets . 40Figure 10. Example from Cedar Summit FarmŠWorksheet 2.4: Institutional Considerations .. 41Figure 11. Crop Enterprise Checklist .. 42Figure 12. Livestock Enterprise Checklist .. 42Figure 13. Example from Cedar Summit FarmŠWorksheet 2.5: Describing Crop Production Systems .. 438BUILDING A SUSTAINABLE BUSINESS
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Figure 14. Example from Cedar Summit FarmŠWorksheet 2.6: Describing Livestock Production Systems 44Figure 15. Example from Cedar Summit FarmŠWorksheet 2.7: Enterprise/Calendar Matrix 45Figure 16. Example from Cedar Summit FarmŠWorksheet 2.8: Human Resources Matrix . 47Figure 17. Example from Cedar Summit FarmŠWorksheet 2.9: Assessing Worker Abilities and Needs . 49Figure 18. Example from Cedar Summit FarmŠWorksheet 2.10: Likely Changes in Our Human Resources Situation . 50Figure 19. FINBIN Average Expenses for 2001 Farm Family in Minnesota and North Dakota .. 52Figure 20. Comparison of Financial Results Based on Tax and Accrual Information .. 53Figure 21. Comparison of Net Worth Based on Cost and Market Values for Assets 53Figure 22. Defining Financial Performance Measurement Areas . 54Figure 23. Example from Cedar Summit FarmŠWorksheet 2.12: Income Statement 55Figure 24. Example from Cedar Summit FarmŠWorksheet 2.13: Balance Sheet . 56Figure 25. Example from Cedar Summit FarmŠWorksheet 2.14: Earned Net Worth Change Analysis .. 57Figure 26. Example from Cedar Summit FarmŠWorksheet 2.15: Financial Ratios Based on the Balance Sheet and Income Statement (sides 1 and 2) 58Figure 27. Example from Cedar Summit FarmŠWorksheet 2.16: Whole Farm Trend Analysis 60Figure 28. Common Sources of Agricultural Risk . 62Figure 29. Example from Cedar Summit FarmŠWorksheet 2.17: Risk Management . 63Figure 30. Example from Cedar Summit FarmŠWorksheet 2.18: Whole Farm SWOT Analysis .. 65Figure 31. Envisioned Northwind Nursery and Orchard Map .. 88Figure 32. Example from Cedar Summit FarmŠWorksheet 3.1: Dreaming a Future Business Vision .. 89Figure 33. Example from Cedar Summit FarmŠWorksheet 3.2: Creating My Business Mission Statement 90Figure 34. Example from Cedar Summit FarmŠWorksheet 3.4: Identifying Our Family Business Goals 93Figure 35. Group Goal SettingŠReconciling Different Goals 94Figure 36. Example from Cedar Summit FarmŠWorksheet 3.5: Prioritizing Goals .. 95Figure 37. Market Segmentation Alternatives 108Figure 38. Cedar Summit Farm Marketing Survey, May, 2001 . 109Figure 39. Example from Cedar Summit FarmŠWorksheet 4.1: Customer Segmentation . 110Figure 40. Example from Cedar Summit FarmŠWorksheet 4.2: Potential Sales Volume . 111Figure 41. Example from Cedar Summit FarmŠWorksheet 4.3: Product and Uniqueness . 113Figure 42. Example from Cedar Summit FarmŠWorksheet 4.4: Competition .. 114Figure 43. Direct Marketing Options . 116Figure 44. Intermediary Options .. 117Figure 45. Recommendations for Approaching Retail Buyers .. 118Figure 46. Example from Cedar Summit FarmŠWorksheet 4.5: Distribution and Packaging (side 2) . 120Figure 47. Blooming Prairie Wholesale Produce Pricing List 122Figure 48. Differentiated Product Pricing Strategies . 123Figure 49. Undifferentiated Commodity Pricing Strategies . 124Figure 50. Example from Cedar Summit FarmŠWorksheet 4.6: Pricing . 125Figure 51. Common Pricing Strategy Mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Figure 52. Cedar Summit Draft Logo Designs 127Figure 53. Example from Cedar Summit FarmŠWorksheet 4.7: Promotion . 128Figure 54. 1998 Educational Classes from Northwind Nursery Catalogue 129Figure 55. Cedar Summit Farm price list with Minnesota Grown logo posted at their farm stand . 129Figure 56. Cedar Summit Farm holiday flyer/advertisement for cheese and meat boxes 130Figure 57. Example from Cedar Summit FarmŠWorksheet 4.8: Inventory and Storage Management 132Figure 58. Excerpt from Cedar Summit Farm™s Worksheet 4.9: Marketing Strategy Summary (side 2) 133Figure 59. Excerpt from Cedar Summit Farm™s Worksheet 4.10: Production System and Schedule .. 135Figure 60. Mabel Brelje™s Five Year Crop Rotation Plan . 136Figure 61. Permits Required by Cedar Summit Farm to Build Plant and Process 137Figure 62. Some Agricultural Licenses and Permits Required by the State of Minnesota 137Figure 63. Excerpt from Cedar Summit Farm™s Worksheet 4.14: Resource Needs and Acquisition .. 139Figure 64. Machinery Acquisition Options 141Figure 65. New Versus Used Machinery and Equipment 141Figure 66. Pladot bottle filler used by Valley Fresh Dairy, West Virginia .. 1429BUILDING A SUSTAINABLE BUSINESS
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Figure 67. Excerpt from Mabel Brelje™s Business PlanŠCrop Yield Projections .. 143Figure 68. Example from Cedar Summit FarmŠWorksheet 4.16: Estimating Output and Capacity .. 144Figure 69. Excerpt from Cedar Summit Farm™s Worksheet 4.17: Operations Strategy Summary .. 145Figure 70. Example from Cedar Summit FarmŠWorksheet 4.18: Tasks and Workload 147Figure 71. Florence Minar working on the Minnesota Organic Milk (MOM™s) processing line .. 148Figure 72. Labor Acquisition Options . 149Figure 73. Example from Cedar Summit FarmŠWorksheet 4.19: Filling Workforce Needs 150Figure 74. Barriers to Effective Communication . 153Figure 75. Excerpt from Cedar Summit Farm™s Worksheet 4.23: Human Resources Strategy Summary . . . . . . . . . . . . . . . . . . . . 154Figure 76. Risk Management Alternatives . 156Figure 77. Example from Cedar Summit FarmŠWorksheet 4.24: Risk Management 157Figure 78. Legal Organization Options 158Figure 79. Example from Cedar Summit FarmŠWorksheet 4.25: Business Organization .. 159Figure 80. Finance Alternatives 160Figure 81. Financial Assistance Options for Beginning Farmers . 162Figure 82. Financial Strategy Issues 162Figure 83. Excerpt from Cedar Summit Farm™s Worksheet 4.27: Finance . 163Figure 84. Excerpt from Cedar Summit Farm™s Worksheet 4.28: Financial Strategy Summary . 163Figure 85. Example from Cedar Summit FarmŠWorksheet 4.29: Summarize a Whole Farm Strategic Plan of Action 165Figure 86. Allocating Whole Farm Expenses . 166Figure 87. Tips for Analyzing Strategic Plans . 167Figure 88. Example for Bed and Breakfast EnterpriseŠBreak-even Analysis . 170Figure 89. Example from Hog Finishing OperationŠWorksheet 4.32: Partial Budget .. 172Figure 90. Example from Hog Finishing OperationŠWorksheet 4.33: Long-Range Income Statement .. 173Figure 91. Example from Hog Finishing OperationŠWorksheet 4.34: Long-Range Projected Cash Flow 174Figure 92. Income Sensitivity Analysis Prepared by Mabel Brelje .. 176Figure 93. Example from Hog Finishing OperationŠWorksheet 4.36: Risk Analysis 177Figure 94. What to Do if Your Strategy Isn™t Feasible in the Long Run .. 177Figure 95. Example from Hog Finishing OperationŠWorksheet 4.37: Transitional Cash Flow 178Figure 96. Strategy fiBest Fitfl Tests 180Figure 97. Example from Cedar Summit FarmŠWorksheet 4.38: Scoring and Deciding on a Final Business Strategy . 181Figure 98. Example from Cedar Summit FarmŠWorksheet 4.40: Executive Summary Statement 185Figure 99. Example from Cedar Summit FarmŠWorksheet 5.1: Business Plan Outline 236Figure 100. Common Presentation Pitfalls . 237Figure 101. The Minar family began processing their first batch of milk in March, 2002 .. 238Figure 102. Example from Cedar Summit FarmŠWorksheet 5.2: Implementation To-do List .. 239Figure 103. Example from Northwind Nursery and OrchardŠWorksheet 5.3: Monitoring . 240Figure 104. Record Keeping Ideas .. 24110BUILDING A SUSTAINABLE BUSINESS
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