Business Planning

You might not need your business plan in writing in order for you to understand your business, but a lender will need to see at least a basic written business plan so they can understand your business.

You may not think you need credit, or plan to apply for credit - but credit is an essential part of most businesses - at the very least to help recover from unexpected setbacks. You may also need a business plan to apply for grants, educational programs, or high quality land tenure opportunities. When land trusts, parks, and other landholders make lease or purchase opportunities available to farmers and ranchers, they typically require a detailed written business plan as part of the competitive application process.

Creating a business plan today helps you be more prepared for an uncertain future. It helps you to think through what you intend to do, and what might go wrong, and how to mitigate those risks. It makes you more prepared to access credit (and other resources) quickly if you need to. 

A business plan is a summary of:

1. Business ownership structure 
2. How key assets (capital) are acquired and used in the business
3. Production and marketing activities
4. An overall management plan including risk management plans 

You should be specific and concise. Write to describe, not to convince. Your plan does not need to be long. A simple plan can fit on one or two pages. Describe your key calculations in words and show them in numbers. 

A business plan should demonstrate that you have a genuine profit motive

A profit motive is the intention to have annual sales in excess of annual expenses, or to create assets with long-term value in excess of costs, or to do both.  

Your theory of profit, or business model, is your idea about how to have revenue in excess of the expenses needed to generate revenue. For example: 

• Growing crops and selling wholesale is a business model. Revenue comes from wholesale sales and if it is greater than the cost to produce and harvest crops the business might be profitable. 
• Raising livestock for the live auction market is a business model. Revenue comes from selling animals at auction and if it is greater than the cost to raise and transport the livestock the business might be profitable. 
• Growing crops and selling at farmers’ markets and through a CSA is a business model. Revenue comes from direct to consumer sales and if it is greater than the cost to produce, harvest and distribute the crops the business might be profitable. 
• Growing feed crops to supply a livestock operation that produces wool and processes some animals for direct-to-consumer meat sales is a business model. Growing feed crops saves costs related to wool and livestock production. If wool and meat revenues exceed costs to raise feed crops and livestock and process and distribute wool and meat, the business might be profitable.

A business plan demonstrates a profit motive by summarizing the details of the business model describing goods or services offered, the markets or customers, the cost of offering them, and when revenue is expected to exceed cost.

A business plan should include strategies to minimize the risk of loss.

A business plan identifies the elements of a business that can be managed and strategies for managing for profit and to minimize risk of loss including:

1. Structuring to Separate Assets from Risk: Structuring a business includes selecting the right business entity and ensuring that valuable assets are owned outside of the entity that conducts day-to-day activities. Typically agricultural operations include an operating entity that engages in day to day activities, and a land owning entity that rents the land to the operating entity.
2. Obtaining Property and Liability Insurance: A business plan should discuss the appropriate insurances needed. The budget should include an adequate amount to cover property and liability insurance. Property insurance provides an indemnity if property is lost or damaged. Liability insurance covers the cost of legal defense and settlement.
3. Planning and Preparing: A business plan should include preliminary plans to ensure:

• Worker and product safety.
• Emergency preparedness.
• Regulatory compliance.

Structuring a Business

Structure is the way a business is owned, how owners buy in, how profits are shared, how assets are used, and how liabilities are limited and shared.

What does it mean to own a business?

A business owner has invested capital and is entitled to receive a share of profits.

The legal form of ownership will determine how the owner makes their investment of capital and how profits or losses are shared.

Depending on the legal form of ownership, there may be documents that specify how owners are entitled to direct the activities of the business.

Business Entity and Ownership Type

Informally we say that the legal form of a business is the entity type. Formally a business is a separate legal entity if it can sue and be sued separately from its owners. These formal business entities include Limited Partnerships, Limited Liability Companies, and Corporations.

• Sole Proprietorship is the default legal ownership for a single owner.
• General Partnership is the default legal ownership for more than one owner.
• Limited Partnership, Limited Liability Company, and Corporation are forms of legal ownership that must be deliberately created under state law.

What is Capital? 

The resources that allow you to operate your business.  

• Cash
• Equipment
• Labor
• Land and natural resources
• Knowledge (technical, processes, procedures)

Credit, leases, and labor agreements are all ways to access capital beyond the owners’ original contributions of capital.

Capitalizing a Business

Owners capitalize a business by contributing cash, or other assets like land or equipment. 

A business plan provides a preliminary assessment of the cash and credit needs of a business.

If a business does not have enough cash, it is “under-capitalized” and may have to take on debt.

At-Risk Capital

Once an owner invests their capital (usually cash and equipment) into a business, that investment is at risk. It may be used to:

• Fund unprofitable activities
• Repay debts that can not be paid from business profits
• Settle legal claims against the business

At-risk capital is also called invested capital because of the risk of loss.

Unlimited Personal Liability

Owners of sole proprietorships and partnerships have unlimited personal liability for debts, fines, penalties and legal judgments against the business.

• May have to use personal savings.
• May have future wages garnished.
• Liability may extend to a spouse’s savings and future earnings.

In a partnership, each partner (and their spouse) is liable for all obligations of the business.

Limited Liability

Business owners may limit their liability to only their at-risk capital contributions by forming a limited partnership, limited liability company, or a corporation. 

These entities are formed under state law (or sometimes Tribal or federal law) and may provide liability protection, limiting the owner’s risk to only their invested capital. These entities will never protect an owner from the risk associated with negligence or deliberate bad acts.

Ownership Rights and Obligations

A business plan discusses the owners' rights and obligations including:

• The amount of cash each owner will initially contribute.
• The owners’ rights to direct and manage the business.
• Circumstances under which an owner may be required to contribute additional cash.
• Limitations on how much owners may withdraw.
• Circumstances under which an owner may withdraw capital from the business.
• Restrictions on the sale or transfer of ownership interests.
• How profit and loss will be shared.

A business plan identifies the key assets needed for the business and identifies when and how those assets will be acquired.  Agriculture and fishing rely on natural resources and other specialized assets.  A lender who understands your industry expects a business plan to discuss key assets. A lender who does not understand your industry is even more in need of a discussion of key assets.

Many assets are substitutes for labor. Labor is an expense - you pay as you go. Assets are an investment, you pay up front, they save you expenses month to month, and then eventually they need to be replaced. But if you finance asset purchase or acquisition, you pay month to month - so it may be just as affordable as labor if you qualify for fairly priced credit.

Assets versus labor is one of the most important decisions you will make as a farm owner, and you will make it over and over again. 

• Your own labor or hired labor?
• Your own labor or equipment?
• Hired labor + more labor or more equipment? 
• Cheaper land & more drive time or more expensive land and less drive time? 

Land is the main driver of and constraint on profitability:

• Location
• Distance to market / Quality of market
• Distance to services and inputs / Quality of available services
• Distance from workforce / Quality of workforce 
• Local government - attitudes, support, hindrances
• Housing availability
• Neighbors
• Productive capacity (soils, acres, water access) 
• Climate and micro-climate(s)

Depending on your business operations plan, you may also need valuable infrastructure including: 

• Buildings
  
  • Packing and Cooling
  • Storage for equipment and supplies
  • Office
  • Other needs? 
• Equipment
  
  • Planting, weeding, harvesting
  • Packing, and transportation
  • Selling (market stand, etc) 

• Permanent Crops
  
  • Orchards
  • Vineyards
• Land Improvements
  
  • Wells, ponds
  • Hedges, wind breaks
  • Irrigation  
  • Roads
  • Fences
  • Septic
  • Electric 

Asset Acquisition Plan

For each asset that you need in your business, consider the direct contribution each asset makes to your theory of profitability, and when the asset is needed. If the asset does not contribute directly or immediately, is it still necessary, and/or when will it be needed? 

Cash or Credit? 

It is relatively easy to get a loan for an asset because the loan is secured by the asset. It is relatively difficult to get an operating loan because even though the lender takes a lien on the crop - the lender does not want the crop. One of the biggest mistakes beginning farmers make is using cash on assets and then coming up short on operating cash. If you are short on operating cash and have to get a loan, it may be too late in the season to get a loan from a lender focused on agriculture, and loans from other lenders offer fewer protections, less expert guidance, and may have higher rates. Some people end up using credit cards with 20% interest rates - it’s an expensive mistake!  

Planning for Maintenance and Replacement of Assets 

Your plan should consider the regular maintenance needs for each significant asset, the true estimated useful life of the asset. Consider when and how the asset might wear out, if the technology might change, and how you will research and finance the replacement. 

Time is one of the key constraints on your business. 

• Plan your own time to ensure you are able to do the tasks only you can do. 
• Plan to outsource tasks you can outsource as soon as possible as you grow.

Understand the legal requirements for who must be on payroll and who may be paid as an independent contractor. Be sure to budget for all legally required labor costs. 

Labor Can Cause Cash Flow Issues

Once you hire payroll labor, you are required to pay every two weeks. If the labor you hire is not directly related to generating cash receipts, you may find that you owe wages and payroll taxes before the related revenue has been received. Careful cash flow planning and planning for what type of labor to hire can help with this. 

Hire first for work directly related to income so you have immediate incoming cash to cover wages.

• Planting short term crops
• Weeding
• Harvesting
• Sales deliveries

Do not hire for labor that does not relate to immediate revenue unless you have a cash flow plan to cover labor. Examples of labor with a longer-term payoff include:

• General maintenance
• Planting long-term crops 
• General marketing 
• Asset construction or development

Budgeting for Labor

To budget accurately for labor you will need a detailed list of tasks and an estimate of time for each task. The best way to estimate time for a task is to time yourself doing the task. You can also ask others, or look at University Extension studies. 

Your cost per hour for payroll labor includes: 

• Hourly Wage
• 15% for FICA and Medicare
• 5% for unemployment and other state taxes
• 5-10% for workers compensation insurance

Many businesses budget a standard 25% on top of hourly wages to factor in all costs including vacation and sick leave.  

Planning to Manage Labor

California has strict laws protecting workers. If you employ anyone other than your legally married spouse or your children or parents to help you in your business, they must be covered by a workers compensation policy. Most workers on a farm or ranch are required to be on payroll with state and federal payroll taxes paid. In addition, you are required to keep detailed records showing that you are in compliance with laws covering hours worked, breaks given, the time, manner and amount of payment, safety training, heat and illness prevention, and a number of other protections. 

Before you hire you will also need a plan to manage labor including: 

• Basic employee records including I-9s
• Legally compliant payment practices including:
  
  • Providing required notices to employees
  • Tracking earned sick/vacation leave 
  • Making timely payroll tax deposits
  • Filing timely W-2s
  • Documenting hours worked and breaks taken
• Creating a safe and respectful workplace
• Policies and procedures covering physical safety, general conduct, discrimination, harassment, etc. 
• Training and documentation of training
• Preparing for audits, inspections, and raids

Be sure you understand the essential requirements of an employee before you hire. Once you do hire, be sure that you have all required and recommended records and that they are secure and easily accessible to you in the event of an audit. 

Your business plan should clearly demonstrate that you have a viable plan for managing your business including keeping and maintaining required records, and making time to review critical data and make strategic decisions about the direction of the operation. 

A personal time budget may be one of your most critical management tools. This is especially true if you have an outside job in addition to your farm or ranch job. Be sure to distinguish between what you need to do to have the records and data you need, and actually making time to review the records and data and use them to improve your business. You can often outsource many of the tasks related to creating and maintaining the records, but you are usually the only person who can review the records and use them to make management decisions. 

Financial Records and Decisions

You are required to keep financial records that are adequate to support the items of income and expenses that you must report on income tax, property tax, and sales tax returns.  

You will need to select a bookkeeping system and decide what level of assistance you want from a bookkeeper. Many bookkeepers bundle the cost of the bookkeeping program with their monthly fee. Be sure that you own your own data. Bookkeeping costs vary by the number of transactions per month. Plan on at least $150/month. 

You will need to ensure that you have dedicated time each week and each month to ensure that bookkeeping tasks are completed as expected, and to review financial data for purposes of ensuring you are on budget and have adequate cash on hand. 

Non-Financial Records and Decisions

You will need detailed production and sales records to inform future decisions based on what you did in the past. They are also required in order to access agricultural credit, crop insurance programs, and disaster assistance, and will affect the value of your land if you own land and later sell it. 

You probably will not be able to outsource keeping production records. Instead you will have to ensure that you have a system to record and review key information such as: 

• What, where and when you planted;
• Harvest dates and yield amounts;
• Animal breeding records with breeding and birthing dates, weights, growth rates and vaccination schedules;
• Product and amounts sold by customer or market;
• Price per unit; 
• Payment terms;
• Customer payment performance, other customer data and notes.

Planning for Physical and Non-Physical Information 

You will need a plan and a budget for how you will manage your physical and computer systems including regular mail, e-mail, and physical and digital data and document storage. Be sure to consider: 

• Where will online files be kept?
• Where will physical records and files be kept?
• What are the backup systems?
• What physical and digital data security systems will you need? 
• What is the plan to retain documents and to destroy them after an appropriate period?

You may consider budgeting for general office support sooner rather than later, since many aspects of developing and maintaining good office systems can be outsourced. 

Your role as a manager is to ensure that you have the data you need to make good decisions, and to use the data you have to manage current and future operations.  If you spend too much time just acquiring and managing data you won’t have time left to be thoughtful about how you use data.

A good management plan will prioritize your role as a leader, and make the tasks associated with gathering and maintaining data as routine and efficient as possible. 

How Long to Keep Records? 

Keep most records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. 

• Keep employment records for 4 years. 
• Keep records for 7 years if you file a claim for a loss from a bad debt.
• Keep records related to depreciable assets as long as you keep the assets.
• Keep records related to asset sales for 3 years after the sale. 
• Keep records related to land for as long as you own the land and 7 years after the sale of land.

Cash flow is a dynamic concept that focuses on how the quantity of available cash changes during the year. 

Agricultural operations typically require an upfront investment and a period of time to pass before the owner has product available for sale and receives cash from sales of products. This means there is a period of negative cash flow before there is positive cash flow. If the business has enough cash at the beginning of the year to cover the period of negative cash flow, it is self-financed. If it needs help with that gap, it needs access to credit. 

Agricultural credit is essential to most operations. It is designed to help a business owner to bridge the gap between when they expend money to grow or raise a product for sale and when they will receive income from a sale. The problem is, it can be hard for an owner to understand if credit is covering a cash flow gap in a profitable operation, or if credit is helping an operation which is not profitable to remain in business. It can be hard for new business owners to distinguish between net income and available cash, but this is an essential skill. 

A general rule is that agricultural operations that require a larger up-front investment and a longer waiting period (orchards and vineyards) are more profitable than those with a smaller upfront investment and a shorter growing period (e.g. leafy greens). 

• Adding value to a product by transforming it from something that will spoil quickly and therefore must be sold quickly increases the amount of cash and time invested in the product before it is sold. So, adding a value added product to your operation may increase your net income, but it may also increase your cash flow problems. 
• Planting peonies on land currently used to grow annual flowers is likely to result in a significant increase in gross sales per acre - but not for a few years. So, adding a high-value crop to your operation may decrease your net income and cash flow for a while before eventually increasing your net income and improving your cash flow. 

If you have a business plan that will result in positive cash flow and net income within a year, or over the appropriate payback period, then credit can be a valuable tool to help you through periods in your growing cycle when you are short of cash. 

If you use credit to help with cash shortages in an operation that does not have a solid plan for positive cash flow and net income within a year, or over the appropriate payback period, then credit will only worsen your problems.  

It can be hard for new business owners to distinguish between net income and available cash, but this is an essential skill. 

Cash Flow has four components:

1. From business operations
2. From assets bought or sold
3. From debt taken on or paid
4. From owner’s contributions and withdrawals

Net Income has three components:

1. From operating activities only, also called ‘Gross Profit’
2. After also including administrative and other expenses
3. After also including extraordinary income or expense items such as lawsuit settlements or disaster events

Cash balances change due to: 

Increases

• Payments made for expenses incurred
• Loan proceeds received
• Owner’s investments received
• Payments received for assets sold

Decreases

• Payments received for sales made
• Payments made for loans owed
• Payments made for owner’s draws
• Payments made for assets purchased

Cash is not included in the calculation of Net Income. Net income changes when:

Increases

• Sales are made - regardless of when cash is received
• Assets are sold - regardless of when cash is received

Decreases

• Expenses are incurred, regardless of when cash payments are made
• Assets are purchased - regardless of when cash payments are made

Note the cash flow items not included in net income: Owner’s investments or draws, loan proceeds, and loan payments. 

If you plan to use credit in your business be sure you can clearly identify why you need the credit—the specific things the credit will cover, and the period of time for which the credit is needed. The term of a loan should match the time frame of the purpose of the loan. 

Agricultural lenders typically offer: 

• Operating Loans designed to cover the gap between planting and sale in an annual operation
• Equipment Loans designed to spread the cost of a piece of equipment over 3-7 years
• Development Loans designed to spread the cost of significant land development (wells, fences, trees, vines) over 3-15 years
• Workforce Housing Loans designed to spread the cost of developing worker housing over 15-30 years
• Land Loans designed to spread the cost of a land purchase over a significant period of time, 10-30 years

One of the ways successful growing operations get in trouble is when they use short-term operating credit for longer-term purposes, such as equipment purchases or planting permanent crops. 

Owner’s Draws

Another way operations get in trouble with credit is when a portion of the funds are used to fund the owner’s living expenses if the operation is not sufficiently profitable. 

Owners may take draws from the business as they please, subject to available cash. Owner’s draws are not business expenses. Ideally owners take draws when the business has sufficient cash, and forgo draws during times when the business is short on cash. But, sometimes this is not possible. If the owners do not have other sources of income, ag lenders may treat owner’s draws as if they were necessary salaries or wages included in operating loans. While it is a common practice, borrowing for owner’s draws is borrowing to cover personal living expenses or future profits. Be sure you understand if you are including owner’s draws in a request for operating credit.  

Before applying for credit be sure you have a cash flow plan that shows your net cash from operations, your net cash available to re-pay credit, and distinguishes between cash needed for operations, equipment and long term needs, and owner’s draws. 

A risk management plan starts with defining and evaluating risk and then matches risk mitigation strategies to risks and sets priorities for implementation.

Define risks by considering categories or types of events that would threaten the success of your business plan. There are two common frameworks for thinking about risk in a farming, ranching or fishing business: 

• The Five Ds: Death, Divorce, Disaster, Disability, Disagreement
• Business Plan Assessment Framework: 
  
  • Production 
  • Marketing 
  • Financial 
  • Legal and Regulatory
  • Human

Evaluate risk by assessing both the likelihood and the severity of consequence from an adverse event.

Mitigate risk by matching risk to an appropriate risk management strategy:

• Death, Divorce, Disability, Disagreement: insurance, strong operating agreements, written leases and contracts
• Disaster: physical protection of assets, insurance for assets
• Production Risks: diversification of production, multi-peril crop insurance 
• Marketing risks: diversification of markets, revenue protection insurance
• Financial risks: strong accounting systems, insurance, strong operating agreements, written leases and contracts
• Legal and regulatory risks: strong management systems, strong training policies and procedures, strong operating agreements, written leases and contracts, regular meetings with appropriate legal counsel when indicated before taking a new, large, or risky course of action
• Human risk: strong management systems, strong training policies and procedures, insurance

Prioritize which risks are most critical and which mitigations are most strategic. 

1. Protect critical assets, identified as those most essential to your operation 
2. Address greatest vulnerabilities, identified as most likely vectors for material losses 
3. Are known to be effective and have a high probability of protecting your operation
4. Benefit your operation regardless of the risk they mitigate. 

Insurance is one of the most important business risk mitigation tools. There are several broad types of insurance, including property, liability, and income, and many specific insurance programs and policies. 

Property insurance covers the cost to replace property lost or damaged due to insurable causes of loss like theft, fire, flood, and accident. Liability insurance protects against the cost of defending against a lawsuit, and pays the cost to settle a lawsuit, or the cost of a legal judgement against the insured. Income insurance provides ongoing income when regular income is ended or interrupted due to an insurable cause. 

Homeowners and business owners insurance are combined policies that cover both property loss and liability related to damage to other people or other people’s property. Automobile insurance works the same. 

Be careful! A homeowner’s policy will not cover a farm business and a personal automobile insurance policy will not cover accidents related to a business. 

Workers compensation insurance is a special kind of liability insurance for employers and income insurance for employees. Each state has laws requiring employers to pay into a workers compensation insurance program to ensure that workers will receive income if they are injured at work and unable to continue working. The program also minimizes the risk that employers will be sued for liability beyond what is covered by the workers compensation insurance. 

Disability insurance is different from workers compensation insurance because it replaces earned income when the insured is unable to work due to injury or illness regardless of the cause of the injury or illness. Businesses can purchase disability insurance for employees as an optional employee benefit.  

Businesses can also buy business interruption insurance, and farmers and ranchers can buy crop insurance, which is a type of combined property and income insurance. 

Crop Insurance

There are some private types of crop insurance, typically specialized hail, fire and tree crop policies, which are developed and administered entirely by private insurance companies

Most crop insurance is Federal Crop Insurance. 

Policies are developed and administered through a public-private partnership between a number of private insurance companies and the Risk Management Agency of the USDA. 

Crop insurance may be purchased by a landowner, tenant, or sharecropper as long as the policy holder shares in the risk of producing the crop and is entitled to an ownership share of the crop. 

The main types of crop insurance are: 

• Multiple Peril Crop Insurance (MPCI) 
• Livestock policies
• Revenue policies including “Whole Farm” and “Micro Farm” policies.
• Pilot programs (specialized, experimental)

Policies must be purchased prior to planting. Some policies can cover prevented planting due to weather-related events, some cover loss of price or price margin, and one product insures the average revenue of the whole farm operation.

Limited coverage for certain types of livestock and for pasture, rangeland and forage are also available. 

Most policies are written for a single crop in a limited number of states and counties and cover loss of crop yields due to natural causes including drought, excessive moisture, freeze, and disease. 

If a policy is not available in your county but is available in a nearby county, you can request, and will usually receive, special permission to purchase the same coverage in your county. 

Non-insured Disaster Assistance Program

The USDA Farm Service Agency administers a program for producers who do not qualify for other types of crop insurance, it is called NAP which stands for Non-insured Disaster Assistance Program. 

NAP is relatively inexpensive to purchase. It is not intended to fully compensate you for crop losses, instead it is intended to help mitigate the cost of disasters and lessen the need for emergency legislation to assist when a farming community is hit hard by a natural disaster such as a wildfire or a tornado.

Structuring a Business

Structure is the way a business is owned, how owners buy in, how profits are shared, how assets are used, and how liabilities are limited and shared.

What does it mean to own a business?

A business owner has invested capital and is entitled to receive a share of profits.

The legal form of ownership will determine how the owner makes their investment of capital and how profits or losses are shared.

Depending on the legal form of ownership, there may be documents that specify how owners are entitled to direct the activities of the business.

Business Entity and Ownership Type

Informally we say that the legal form of a business is the entity type. Formally a business is a separate legal entity if it can sue and be sued separately from its owners. These formal business entities include Limited Partnerships, Limited Liability Companies, and Corporations.

• Sole Proprietorship is the default legal ownership for a single owner.
• General Partnership is the default legal ownership for more than one owner.
• Limited Partnership, Limited Liability Company, and Corporation are forms of legal ownership that must be deliberately created under state law.

What is Capital? 

The resources that allow you to operate your business.  

• Cash
• Equipment
• Labor
• Land and natural resources
• Knowledge (technical, processes, procedures)

Credit, leases, and labor agreements are all ways to access capital beyond the owners’ original contributions of capital.

Capitalizing a Business

Owners capitalize a business by contributing cash, or other assets like land or equipment. 

A business plan provides a preliminary assessment of the cash and credit needs of a business.

If a business does not have enough cash, it is “under-capitalized” and may have to take on debt.

At-Risk Capital

Once an owner invests their capital (usually cash and equipment) into a business, that investment is at risk. It may be used to:

• Fund unprofitable activities
• Repay debts that can not be paid from business profits
• Settle legal claims against the business

At-risk capital is also called invested capital because of the risk of loss.

Unlimited Personal Liability

Owners of sole proprietorships and partnerships have unlimited personal liability for debts, fines, penalties and legal judgments against the business.

• May have to use personal savings.
• May have future wages garnished.
• Liability may extend to a spouse’s savings and future earnings.

In a partnership, each partner (and their spouse) is liable for all obligations of the business.

Limited Liability

Business owners may limit their liability to only their at-risk capital contributions by forming a limited partnership, limited liability company, or a corporation. 

These entities are formed under state law (or sometimes Tribal or federal law) and may provide liability protection, limiting the owner’s risk to only their invested capital. These entities will never protect an owner from the risk associated with negligence or deliberate bad acts.

Ownership Rights and Obligations

A business plan discusses the owners' rights and obligations including:

• The amount of cash each owner will initially contribute.
• The owners’ rights to direct and manage the business.
• Circumstances under which an owner may be required to contribute additional cash.
• Limitations on how much owners may withdraw.
• Circumstances under which an owner may withdraw capital from the business.
• Restrictions on the sale or transfer of ownership interests.
• How profit and loss will be shared.

A business plan identifies the key assets needed for the business and identifies when and how those assets will be acquired.  Agriculture and fishing rely on natural resources and other specialized assets.  A lender who understands your industry expects a business plan to discuss key assets. A lender who does not understand your industry is even more in need of a discussion of key assets.

Many assets are substitutes for labor. Labor is an expense - you pay as you go. Assets are an investment, you pay up front, they save you expenses month to month, and then eventually they need to be replaced. But if you finance asset purchase or acquisition, you pay month to month - so it may be just as affordable as labor if you qualify for fairly priced credit.

Assets versus labor is one of the most important decisions you will make as a farm owner, and you will make it over and over again. 

• Your own labor or hired labor?
• Your own labor or equipment?
• Hired labor + more labor or more equipment? 
• Cheaper land & more drive time or more expensive land and less drive time? 

Land is the main driver of and constraint on profitability:

• Location
• Distance to market / Quality of market
• Distance to services and inputs / Quality of available services
• Distance from workforce / Quality of workforce 
• Local government - attitudes, support, hindrances
• Housing availability
• Neighbors
• Productive capacity (soils, acres, water access) 
• Climate and micro-climate(s)

Depending on your business operations plan, you may also need valuable infrastructure including: 

• Buildings
  
  • Packing and Cooling
  • Storage for equipment and supplies
  • Office
  • Other needs? 
• Equipment
  
  • Planting, weeding, harvesting
  • Packing, and transportation
  • Selling (market stand, etc) 

• Permanent Crops
  
  • Orchards
  • Vineyards
• Land Improvements
  
  • Wells, ponds
  • Hedges, wind breaks
  • Irrigation  
  • Roads
  • Fences
  • Septic
  • Electric 

Asset Acquisition Plan

For each asset that you need in your business, consider the direct contribution each asset makes to your theory of profitability, and when the asset is needed. If the asset does not contribute directly or immediately, is it still necessary, and/or when will it be needed? 

Cash or Credit? 

It is relatively easy to get a loan for an asset because the loan is secured by the asset. It is relatively difficult to get an operating loan because even though the lender takes a lien on the crop - the lender does not want the crop. One of the biggest mistakes beginning farmers make is using cash on assets and then coming up short on operating cash. If you are short on operating cash and have to get a loan, it may be too late in the season to get a loan from a lender focused on agriculture, and loans from other lenders offer fewer protections, less expert guidance, and may have higher rates. Some people end up using credit cards with 20% interest rates - it’s an expensive mistake!  

Planning for Maintenance and Replacement of Assets 

Your plan should consider the regular maintenance needs for each significant asset, the true estimated useful life of the asset. Consider when and how the asset might wear out, if the technology might change, and how you will research and finance the replacement. 

Time is one of the key constraints on your business. 

• Plan your own time to ensure you are able to do the tasks only you can do. 
• Plan to outsource tasks you can outsource as soon as possible as you grow.

Understand the legal requirements for who must be on payroll and who may be paid as an independent contractor. Be sure to budget for all legally required labor costs. 

Labor Can Cause Cash Flow Issues

Once you hire payroll labor, you are required to pay every two weeks. If the labor you hire is not directly related to generating cash receipts, you may find that you owe wages and payroll taxes before the related revenue has been received. Careful cash flow planning and planning for what type of labor to hire can help with this. 

Hire first for work directly related to income so you have immediate incoming cash to cover wages.

• Planting short term crops
• Weeding
• Harvesting
• Sales deliveries

Do not hire for labor that does not relate to immediate revenue unless you have a cash flow plan to cover labor. Examples of labor with a longer-term payoff include:

• General maintenance
• Planting long-term crops 
• General marketing 
• Asset construction or development

Budgeting for Labor

To budget accurately for labor you will need a detailed list of tasks and an estimate of time for each task. The best way to estimate time for a task is to time yourself doing the task. You can also ask others, or look at University Extension studies. 

Your cost per hour for payroll labor includes: 

• Hourly Wage
• 15% for FICA and Medicare
• 5% for unemployment and other state taxes
• 5-10% for workers compensation insurance

Many businesses budget a standard 25% on top of hourly wages to factor in all costs including vacation and sick leave.  

Planning to Manage Labor

California has strict laws protecting workers. If you employ anyone other than your legally married spouse or your children or parents to help you in your business, they must be covered by a workers compensation policy. Most workers on a farm or ranch are required to be on payroll with state and federal payroll taxes paid. In addition, you are required to keep detailed records showing that you are in compliance with laws covering hours worked, breaks given, the time, manner and amount of payment, safety training, heat and illness prevention, and a number of other protections. 

Before you hire you will also need a plan to manage labor including: 

• Basic employee records including I-9s
• Legally compliant payment practices including:
  
  • Providing required notices to employees
  • Tracking earned sick/vacation leave 
  • Making timely payroll tax deposits
  • Filing timely W-2s
  • Documenting hours worked and breaks taken
• Creating a safe and respectful workplace
• Policies and procedures covering physical safety, general conduct, discrimination, harassment, etc. 
• Training and documentation of training
• Preparing for audits, inspections, and raids

Be sure you understand the essential requirements of an employee before you hire. Once you do hire, be sure that you have all required and recommended records and that they are secure and easily accessible to you in the event of an audit. 

Your business plan should clearly demonstrate that you have a viable plan for managing your business including keeping and maintaining required records, and making time to review critical data and make strategic decisions about the direction of the operation. 

A personal time budget may be one of your most critical management tools. This is especially true if you have an outside job in addition to your farm or ranch job. Be sure to distinguish between what you need to do to have the records and data you need, and actually making time to review the records and data and use them to improve your business. You can often outsource many of the tasks related to creating and maintaining the records, but you are usually the only person who can review the records and use them to make management decisions. 

Financial Records and Decisions

You are required to keep financial records that are adequate to support the items of income and expenses that you must report on income tax, property tax, and sales tax returns.  

You will need to select a bookkeeping system and decide what level of assistance you want from a bookkeeper. Many bookkeepers bundle the cost of the bookkeeping program with their monthly fee. Be sure that you own your own data. Bookkeeping costs vary by the number of transactions per month. Plan on at least $150/month. 

You will need to ensure that you have dedicated time each week and each month to ensure that bookkeeping tasks are completed as expected, and to review financial data for purposes of ensuring you are on budget and have adequate cash on hand. 

Non-Financial Records and Decisions

You will need detailed production and sales records to inform future decisions based on what you did in the past. They are also required in order to access agricultural credit, crop insurance programs, and disaster assistance, and will affect the value of your land if you own land and later sell it. 

You probably will not be able to outsource keeping production records. Instead you will have to ensure that you have a system to record and review key information such as: 

• What, where and when you planted;
• Harvest dates and yield amounts;
• Animal breeding records with breeding and birthing dates, weights, growth rates and vaccination schedules;
• Product and amounts sold by customer or market;
• Price per unit; 
• Payment terms;
• Customer payment performance, other customer data and notes.

Planning for Physical and Non-Physical Information 

You will need a plan and a budget for how you will manage your physical and computer systems including regular mail, e-mail, and physical and digital data and document storage. Be sure to consider: 

• Where will online files be kept?
• Where will physical records and files be kept?
• What are the backup systems?
• What physical and digital data security systems will you need? 
• What is the plan to retain documents and to destroy them after an appropriate period?

You may consider budgeting for general office support sooner rather than later, since many aspects of developing and maintaining good office systems can be outsourced. 

Your role as a manager is to ensure that you have the data you need to make good decisions, and to use the data you have to manage current and future operations.  If you spend too much time just acquiring and managing data you won’t have time left to be thoughtful about how you use data.

A good management plan will prioritize your role as a leader, and make the tasks associated with gathering and maintaining data as routine and efficient as possible. 

How Long to Keep Records? 

Keep most records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. 

• Keep employment records for 4 years. 
• Keep records for 7 years if you file a claim for a loss from a bad debt.
• Keep records related to depreciable assets as long as you keep the assets.
• Keep records related to asset sales for 3 years after the sale. 
• Keep records related to land for as long as you own the land and 7 years after the sale of land.

Cash flow is a dynamic concept that focuses on how the quantity of available cash changes during the year. 

Agricultural operations typically require an upfront investment and a period of time to pass before the owner has product available for sale and receives cash from sales of products. This means there is a period of negative cash flow before there is positive cash flow. If the business has enough cash at the beginning of the year to cover the period of negative cash flow, it is self-financed. If it needs help with that gap, it needs access to credit. 

Agricultural credit is essential to most operations. It is designed to help a business owner to bridge the gap between when they expend money to grow or raise a product for sale and when they will receive income from a sale. The problem is, it can be hard for an owner to understand if credit is covering a cash flow gap in a profitable operation, or if credit is helping an operation which is not profitable to remain in business. It can be hard for new business owners to distinguish between net income and available cash, but this is an essential skill. 

A general rule is that agricultural operations that require a larger up-front investment and a longer waiting period (orchards and vineyards) are more profitable than those with a smaller upfront investment and a shorter growing period (e.g. leafy greens). 

• Adding value to a product by transforming it from something that will spoil quickly and therefore must be sold quickly increases the amount of cash and time invested in the product before it is sold. So, adding a value added product to your operation may increase your net income, but it may also increase your cash flow problems. 
• Planting peonies on land currently used to grow annual flowers is likely to result in a significant increase in gross sales per acre - but not for a few years. So, adding a high-value crop to your operation may decrease your net income and cash flow for a while before eventually increasing your net income and improving your cash flow. 

If you have a business plan that will result in positive cash flow and net income within a year, or over the appropriate payback period, then credit can be a valuable tool to help you through periods in your growing cycle when you are short of cash. 

If you use credit to help with cash shortages in an operation that does not have a solid plan for positive cash flow and net income within a year, or over the appropriate payback period, then credit will only worsen your problems.  

It can be hard for new business owners to distinguish between net income and available cash, but this is an essential skill. 

Cash Flow has four components:

1. From business operations
2. From assets bought or sold
3. From debt taken on or paid
4. From owner’s contributions and withdrawals

Net Income has three components:

1. From operating activities only, also called ‘Gross Profit’
2. After also including administrative and other expenses
3. After also including extraordinary income or expense items such as lawsuit settlements or disaster events

Cash balances change due to: 

Increases

• Payments made for expenses incurred
• Loan proceeds received
• Owner’s investments received
• Payments received for assets sold

Decreases

• Payments received for sales made
• Payments made for loans owed
• Payments made for owner’s draws
• Payments made for assets purchased

Cash is not included in the calculation of Net Income. Net income changes when:

Increases

• Sales are made - regardless of when cash is received
• Assets are sold - regardless of when cash is received

Decreases

• Expenses are incurred, regardless of when cash payments are made
• Assets are purchased - regardless of when cash payments are made

Note the cash flow items not included in net income: Owner’s investments or draws, loan proceeds, and loan payments. 

A risk management plan starts with defining and evaluating risk and then matches risk mitigation strategies to risks and sets priorities for implementation.

Define risks by considering categories or types of events that would threaten the success of your business plan. There are two common frameworks for thinking about risk in a farming, ranching or fishing business: 

• The Five Ds: Death, Divorce, Disaster, Disability, Disagreement
• Business Plan Assessment Framework: 
  
  • Production 
  • Marketing 
  • Financial 
  • Legal and Regulatory
  • Human

Evaluate risk by assessing both the likelihood and the severity of consequence from an adverse event.

Mitigate risk by matching risk to an appropriate risk management strategy:

• Death, Divorce, Disability, Disagreement: insurance, strong operating agreements, written leases and contracts
• Disaster: physical protection of assets, insurance for assets
• Production Risks: diversification of production, multi-peril crop insurance 
• Marketing risks: diversification of markets, revenue protection insurance
• Financial risks: strong accounting systems, insurance, strong operating agreements, written leases and contracts
• Legal and regulatory risks: strong management systems, strong training policies and procedures, strong operating agreements, written leases and contracts, regular meetings with appropriate legal counsel when indicated before taking a new, large, or risky course of action
• Human risk: strong management systems, strong training policies and procedures, insurance

Prioritize which risks are most critical and which mitigations are most strategic. 

1. Protect critical assets, identified as those most essential to your operation 
2. Address greatest vulnerabilities, identified as most likely vectors for material losses 
3. Are known to be effective and have a high probability of protecting your operation
4. Benefit your operation regardless of the risk they mitigate. 

Insurance is one of the most important business risk mitigation tools. There are several broad types of insurance, including property, liability, and income, and many specific insurance programs and policies. 

Property insurance covers the cost to replace property lost or damaged due to insurable causes of loss like theft, fire, flood, and accident. Liability insurance protects against the cost of defending against a lawsuit, and pays the cost to settle a lawsuit, or the cost of a legal judgement against the insured. Income insurance provides ongoing income when regular income is ended or interrupted due to an insurable cause. 

Homeowners and business owners insurance are combined policies that cover both property loss and liability related to damage to other people or other people’s property. Automobile insurance works the same. 

Be careful! A homeowner’s policy will not cover a farm business and a personal automobile insurance policy will not cover accidents related to a business. 

Workers compensation insurance is a special kind of liability insurance for employers and income insurance for employees. Each state has laws requiring employers to pay into a workers compensation insurance program to ensure that workers will receive income if they are injured at work and unable to continue working. The program also minimizes the risk that employers will be sued for liability beyond what is covered by the workers compensation insurance. 

Disability insurance is different from workers compensation insurance because it replaces earned income when the insured is unable to work due to injury or illness regardless of the cause of the injury or illness. Businesses can purchase disability insurance for employees as an optional employee benefit.  

Businesses can also buy business interruption insurance, and farmers and ranchers can buy crop insurance, which is a type of combined property and income insurance. 

Crop Insurance

There are some private types of crop insurance, typically specialized hail, fire and tree crop policies, which are developed and administered entirely by private insurance companies

Most crop insurance is Federal Crop Insurance. 

Policies are developed and administered through a public-private partnership between a number of private insurance companies and the Risk Management Agency of the USDA. 

Crop insurance may be purchased by a landowner, tenant, or sharecropper as long as the policy holder shares in the risk of producing the crop and is entitled to an ownership share of the crop. 

The main types of crop insurance are: 

• Multiple Peril Crop Insurance (MPCI) 
• Livestock policies
• Revenue policies including “Whole Farm” and “Micro Farm” policies.
• Pilot programs (specialized, experimental)

Policies must be purchased prior to planting. Some policies can cover prevented planting due to weather-related events, some cover loss of price or price margin, and one product insures the average revenue of the whole farm operation.

Limited coverage for certain types of livestock and for pasture, rangeland and forage are also available. 

Most policies are written for a single crop in a limited number of states and counties and cover loss of crop yields due to natural causes including drought, excessive moisture, freeze, and disease. 

If a policy is not available in your county but is available in a nearby county, you can request, and will usually receive, special permission to purchase the same coverage in your county. 

Non-insured Disaster Assistance Program

The USDA Farm Service Agency administers a program for producers who do not qualify for other types of crop insurance, it is called NAP which stands for Non-insured Disaster Assistance Program. 

NAP is relatively inexpensive to purchase. It is not intended to fully compensate you for crop losses, instead it is intended to help mitigate the cost of disasters and lessen the need for emergency legislation to assist when a farming community is hit hard by a natural disaster such as a wildfire or a tornado.