Exploration

Financial planning for my farm business

In this section we will be reviewing key concepts related to financial planning for your farm business. Before you continue with this section, be sure to read pages 154-181 from MISA’s business plan template (see Module 4). Then, resume this section.  

We begin by summarizing useful information about financial concepts and discuss them in the context of an Excel-based financial planning tool. You need not use the Excel tool provided here, but following along will provide a useful approach to documenting your farm’s finances. The information shared here is based on content developed by UC Santa Cruz- Center for Agroecology, which is worth reviewing if you’d like more information. 

Why do we need financial planning for farm businesses? Consider these points:

• Most farms need to spend money on farm inputs such as seed and soil amendments some months before they have products available for sale. This requires farmers to estimate income, expense, cash and credit needs on a month-by-month basis so they can plan in advance to have cash or credit available when it is needed.
• Lenders look at income and expenses in a very particular way. If a farmer wants to finance something like a tractor or a new barn, she or he will need to be able to show ability to make monthly or annual loan payments. Lenders will want to see financial projections that show income and expenses associated with producing agricultural products clearly separated from other sources of income and uses of cash such as outside savings or employment or owner living expenses.
• Loans for operating expenses are different from loans for long-term assets. Operating loans are expected to be paid back within twelve months and typically charge a higher interest rate; assets loans are typically for a period of years that correlates to the expected life of the asset and typically charge a lower interest rate.
• A lender will use the terms presented in this unit. Be conversant with these terms when approaching any lending agency. If you bring in a cash flow projection that demonstrates you do not understand the difference between “operating expenses” and “loan payment,” you are unlikely to get a loan.
• A lender wants to see that income from operations will cover your basic living expenses and your monthly debt service. If you cannot demonstrate this, you will need to demonstrate how you will self-finance the operation (i.e., show that you have income from an outside job that you will contribute to the business).

Watch the following video, which will walk you through several key concepts, terms, and steps of the cash flow analysis process.

Introduction to Cash Flow Planning

In the application section on the next page, you’ll have the chance to practice using the cash flow template and will access a step-by-step guide that will help you through the process. 

For now,  it’s safe to say that we have  covered a lot of ground in this course so far! We started by considering holistic tools to describe the performance of an agroecological farm from an environmental, economic, and social perspective. Then, we began to describe our business idea using the Business Model Canvas. From there, we learned about a more rigorous and highly relevant tool, the business plan. Lastly, we took a closer look at the financial aspects of business planning and management. We hope that the resources shared will support you in your entrepreneurial journey!

As we wrap up this module, we would like to share some additional resources, which you can find in the “Deeper Exploration” section below.

DEEPER EXPLORATION

(Optional Content)

Additional financial information for farm businesses:

• Farm Pulse from the University of Wisconsin-Madison Extension:
  “Developing a Farm Financial Model“
• Farm Pulse from the University of Wisconsin-Madison Extension:
  Farm Financial Model Series on YouTube

An online business plan development tool:

• LivePlan Software (there’s a free trial available, which you can access
  by clicking the “Get Started Risk Free” links
• LivePlan Software: How It Works

Consider challenging yourself to sign up for the free trial and complete your business plan before the trial runs out!