When Colin Penner enrolled as a student in the University of Manitoba’s agricultural diploma program 10 years ago, he had to prepare a business plan for his farm. Today, he is back at the U of M as an instructor, teaching other students how to complete today’s planning assignments, which are miles ahead.
Preparing a farm business plan is part of the capstone courses in management planning in today’s ag schools. At the end of their U of M diploma course, for instance, students defend their plan to a panel of farmers, agronomists, bankers, lawyers, scientists and teachers.
“The objective is for them to understand the farm,” says Penner. “A lot of students that come from the farm know how to drive the tractor and do the labour side of things well, but lack knowledge in the management and financial areas. We want to bring them up to speed about how to be a good manager and understand how the farm’s finances work.”
Ag students in the diploma program at Olds College in Alberta also have to prepare a business plan, but they aren’t allowed to base it on their home farm. Instead, students have a choice of farm operation such as a grain or mixed farm, cow/calf operation or value-added or quota-based farm, but they must begin from scratch.
“The students choose what type of farm they want to start and then we give them the land base that they’re going to use,” says Mark Fournier, an instructor at Olds College. “They can’t take over their own operation because they know that one already, so they have to research the area, land prices, the equipment that they’re going to need and the loans and programs that are available to get started.”
“We wanted to make sure that there are no shortcuts for any of them,” says Fournier. “They actually have to research everything from scratch.”
Fournier says students not only gain the knowledge to research a brand new farm operation, they also understand the costs and amount of funding required, and the risks involved in starting a farm from scratch. The completed business plan also provides direction. “The value of a business plan is that everybody knows what’s happening and what the key priorities are, so when they’re making decisions, either as a farm family or as individuals, they know what those decisions should lead towards,” says Fournier.
There are many vital components to any business plan and Penner’s students focus first on defining the goals and objectives of the farm. “The first-semester students have to work on the overall vision and a mission statement,” says Penner. “We ask them where the farm is going and what do they need to do to get there. What are their two-, five- and 10-year goals? Maybe for some the short-term goal is to get a job or graduate from university. The five-year goal may to establish themselves in the ag industry, and take over the farm 10 years from now. Because things change so much, they need to do crop budgets and plan for the future every year, but if they have an over-arching vision of where they want to go, that helps to steer them into making informed decisions in the future.”
Understanding the finances
Finances are another big focus in preparing budgets for enterprises that become more diversified as students look at different ways to add value to farm operations. “We’re seeing the traditional enterprises like wheat, canola, soybeans, oats, corn and cattle, but we are also beginning to see some unique budgets coming forward,” says Penner. “I recently marked a budget on a maple farming enterprise as part of the farm. The objective is to figure out if something will fit on the farm. Will it be profitable?”
Fournier also focuses heavily on financial planning, and makes sure his students understand the differences between the types of plans, such as funding proposals for operating versus enterprise plans for new initiatives such as land purchases, new farming methods or technologies, or different crops or livestock.
“There are also plans that are designed to help struggling farms, so if they are at a point where they’re not overly profitable and it’s going to be a bit of a crisis, then they’ll need to work their way out of it,” says Fournier. “At that point they’re not looking from scratch, they’re looking from a point of usually very high loans and they need to plan for how they’re going to cope with that.”
Cash flows play a big part in these financial pictures and Fournier encourages students to do a 36-month rolling cash flow so every month they are looking at least two years out. “When we are doing our business plan in class I have them do a 36-month cash flow statement, and at all points, they have to have money in the bank, including a line of credit, just so they can eat,” he says.
What’s interesting is that often, halfway through the semester, students realize that out of their team of three, only one person can work on the farm full time and the other two have to go get full-time jobs just to make a go of it.
“That’s quite an eye-opener for them,” says Fournier, who doesn’t award any marks for profit in his course. “Grades are awarded on the best researched and most realistic plan, not the most profitable plan. If their final conclusion says that here’s the entire plan and as we have it thought out, it’s not going to be a profitable farm, and we cannot advise starting it, there’s full marks for that because that’s why we do business plans.
“If it’s not feasible on paper, if they can’t get it to work in black and white, then why would they risk millions of dollars and years of their life to run something into the ground. If the plan shows it’s going to be successful, fair enough, but what do you need to do that’s different if it’s not?”
In most cases, getting a farm enterprise off the ground involves a high demand for cash. Fournier recalls a former graduate whom he ran into who figured out he’d be better off working at Tim Horton’s than getting into a quota system as he’d hoped to do.
“He did a full business plan and realized he would need about $250,000 to put down in equity before he could actually make a living wage off of the farm,” says Fournier. “At that point in time, he was going up north to try and make his $250,000.”
The bigger picture
Looking at the bigger picture and how everything on the farm ties together is something that Penner’s students often struggle with. “They come to realize that it’s not just driving tractors, or hauling grain, or buying fertilizer. It’s the whole picture and how everything ties together,” says Penner.
That often extends to the industry as well. Fournier says he’s surprised at how little students pay attention to the larger agricultural industry and how they fit into it. “It amazes me that they know what they and their neighbours have done in the past, but when I ask them what has happened the last five years in Alberta or Western Canada or across Canada as a whole, they often have trouble with that,” says Fournier. “So it’s breaking them out of that mindset to not look just at their particular farm, but to look at the overall industry that’s probably the biggest hurdle I’ve come across. To see that, yes, their farm is important but it’s part of a bigger system and we have these micro/macro trends that will have an impact on them.”
Part of the reason for planning is to try and anticipate the unexpected, which is why Penner includes a stress test as part of his students’ business plan project.
“We tell them to think of something that they don’t think is ever going to happen on the farm, and consider how the farm would handle this stress,” Penner says. “As an example, what if the neighbour decides to sell their farm and it’s the same size as theirs; can they afford to double in size? What happens if they have a crop insurance year? What happens if they have another year like we had this past year, where crop yields in some areas were through the roof? How does that affect the farm? It’s about looking at what they’re doing now, but planning for the future, and for a best-case scenario, and a worst-case scenario, and for things that come out of left field.”
Fournier’s program also tries to prepare students for some unexpected pitfalls, and he says one of the biggest fears he has is increasing interest rates. “Our students have never known a period of rising interest rates. They’ve always known incredible low interest rates so for them this is the norm,” he says. “In all probability they will, over their lifetime, see interest rates at least double and if they don’t factor that into their long-term loan payment decisions, we could definitely see some struggling farms in the future.”
Help with transition
A big component of the business plan project at both U of M and Olds College is transition planning, and that begins with equipping the students so they can start to have a conversation with their parents and begin to understand the family farm operation better.
This is often the hardest part of the transition process, and can be a stumbling block to creating an effective business plan.
“One of my assignments is to go home and ask your parents if they have a will,” says Penner.
“The succession plan starts there. Being able to discuss finances with parents is difficult because the parents have worked hard for years to build the operation and sharing it with an 18-year-old or somebody that wants to move from the tractor into management, that’s a tricky conversation. Our goal is to start that conversation.”
It’s not unusual for some students to come back frustrated at first because their parents just don’t want to have that conversation, but as they progress through the business planning process and demonstrate their ability to understand complex management issues, and share that knowledge with their parents, in many cases the attitudes and relationships change.
“Often, what we find is that as the conversation goes on between the students and the parents, the parents sit back and say this kid is showing initiative and really does understand what’s going on,” says Penner. “The students are smart. They start to figure things out on their own and it really opens that dialogue and is a positive experience.”
At Olds College, succession planning is part of the finance component of their program because a big part of the process is figuring out how the next generation will finance the farm transition.
“The incoming generation needs to know all the tax rules and regulations and what vehicle they’re going to use to pay the last generation out, and whether it’s a family trust, or a corporate farm and who’s going to own the land,” says Fournier.
“If there are multiple kids, what role are they going to take, who’s going to be the boss, who’s going to live in the big house, and what roles are off-farm siblings going to play? These are things that any long-term farm plan should have. So we are trying to give our students some high-level tools to help them open up discussions over the next few years with their parents about farm transition.”
A lifelong value
Penner has many students come back and tell him that these exercises have helped them make decisions and weather challenges on their own farm years later. “The students get a good grasp of their operation and when there’s an opportunity to expand the farm or to step in and be a manager, I’ve had a number of students say, this has really prepared me, this has really been a useful exercise,” he says. “It’s neat to have students emailing me a couple of years after the fact and say, ‘Can I get your spreadsheet because I want to do something at home on the farm and I remember using this and it worked well’.”
Fournier says the biggest feedback he gets from students about what the program has taught them is how hard it is to make a profit and how expensive farming really is. That causes them to get realistic about farming in a big hurry.
“In the first year they are often talking about new equipment, but when they’re doing the business plan, most of the equipment is coming from Kijiji, it’s equipment that’s five or six years old because they learn that getting this older, less costly equipment is the only way they can get enough money to eat,” says Fournier.
It takes a lot of time and effort to write a comprehensive business plan, which is why they shouldn’t sit on the top shelf and gather dust. “When people are getting started, they should do a larger plan and update it on an annual basis,” says Fournier. “Needs are always going to change and they need to know what’s the cash position, the loans position, what needs to change, is there new equipment that needs to come in, how is that going to be dealt with, so they can address all these needs on a proactive ongoing basis.”
Because the bigger picture is so important, it’s vital that students get out in the industry and make connections, build relationships and never stop learning.
“I tell my students to go to as many workshops and seminars as they can, learn what the changes are, look how people are adapting to changes. Then make those contacts and start incorporating those into their yearly operational plans,” says Fournier. “Forming relationships in order to navigate the challenges of the future is essential because the industry is changing so fast. You don’t necessarily have to be leading the industry but you need to be talking with those who are leading the industry to see what’s working and what’s not.
“I advise my students to be involved in different things. It doesn’t need to be all ag-related but if they are on a Co-op board, or the curling rink board, or part of an organization, they’re going to be in leadership with other tremendous leaders and will learn from them and be encouraged by them to keep learning and to keep working at it.”