'Cash flow is king': Tips on putting together a bulletproof farm business plan
Walking into a lender's office with hopes of walking out with financing for a new or growing farm operation may rank up there with public speaking and untimely death on the list of biggest fears for many young or beginning farmers.
One way to cull such anxieties is by arming yourself with a solid, comprehensive business plan. Officials with Rabo AgriFinance shared tips on how to develop a business plan, what to include and how to make it attractive to lenders, with the young farmers in attendance at this year's New Century Farmer (NCF) conference held at the headquarters of Pioneer Hi-Bred International, Inc., this week in Johnston, Iowa. This year's NCF event is made possible by sponsorships from Pioneer, Successful Farming magazine and Rabobank as a special project of the National FFA Foundation.
Every good business plan has four major components, according to Rabo AgriFinance senior vice president and marketing director Shawn Smeins:
- Description of business
- Marketing plan
- Financial analysis
- Management plan
The plan, which should show what you plan on doing to "generate financial success by developing and following a detained program with specific objectives," should ultimately answer a few questions, Smeins told NCF attendees Wednesday.
"Who are you and what makes you who you are? What are you trying to accomplish?" Smeins asked the NCF attendees, mainly comprising college juniors, all who intend on farming as a career after graduation. "Why is this a great idea? Why has no one else thought about it, and if they have, why is it a good idea for you? How can you accomplish this?"
Among the elements important to any business plan, especially in agriculture, the ability to demonstrate cash flow potential in a financial analysis lies on top of the list, Smeins said.
"Anymore these days, business is about cash flow. When approaching a lender, you must be able to show cash flow," he said. "Cash flow is king. Collateral and good management are key, but they're second and third to cash flow in importance to the lender."
In describing the business, Smeins said no detail should be spared, as the more detailed the plan is in describing the business, the more apt the lender is to have a good understanding of the applicant's plans and, in turn, provide a financing opportunity. With a marketing plan, the individual seeking financing should be clear in describing his or her competitive advantage.
"The marketing plan is where we talk about how we're going to do it and what your competitive advantage is. It might be how you approach your business differently to set yourself apart," Smeins said. "You might grow corn, but how will you do it to a competitive advantage?"
When presenting a business management plan to a lender, the applicant should illustrate the support infrastructure he or she will utilize in growing the business, as well as provide realistic growth plans and critical benchmarks along the way.