Although some of life’s greatest travel adventures occur when a certain level of spontaneity is involved, unplanned activities can also lead to disappointment and disaster.
As an old saying goes, “without some sense of direction, you can wind up anywhere.” The same point can be made concerning operating a business. Many business owners are so caught up in the day-to-day operational activities that they fail to consider their destination or how they are going to get there. A strategic business plan can serve as a road map to help business owners achieve their goals and reach their destinations.
As many dairy businesses owners face life-changing decisions or search for answers as they struggle to recover from the tough economic conditions of 2009, the need for sound strategic planning is a reality they should not avoid. Others may be looking to expand their operations in hopes of capitalizing on the next cycle of high prices. In most instances this bold move requires a considerable investment in facilities. No dairy producer would build a multi-million- dollar facility without a detailed set of blueprints. Yet many are running the resulting million-dollar businesses without a strategic plan
While strategic planning is always important, it is more critical going forward today, than perhaps at any point in recent history. A strategic business plan is your “blueprint” for building a successful business. It will help to center the focus of all involved in the business as you move forward on the path to a successful future, no matter what the future might be.
When to plan
Producers who are undergoing changes in their operation, or who are facing challenging times, should take the time to develop a strategic business plan. Some examples of when a plan is recommended include the following:
- exiting or transferring a business
- restructuring the financial position of a business
- expansion or growth of a business
- addition of a family member or partner
- shifting of enterprises
- high employee turnover
One should develop a plan anytime the future of the business is in question or the owners, or their advisers, feel changes are needed. Even if a business is currently running smoothly it may be wise to take the time to go through the process. Owners of such businesses often challenge me on this point. “Why is this necessary, when I am already making money?” or “I am already paying too much in taxes!” are two responses I have received on more than one occasion. My reply is always the same. Developing a strategic plan requires the owner to examine the past history and current performance of the operation. In doing so, the business owner may find some aspects of their operation that, if changed, can lead to increased profits, better cash flow or other benefits, such as improved employee performance or more free time to spend with friends or family.
This process also requires the business owner to look toward the future. I have worked with many businesses over the years that were severely distressed. The lender required the owners to develop a business plan before they would lend them additional money. Cropping season was soon approaching and there was no money to purchase inputs. To make matters worse, the dairy enterprise was losing money and couldn’t support additional loan payments. Surely the owners of these businesses had an indication that there was going to be trouble on the horizon. Yet they waited until a crisis developed before they took action.
Had the owners gone through the strategic planning process they would have been forced to look at the future. They could have seen future problems and developed a plan to deal with the situation before it became reality. Even if a business is running smoothly, there may be problems developing that will have adverse effects in the future. A strategic business plan can help prevent a situation from turning critical and greatly improves the chances that any business will be successful.
Components of a business plan
Exactly what should be included in a business plan? Although there is no one correct method for putting a plan together, there are some key components that I feel should be included. They are the following:
- cover sheet, table of contents and executive summary
The executive summary should be a brief one-page (two at max) summary of the key points of the plan.
- vision and mission statements
Two key items that serve as the foundation of a strategic business plan are the vision and mission statements. The vision statement describes what the business owners desire to create or achieve, while the mission statement helps to center the focus of the business owners by identifying what the business does and why they do it. Both are built on the values and principles of the business owners and serve as guidance systems for making strategic decisions.
- situation description
This can be a narrative or bullet list that provides some background information on the business. This section may include a brief history of the business, the current situation concerning ownership, information on resources (i.e. land base, facilities and labor), identification of profit and cost centers, management systems in place, herd size and production levels, and the situation or challenges facing the business. It should also include an organizational chart of the business.
- trend analysis
Analysis of three to five years of historical financial and production data, including balance sheets, income statements, cash flow analysis, analysis of key expenses, cost of production data and key financial ratios. The analysis should focus on the profitability, liquidity and debt repayment, solvency, and the capital and operations efficiencies of the business.
- SWOT analysis
An analysis of the strengths, weaknesses, opportunities and threats of the business. Strengths and weaknesses are internal characteristics, while opportunities and threats are factors outside the control of the business that could affect it. Some of the SWOT analysis can be based on a trend analysis, but also include non-financial and production items.
- goals and objectives
These are built on the foundation of the vision and mission statements and should be based on outcomes of the SWOT analysis. Objectives are broad-based, directional and long- term. Goals are SMART; specific, measurable, attainable, rewarding and timely. Goals and objectives should be addressed in terms of short term (one year), intermediate term (three to five years); and long term (10 years). This encourages the business owner to take a long-term view of the operation and forces him/her to think about where they want the business to be in ten years (vision statement).
This section includes the strategies and tactics the business will employ to accomplish the goals and objectives that have been established. Strategies are long-term and broad-based, with little detail. Tactics are very detailed and cover a short period of time. Tactics represent the day-to-day tasks that will be done to achieve goals.
The other part includes the detailed financial projections of how business will perform as the plan is implemented. This section should include capital requirements, pro-forma income and expense statements, statement of cash flows, balance sheets and other information as necessary to project where the business will be within the time frame addressed (usually three to five years).
It is critical to document the assumptions and justifications on which it was based. Assumptions are a critical part of financial projections and should be outlined in the plan. Justification of any shifts in performance levels or changes from historical trends must be included so readers of the plan understand how you plan to accomplish your goals and achieve your objectives.
Business planning can be a time-consuming process, so business owners should consider outsourcing some of the process. Using consultants to help walk you through the process and to develop some aspects of a business plan can help expedite the process. Many are also equipped with tools that organize the information into a very professional presentation. But remember, this is your plan, so be involved and involve the rest of the family and key individuals of the business.
This is an ideal time to reflect and look ahead. The strategic planning process will enable you to do both and come away with a better sense of where you and your business are heading. By taking the time to develop a strategic plan in a time when many feel that everything is out of control, dairy producers can take back much of that control and ensure that their business will survive and thrive well into the future. PD
—Excerpts from Penn State Dairy Digest, October 2009
Bradley J. Hilty is a senior extension associate withPenn State Dairy Alliance.