advanced business planning jeffrey hyde the pennsylvania state university penn state is committed to...
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Advanced Business Planning
Jeffrey Hyde
The Pennsylvania State University
Penn State is committed to affirmative action and the diversity of its workforce
Business Planning Skills & Tools
Information GatheringRecord keepingResearch
Information ProcessingEnterprise & cash flow budgetsFinancial statements and ratios
Without Records…Planning Process
Take Action
Get Results
Measure & Record ResultsCompare Actual vs. Plan
Explain Deviation
Integrate Changes
MissionSituation
Objectives & GoalsStrategies & Tactics
Record Keeping
Production recordsProduction dataSales data (revenues)Cost data (expenses)
Record Keeping
Investment recordsPurchase and sale of long-lived assetsDepreciation
Records should include1. Purchase date & price2. Annual depreciation3. Book & market value4. Sale date & price5. Gain or loss on sale
Record Keeping
Financing recordsMoney borrowed (new investments, working
capital, accounts payable) Interest paidPrincipal paid
Necessary Research
Industry analysis
Market analysis
Competitive analysis
SWOT analysis
Who are the industry players?
•Input suppliers•Growers•Processors•Wholesalers•Retailers
What are the industry trends?
Necessary Research
Industry analysis
Market analysis
Competitive analysis
SWOT analysis
Who and where are your customers?
What do they need?
What is their purchasing behavior?
How can you reach them?
Necessary Research
Industry analysis
Market analysis
Competitive analysis
SWOT analysis
Who are your competitors?
What are they like?
What products do they have?
How have they grown?
Necessary Research
Industry analysis
Market analysis
Competitive analysis
SWOT analysis
Strengths and Weaknesses are internal to the business
Opportunities and Threats are external to the business
SWOT should be easy after performing the other analyses
Research Methods
Hire a consultant
1. Review your records and provide summary reports2. Develop a market analysis3. Develop a competitive analysis4. Develop an industry analysis
Consultants are expensive, but may be worth it; especially if they know your industry
Research Methods
Find publicly available data
1. US Census2. Consumption data3. Websites (competitors, associations, suppliers,
customers
Searching for specific data may become frustrating, particularly if you’re not an Internet whiz. However, doing this once will prepare you to easily update your plan over time.
Research Methods
Buy data and reports
There may be third parties who have collected market or industry data. The data may be for sale in raw form or as a report. These don’t tend to be available for small, specific industries like local cheese-making.
Research Methods
Publications/Media
1. Television2. Radio3. Newspapers (Wall Street Journal)4. Trade magazines5. Extension publications and newsletters
These may help you learn about the economic environment, your competitors, the industry, and your markets.
Research Methods
Personal interaction
1. Talk with friends, family, neighbors, …2. Visit your competitors and buy stuff; talk with owners3. Talk with customers4. Watch what people do or buy5. Talk with industry leaders6. Attend conferences and workshops
Enterprise Budgets
What is an enterprise?
Also called a “cost center” or “profit center,” an enterprise is a user-defined production and sales unit.
Enterprise Examples
1. Cheese2. Cheddar cheese3. Sharp cheddar cheese4. Milk production5. Crops6. Hay7. Corn silage
Enterprise Budgets
Three major sections to the budgetRevenuesVariable expenses (aka; direct expenses)Fixed expenses (aka; indirect expenses,
overhead)
Cash Flow Budgets
Budgets help you see if the enterprise is profitable
You need to know when cash flows occur.
For most ventures, you’ll have lots of cash out before you get any cash in.
Cash Flow Budgets
Develop a monthly cash flow budget similar in form to the enterprise budget
For each month, indicate which categories have cash in or cash out.
Where cash out exceeds cash in, must have a plan to manage shortfall.
Income Statement & Balance SheetYou will need three years of historical
financial statements and three years of pro forma statements
Work closely with an accountant to develop these.
Financial Ratios
Ratios are used to summarize your financial situation
Let’s look at three…
1. Return on assets
2. Current ratio
3. Debt-to-asset ratio
Return on Assets
Rate of return on the farm’s average total investment on assets
An ROA of 5% means that every dollar invested in business assets generated a return of five cents.
ROA = (net income + interest expense – value of operator labor and management) / average total farm assets
•Compare ROA to your profit goals.
•Compare to returns elsewhere (stock market, bank account…)
Current Ratio
Measures ability to pay current debt with current assets - Liquidity
A CR greater than one means the value of current assets is greater than the value of current debt -> You are “liquid”
Current Ratio = (value of current assets) / (value of current liabilities)
•Current assets are those that can be converted to cash or used up within one year•Current liabilities are payable within one year•Shoot for a number significantly greater than one
Debt-to-Asset Ratio
Measures the percentage of total assets owned by creditors
A DA ratio of 0.4 means that creditors own 40% of the assets of your business.
DA Ratio = (value of total debt) / (value of total assets)
•Many lenders like to see a strong equity commitment•Shoot for DA < 0.5
Business Planning Skills & Tools
Information GatheringRecord keepingResearch
Information ProcessingEnterprise & cash flow budgetsFinancial statements and ratios
Business Planning Skills & Tools
Well-honed record keeping, research, and analytical skills make the business planning process less cumbersome.
Resources
Accountant Attorney Extension educator Small Business Development Center Lender Business consultants FAMILY!
Conclusion
Planning is fundamental to success Planning is continual Lenders and granting agencies
increasingly requiring written plans Access help where you can
Advanced Business Planning
Jeffrey Hyde
The Pennsylvania State University
Penn State is committed to affirmative action and the diversity of its workforce