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Business Planning --

Developing and Testing Transitional Plans*

At this point in the planning process, the owners have an inventory of their business, they have specified business and personal goals, they have considered their interests and skills, and have a plan of what they want their business to be. This step is an opportunity for the owners to consider how they will transform their current business into their desired business. This will involve identifying

• what inputs are needed for the business in the long-run,
• which of those assets the business currently has,
• what assets the business needs to acquire,
• which assets will no longer be necessary, and
• what aspects of the business need to be changed.

Also as part of this step, the owners will establish a time frame for accomplishing the changes, and develop an understanding of the necessary financial resources.

The following examples suggest the type of transitional plans some farmers are developing and implementing to reach their desired farms:

Example . A married couple desire a farm business where they provide nearly all the labor, and no longer relies on an employee or exchanging labor with relatives. They also hope to have a farm that meets conservation requirements. Therefore, the farm couple is converting its small grain operation to no-till. The steps involve acquiring a no-till drill this year, a tractor in year 2, a sprayer in year 2 or 3, a combine in 3 to 5 years, and a truck in about 5 years. They also expect to rely on less hired labor within 1 or 2 years (when the youngest child enters school), and to no longer exchange labor after the combine is purchased.

Example . A farmer intends to still be producing grain 3 to 5 years from now, but the current combine, given its age and the acreage expected to be farmed, will likely be worn out by then. The farmer hopes to be prepared to harvest the crop in a timely manner without relying on custom harvesters. So, the farmer plans to purchase a new combine 3 to 5 years from now. The farmer made assumptions about: the acreage expected to be harvested, the amount of wear and tear the machine will endure over the next several years, the relative cost of new and used combines, and the amount of time the farmer wants to spend harvesting

Other examples of alternatives that will likely take time to develop and thus require a transitional plan:

• add a grain handling system by construct a component each year but according to an overall plan;
• change the scale of equipment by first replacing the tractor, then the field equipment;
• move out of farming by selling the livestock first, followed by discontinuing to lease some land, and then lease out owned land and sell the equipment;
• move into farming by leasing some land this spring and exchanging labor for use of a relative's equipment, intend to buy or lease another tract within 2 years, and begin to purchase equipment at that time.

For most farmers, transitional planning will involve developing successive short-run plans for several years. Alternatively, farmers may prepare short-run plans only for the years when major changes are expected in their operation.

Transitional planning is important because farmers operate with a large proportion of fixed assets that are difficult to acquire and dispose of. Moreover, many assets are linked together. For example, row crop farmers usually have planters, cultivators and harvesting equipment of similar width, or least a multiple thereof. In such a situation, a question the farmer may ask is whether to replace each asset individually over several years or replace the entire set at once. A partial budget and time value of money analyses (as described in the appendix to step 6) can assist with this decision.

Similar to the long-run planning step, the process of short-run planning begins with selecting a set enterprises on the basis of net economic income. Once the set of short-run enterprises is defined, the business owners can develop functional plans for production, marketing, labor, capital investments, and estate management.

A complete set of projected financial statements including cashflow, net income and balance sheet statements should be developed. These plans can then be shared with interested parties (such as lenders, landowners, or investors) to inform them of the plan. That way, they can be prepared for fluctuations in cashflow that may accompany the transition. Moreover, major investment requests will not be a surprise.

An important part of this step is to outline, in sufficient detail, how, when, where, and why changes in the current farm business (or baseline farm) will occur. The description could answer some of the following questions:

• what needs to be changed,
• why does that need to be changed,
• when does the change need to occur,
• what resources are needed to accomplish the change,

• what risks are associated with making the change (analysis of risk is described in step 8)
• will the change generate the necessary profit/return,
• how will the change impact the farm's cash flow,
• how will the change impact the match between resource availability and needs,
• will the change fulfill the owners' goals for making the change [compare the results of the change to the description of the problem/shortcoming of the current business (beginning of step 6)].

Some of these questions should be familiar because they are similar to the criteria suggested in the preceding two steps.

If the answers to these questions indicate that the transitional plan could be implemented, the owners should be ready to move their planning process to step 8 (constraints, contingency plans, and risk management). If the transitional plan is not yet ready to be implemented, the owners may want to "take another spin around the inner circle" and repeat some or all of steps 6 and 7.

Conclusion

The emphasis on this step is identifying the intermediate steps to change the current farm (as described in step 1) into the targeted alternative farm (as described in step 6). This step relies on methodologies described in previous steps (primarily steps 5 and 6). The emphasis in transitional plan is on envisioning and testing the sequence of changes necessary to implement the alternative farm.

* Prepared by David M. Saxowsky, Dr. Cole R. Gustafson, Dr. Laurence M. Crane, and Joe C. Samson, agricultural economists, Department of Agricultural Economics, North Dakota State University. August 1995.

Last Updated May 30, 2007

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

E-Mail:sswandal@ndsuext.nodak.edu
Published by Agricusiness and Applied Economics
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