I hope you all had a great holiday and more importantly, I hope you survived the arctic blast. I am sure we will have more cold before winter is finished but let’s hope the new year continues with mild weather. As the new year approaches have you got your plans for the coming year set?
OSU Extension encourages farm families to adopt a whole farm planning approach as they develop strategies for the future success of their business. The whole farm approach allows families to examine the internal structure of their business and then develop business, retirement, transition, estate, and investment plans that work in harmony.
At the center of most farms and agricultural businesses is the family unit. It is valuable for the business to begin the planning process by reflecting on family and farm history. Valuable lessons can be learned by all the generations involved by examining past successes and disappointments. The underlying values and goals of the family unit and each individual should also be determined. An analysis of the current state of the farm should also be conducted to determine the physical, fiscal and personnel status of the business. The farm’s profitability, business structure, operating procedures and employee management should also be examined. It is also helpful for the management team to identify the external influences that could impact the business in the future.
Once a family has completed its internal analysis, family members can continue the planning process by developing business, retirement, transition, estate, and investment plans. Let’s look at each planning area. Like spokes in a wheel, all will need to work in harmony to ensure the long-term viability of the business. Each area can positively or negatively affect the performance of the others. As plans are developed for each of the five areas, it is essential that the management team examine the effects that each has or could potentially have on the other plans.
Business Plan– A business must be profitable in the long run-in order to exist. On most farms, the major planning that occurs is for the farm’s production practices. An example of this is deciding what variety of corn to plant or deciding what sires to use for breeding cows. However, planning for the success of the farm business should include much more.
A comprehensive business plan should be developed. This plan not only helps the family develop a plan of action for production and operation practices, but also helps develop plans for the financial, marketing, personnel, and risk-management sectors of the business. One recommended method of evaluating the farm business is to conduct a SWOT analysis. This analysis examines the Strengths, Weaknesses, Opportunities and Threats in each of these areas. In short, the agricultural business plan presents a picture of the agricultural business or farm, where the business is going, and how it will get there.
Retirement Plan– No one expects to work forever. A strategy to help each business member meet his or her expected retirement needs should be developed. The two main retirement questions that should be addressed are how much money does each family member need for retirement and what will the farm’s obligation be to retirees? A variety of factors such as age at retirement, retirement housing and other retirement accounts held by the family will affect retirement needs. It is essential that retirement plans are established early for all members of the business. It is also important that the profitability of the farm be such that a family member can retire and not adversely affect the financial position of the business.
Transition Plan– The goal of transition planning is to ensure that the business has the resources to continue for many generations. Transition planning helps the family analyze its current situation, examine the future, and then develop a plan to transfer the business to the next generation. This includes planning not only for the transfer of assets but also managerial control. Members of the primary generation should invest time in transferring their knowledge to the next generation.
Estate Plan– Farm estate planning is determining how the farm assets, such as land, buildings, livestock, crops, investments, machinery, feed, savings, life insurance, personal possessions, and debts owed to or by the farm, will be distributed upon the death of the principal operator(s). The estate plan, in concert with the transition plan, helps to address how the off-farm heirs can be fairly treated without jeopardizing the future of the farming heir.
Investment Plan– The primary investments made by farm families are usually in land, machinery, and livestock. Farm operations may, however, wish to invest in such off-farm investments as stocks, bonds, mutual funds, real estate, life insurance, retirement homes, precious metals, or disability insurance. These investments allow farm families to save for future education or retirement needs and allow for investment diversification. Factors that farmers will need to consider during investment planning include the rate of return, personal risk tolerance levels, tax considerations and the time horizon available for investing.
Check out the Farm Office Website at http://farmoffice.osu.edu/ for additional farm management resources.
Tony Nye is the state coordinator for the Ohio State University Extension Small Farm Program and has been an OSU Extension Educator for agriculture and natural resources for over 30 years, currently serving Clinton County and the Miami Valley EERA.