Naomi and Reid are thinking about retirement. Sure, they’re still young, in their early 30’s, but they know that if they don’t start socking away some money now, they will never save enough to support themselves in their golden years. Not only that, they want to pay for the kids’ college; it’s what their parents did for them, and they want to be able to do that for their kids too. As farmer/entrepreneurs, this savings will come from the profits in their business.
They launched First Light Farm ten years ago. Initially they just grew and sold vegetables, but they slowly expanded the operations to include chickens for meat and eggs, flowers, and pigs; they planted an orchard so they could sell fruit. They built a farmstand, and grew their CSA membership. By the end of their third year in business, they generated enough profit to support themselves and their young family.
Now, Naomi and Reid need a plan for growth. Organic growth has gotten them this far, but to grow their business bigger, they need to be more strategic. They called me wanting to gain a better understanding of their business and how to grow their business strategically.
We set out in a four step process.
Step 1 – Understand current operations
Before we could even think about how to grow, we reviewed the current state of the business. What products are most profitable? What sales channels are most productive? Is there a gap in the business that could generate more profit?
Naomi and Reid dug deep into their numbers. They evaluated the profitability of their different products – flowers, broiler chickens, eggs and vegetables. They looked at how much revenue they earned from their CSA vs. farmstand; wholesale vs. retail.
After some analysis, they could see that their farmstand, despite earning significant revenue, wasn’t generating much profit, and certainly not enough to support the overhead. Their vegetables were most profitable, and they were actually losing money on the pigs. The flowers earned their keep, but they weren’t huge money makers.
Step 2 – Evaluate Opportunities for Growth
As they thought about growth, they recognized that isn’t just about increasing top-line revenue, it is about bottom-line profits. And growth can come in two ways: growing the core business or expanding into a new enterprise.
Expanding the core business
For Naomi and Reid, the farm-store held promise as a growth opportunity. After talking with a retail consultant, they learned they undercharged for their resale items (meat they purchased and sold from a local farmer, jams and jellies, and so on) and they could increase their prices by 20% for a standard and competitive mark-up. With minimal effort, this would increase profits by $6,000. They also noticed that over the past few years, revenue from the farmstand steadily increased – maybe there’s an opportunity to grow there.
The vegetables were most profitable, so it seemed that portion of their business was ripe for growth. Just this past year, they grew the egg operation sufficiently that that too was profitable.
Last year, they spent $14,000 on the pigs – from paying for the bedding, feed, processing and so on, and earned just less than that from the sale of the meat. While they saw an opportunity to increase their pork sales, they didn’t want to increase production unless they could figure out how to reduce the costs of raising and processing pigs
Expand into new enterprises
A new enterprise comes with more unknowns – you may have a sense of the potential revenue and expenses, but no historical financials to base the assumptions. Expanding into a new enterprise comes with more risk but also the potential for greater reward.
With the farmstand growing, Naomi and Reid considered creating value added products such as salsas, sauces and jams. With the farm-stand, they had a ready sales channel. And with the efficiencies in the vegetable production, they had plenty of fruits and vegetables.
Run the Numbers
With all the back-work, Naomi and Reid had a solid understanding of their historical numbers. They could begin plotting out what expanding their operations would mean to their cash flow and profitability. What investments would be made, what expenses would increase, and how much additional profit could they expect.
They calculated “back-of-the-envelope” numbers, and figured that if they could grow an additional $50,000 worth of produce annually, they could add $25,000 to their profits.
Step 3: Create a Plan
An increase of $50,000 in production doesn’t just magically happen. Seeds and supplies need to be ordered, staff needs to be scheduled, recipes need to be developed and product needs to be processed.
Naomi and Reid decided that in their first year, they would target an increase in production of $25,000, the second year $50,000 with the 5 year goal of increasing production by $250,000. With the stepped up production, they figured on stepped up costs, and planned out their purchasing, infrastructure and staffing needs to achieve their goals.
Just like production doesn’t magically increase, neither do sales. Naomi and Reid sketched out their plan to sell the products – in their farm store, at farmers markets and eventually wholesale.
With the plan laid out, Naomi and Reid realized that a loan would help them make the initial jump in growth: to purchase new equipment or prepay for supplies. Of course, to apply for a loan, they needed to create financial projections. This would demonstrate to the banks they had a plan for increasing sales, moderating expenses, and generating enough profit to pay back the loan and start saving.
Step 4: Track and Measure
A business plan is written with starry eyes and lofty goals. You may know for certain some details, but not all. It’s not until you’re in the thick of your growth plan that you really know how things will evolve. You may incur unexpected costs, or gain efficiencies faster than expected. You may realize that one sales channel is not available after all, but another is. Seasonal demands may shift.
With all the vagaries of the business plan, it’s important to look back to make sure you’re on track. You wrote the plan with end in mind, but if the path changes, then you need to adapt. By reviewing your plan often and comparing it to the actual business you can make adjustments to ensure you reach your goals.
The best way to track and measure your progress, is to have a good bookkeeping system in place. With solid records, you can review your progress – revenues and expenses – and compare them to the projections in the business plan. If you notice that sales are ramping up more slowly than expected then you review your marketing strategies to better sell, cut back on expenses to ensure that your cash flow doesn’t spiral out of control and review your product quality to ensure that your customers are buying the product you intend. With regular review of your progress, you can make micro-adjustments to ensure you stay on track.
Of course – if your actual profitability exceeds expectations…. Good for you! I send you my heartiest congratulations.
Need helping articulating your growth plan? Give us a call or check out The Farmer’s Office.