Growth lets farm businesses increase revenue and earnings, take advantage of economies of size, and better use the skills of current and future employees. But the Center for Commercial Agriculture at Purdue University encourages producers to ask these 10 questions first.
Before growing, think about the strategic direction: Is the operation interested in a commodity-based strategy or a differentiated product strategy? A commodity product strategy focuses on cost control and a differentiated product strategy focuses on value-added production or receiving an above-average price for the farm’s products.
2What are my options?
There are at least six growth alternatives available to farms: focusing or specializing in one activity, intensify or modernize current production, expanding, diversifying, replicating the business into multiple sites, and integrating.
3What influences growth?
Conduct an internal and external analysis of your farm business. An internal analysis identifies key resources, capabilities, and core competencies. Ask yourself whether your operation has unique resources that lead to a competitive advantage.
It’s also important to examine the external environment or scan the horizon. What’s the social environment and industry the farm faces? Think about key drivers facing the markets for the products you produce.
The following eight criteria can be used in making the choice: strategic fit, expected returns, risk, capital required, the cost and ease of entry and exit, value creation, managerial requirements, and portfolio fit.
5What skills do I need?
Analyze the skills of current employees. How strong or weak are the workforce’s production management skills, procurement and selling skills, financial management skills, personnel management skills, strategic positioning skills, relationship management skills, leadership skills, and risk management skills?
6How do I finance growth?
Besides using debt and equity (retained earnings), growth can be financed through leasing assets or joint ventures. It is also important to examine working capital funding.
7What business model do I use?
There are numerous business models that can be used to implement a growth strategy: organic or internal growth, merger or acquisition, franchise, joint venture or strategic alliance, service provider, asset or service outsourcer, agricultural entrepreneur, or investor. Traditionally, most farms use the organic or internal growth model.
8How will expansion impact my operation?
Use pro forma statements or projections to gauge how each option will impact the farm’s balance sheet and income statement. Use at least three scenarios (worst case scenario, most likely scenario, best case scenario) when evaluating each growth option.
Particular focus should be given to how each growth option impacts the profit margin, the asset turnover ratio, and returns on investment and equity under each scenario.
Start-up challenges can include construction delays, cash flow shortages, depleted working capital, and short-term operational inefficiencies and management bottlenecks. Cash flow and working capital requirements can vary substantially between growth options.
10What is my sustainable growth rate?
The sustainable growth rate is the maximum rate of growth that a farm can sustain without having to increase financial leverage or look for outside financing. The sustainable growth rate can be computed using information on earnings, retained earnings or savings, and business withdrawals.
Sources: Farm Growth: Challenges and Opportunities, Michael Boehlje and Michael Langemeier, Center for Commercial Agriculture, Purdue University.
Next week: 9 options for expanding the farm business.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)
More Farming 101 columns:
- How to select quality replacement heifers
- Stay safe working with electricity on the farm
- How to create a job safety analysis
- Tips for a successful lambing season
- Do you have a vision for your farm?
- Cattle handling for beginners
- Should I buy a new or used tractor?
- How to inspect a used tractor before purchase
- How to buy the right tractor for your farm
- 5 tips for a better farm marketing plan
- How to seek help with retirement planning
- How to set goals for retirement
- A farmer’s guide to saving for retirement
- A farmer’s guide to planning for retirement
- 5 steps to get NRCS assistance
- How can conservation easements help you?
- How to fund conservation plans
- What is a conservation plan?
- How can NRCS help you?
- More airborne hazards on the farm
- 5 airborne hazards to beware of on the farm
- 5 things to know about Wagyu beef
- Pennsylvania utility vehicle laws
- Ohio utility vehicle laws
- Farm chemical safety checklist
- When should a farm become a business entity?
- Harvest prep: Check your yield monitors
- How to tag livestock properly
- 6 tips for decision making on a family farm
- 8 tips to prepare your farm for agritourism
- How to plan for farm emergencies
- 7 keys to success on the farm
- 7 tips for healthy fair animals
- 5 tips to ensure livestock health before the fair
- 6 tips to keep your livestock parasite free
- 6 tips for vaccinating your livestock
- 5 tips to prevent dairy cow foot problems
- 6 common foot problems found in dairy cows
- Recognize, prevent heat stress in dairy cattle
- How to monitor your dairy herd
- How to start your own dairy farm
- 5 tips for sun safety in the field
- Employing youth for the summer
- What to do if a hay fire occurs
- How to prevent hay fires
- How to extend the life of your fence
- 10 safety tips for installing electric fences
- How to chose the right fence for your farm
- How to create a fencing plan
- 7 steps for easy sprayer calibration
- Prepare for planting season, Part 2: Calibration
- Prepare for planting season, Part 1: The Basics
- 7 tips to improve security on your farm
- 5 tips to protect your farmland
- 3 measures to deal with severe farm debt
- How to buy time to catch up on farm debt
- 6 tips to manage income on the farm
- 5 tips to recognize and deal with farm stress
- How to prepare a livestock birthing kit
- 5 tips for marketing your farm
- How to develop farm mission, vision statements
- 5 tips for setting farm goals
- 2 types of livestock insurance policies
- 6 things you need to know about WFRP plans
- 3 basics of crop insurance
- How does liability insurance work on the farm?
- Why do I need farm insurance?
- How to understand and use Ohio’s CAUV
- How to utilize the Pa. Clean and Green Act
- 9 tips for filing farm taxes
- 8 reasons record keeping for taxes is essential
- 5 tips for post-harvest storage
- 7 tips for family meetings on the farm
- 4 tips for balancing your farm and family
- 4 tips for communicating on the family farm
- 4 tips for firing an employee
- 6 tips for keeping good farm help
- 4 tips for recruiting farm labor
- 5 general farm labor laws
- 4 tips for employing minors
- 4 tips for PTO safety
- 5 things young farmers should know about finances
- The farm balance sheet
- 5 items for your farm’s cash flow statement
- Personal and business records: Keep them separate
- What to include in your farm business plan
- How to approach a lender: Tips for getting a farm loan
- How to use microloans to get your farm started
- Saving for the future: 6 tips for young farmers
- How to create a farm safety kit
- 5 tips for child safety on the farm
- 4 tips for transporting livestock
- 5 ways to better understand tractor stability
- 6 farm equipment hacks