Business planning

1
Business planning budgeting
2
Definitions

• Planning
• process of deciding which objectives need to be
  achieved and the preparing of how to meet them
• Objectives
• anticipated end result of activity, the things
  you hope to achieve

3
Business Planning and Control

• To Plan is to arrange beforehand
• PROACTIVE
• Give time to something before it happens in order
  to have influence over events when they do happen
• REACTIVE
• Avoid crisis management and responding to things
  when they have gone wrong

4
The planning gap
Where we are now
Where we want to be
5
Main management activities

• Planning is one of the 4 main management
  activities

6
Planning

• Precedes all other management activities
• Focus attention on objectives through unity of
  purpose
• Removes uncertainty by providing a framework for
  contextualised activity
• Facilitates control by setting targets

7
The planning hierarchy
Mission Objectives Strategies Policies Procedures
and Rules Programmes Budgets
8
Definitions

• Mission
• the organisations basic functions
• Strategies
• course of action including resource use to
  achieve overall objective
• Policies
• general statements to guide thinking and actions

• Procedures
• customary methods of action
• Rules
• specific statements of what may or may not be
  done
• Programmes
• collection of activity carried out to achieve
  desired outcome
• Budgets
• statements of expected results expressed in
  financial terms

9
Planning is a continual process
Establish objectives
What do we want to achieve?
How successful have we been in implementing the
strategy ?
How can we achieve our objectives?
Review progress
Plan the strategy
How do we make the strategy operate with success?
Implement the strategy
Decide tactics (budget)
How best can the strategy be implemented?
10
Planning

• .Change is inevitable. In a progressive country
  change is constant.

DISRAELI
11
Types of plans
Strategic plans
Long term (produce milk from grass)
Short term (milk 3 times a day if below quota)
Tactical plans
Unit plans
Feed according to yield
Operational plans
Milking at 0600 and 1600 hrs
12
Planning horizons

• Time or duration of plan
• Should cover
• LONG TERM - significant commitment
• SHORT TERM
• Long and short term plans may conflict
• Attempt to reconcile

13
Strategic planning

• Managerial process of developing and maintaining
  a strategic fit between the organisations
  objectives and resources and changing market
  opportunities

14
Strategic planning

• Define the direction of other plans
• Long term
• Comprehensive
• Clear mission or purpose
• developed and controlled by management

15
The external environment
SOCIAL
PHYSICAL
COMPETITIVE
16
Physical environment

• Natural conditions
• location
• Climate
• Size of land holding

17
Social environment

• Political-legal
• Economic
• Social-cultural
• Technological

18
(No Transcript)
19
Political-legal environment

• Legal constraints
• Parliament
• European Union

• Employment law
• Health and Safety
• Marketing
• Financial law
• Environmental law

20
Political-legal environment

• Benefits can arise from political sources
• Various Agriculture Acts
• Treaty of Rome
• Common Agricultural Policy

• Areas receiving special assistance
• Objective 1
• Less Favoured Areas
• Subsidies
• Single Farm Payment

21
Economic environment

• Regional economic influences
• labour, disposable income, subsidies, roads
• National economic influences
• inflation, interest rates, exchange rates,
  taxation
• International economic influences
• economic growth rates, inflation, interest rates,
  protectionist measures and economic measures

22
Some economic information
Office of National Statistics - Economy
23
Social-cultural environment

• Demography
• growth, age distribution, concentration of
  population
• Cultural change
• ethnicity, religion, social class, membership of
  organisations
• Social change and social trends
• standard of living, attitude to business,
  workforce

24
Some demographics
25
Changing population
Concentrations of people born outside British
Isles
Map on right shows country as if areas with
roughly equal populations were the same size. So,
densely populated London takes up much more space
than sparsely populated Scottish Highlands
From http//news.bbc.co.uk/1/shared/spl/hi/uk/05/b
orn_abroad/html/overview.stm
26
Technological environment

• Type of products or services
• Ready meals
• Method of production
• Larger farms
• Market identification
• Information chain from supermarkets
• Mobilisation of employees
• Single market, gangmasters

27
Competitive environment

• Threat of new entrants
• limited
• Threat of substitute products
• red vs white meat
• organic
• vegetarian
• Bargaining power of customers
• Influence of supermarkets significant
• Bargaining power of suppliers
• Rivalry amongst current competitors in the
  industry

28
Uncertainty

• "Reports that say something hasn't happened are
  always interesting to me, because, as we know,
  there are known knowns, there are things we know
  we know. We also know there are known unknowns
  that is to say, we know there are some things we
  do not know. But there are also unknown unknowns
  - the ones we don't know we don't know."
• Donald Rumsfeld
• 2003

29
Uncertainty
30
Coping with uncertainty

• Identify major influences on business
• Place an empirical measurement on major
  influences on business convert it to a risk
• Genuine uncertainty cannot be measure in terms of
  probability

31
Whole business planning

• When will the need arise?
• Old system unacceptable
• Changing circumstances
• age, health, labour, profitability
• Change in subsidy rules
• Cross compliance, single farm payment
• New business / extra land

32
Assembling the facts

• Determine the objectives
• Assess the resources
• Make an appraisal of the present system

33
Objectives

• The anticipated end result should be-
• Specific
• Measurable
• Agreed
• Realistic
• Timetabled

34
Determine your objectives

• Agree the objectives
• Prioritise
• Define activities and tasks
• Agree standards of performance
• Allocate roles
• Set and timetable performance criteria

35
Types of objectives

• Financial
• Profitability
• Stability
• Adaptability
• Reduction of borrowing
• Avoid tax
• Short term
• Long term

• Non financial
• Quality of life
• Personal satisfaction

36
Assess the resources

• Land
• Labour
• Capital
• Management

37
Make an appraisal of the present system

• Assess both PHYSICAL and FINANCIAL performance
• Compare
• Current vs Past performance
• Current vs Budgeted performance
• Current vs Industry performance

38
Financial assessment

• Gross margins
• Profit
• Net Income (Net Farm Income)
• Balance sheet

39
Reductionalist theory

• Breakdown items into individual components
• Milk revenue to milk price per litre and litreage
  produced
• Trekking revenue to no horses, no treks per day
  and per trek
• Fertiliser expenditure to per tonne,
  application rate per ha and number of hectares
  covered.
• MAKE APPROPRIATE COMPARISONS

40
Dairy sales example
Calf price ( per hd)
Calf sales
No. calves sold
Cull price ( per hd)
Dairy sales
Cull sales
No. culls sold
Milk price (p per litre)
Milk receipts
Milk yield (litres)
41
Planning business structure

• List all possible enterprises
• Select the best combination of enterprises
• Prepare a complete detailed budget for the plan

42
Planning techniques

• Short list and budget method
• Gross margin planning
• Linear programming

43
Shortlist and budget method

• Set your objectives.
• Subjectively formulate alternative plans choosing
  the most attractive to include in a short list.
• (A plan which is a continuation of the present
  system should be chosen as one alternative for
  comparative purposes.)
• Prepare budgets for each of the chosen plans.
• Select the plan that best fulfils the objectives
  set at the start.

44
Shortlist and budget method

• No straightforward answer
• Two plans may seem attractive but no decision
  either way is apparent
• Construct a STRENGTH AND WEAKNESS TABLE
• Set pros and cons out on paper in order to make a
  judgement.
• Not complex, practical

45
Strengths and Weakness table
46
Gross Margin planning

• Expand the enterprise which contributes most
  towards your objectives to its most limiting
  constraint.
• Enterprise with the second largest contribution
  is then expanded to its most limiting constraint
  etc

47
Gross Margin planning

• Decide which key resource is the most limiting
  (land, labour, capital).
• List all feasible enterprises and calculate a GM
  per unit of limiting resource.
• GM / ha
• GM / 100 working capital
• GM / 100 man hours

48
Gross Margin planning

• Identify enterprise with largest GM per unit
  most limiting resource and introduce into plan
  to maximum that constraints allow e.g. dairy up
  to quota, or silage stocks, or cubicle
  availability, pigs up to housing available.
• Introduce enterprise with second largest GM per
  unit most limiting resource into plan, and so on.
  

49
Gross Margin planning

• Continue process until one of key resources used
  up.
• Introduce enterprises which do not utilize used
  up resource.

50
Gross Margin planning

• Limitations
• Deciding on most limiting key resource
• Fixed costs assumed to remain constant
• Simple and practical and logical
• More sophisticated techniques tend to be less
  practical.

51
Linear programming

• Wheat vs Barley
• Max 50 ha
• Contract 20ha barley (minimum)
• Contract 20ha wheat (maximum)

52
Detailed budget for the plan

• Quantify physical components
• Construct
• Gross Margins
• Trading Profit and Loss Budget
• Balance Sheets
• Cash Flow Budget
• Normally a 3 year span

53
The right way to quote information
54
The six steps of budgeting
List available resources and state objectives
Estimate enterprise size
Estimate physical inputs and outputs
Construct financial statements
Estimate prices calculate costs and returns
Estimate fixed costs
55
FINANCING IMPLEMENTATION

• Physically phase in the plan
• Prepare interim plans budgets
• Prepare cash-flows balance sheets.

56
Prepare interim plans budgets

• Monitor the plan
• Review where necessary

57
Physically phase in the budget

• Seasonality is a major factor
• Availability of livestock
• Seasonality of crop work
• Erection of buildings
• Availability of finance

58
Items under control

• Number of animals kept
• Area crops grown
• Feeding regime
• Fertiliser regime
• Services available
• Labour employed
• Investments in infrastructure (some not
  controllable)
• CONCENTRATE ON MAJOR ITEMS

59
Non controllable items

• Interest rate
• Market price
• Animal deaths
• Crop failure
• Weather
• SOME EXCEPTIONS DO APPLY

60
Reliability of data

• Previous performance is best
• Published information is a guide
• A guess can be inaccurate

61
Sources of information

• Farm Management Handbooks
• SAC. ABC, Nix
• Farm Business Survey
• Equine Business Guide
• Information from banks and other organisations
• Your own experience

62
9 point plan
Assembling the facts

• Determine the objectives
• Assess the resources
• Make an appraisal of the present system
• List all possible enterprises

Planning the system

• Select the best combination of enterprises
• Prepare a complete detailed budget for the plan.

Finance and implement

• Physically phase in the plan
• Prepare interim plans budgets
• Prepare cash-flows balance sheets

Success or failure?