The old adage is true for all walks of life, including in your farm business whether you are in tillage, beef, dairy or sheep – fail to plan, plan to fail. Quite often, a farm plan is drawn up when it is requested by a financial institution. However, in my view, the farm plan should be a detailed road map for the future and not just an exercise for a financial institution.

Why are you farming?

The first key question is why are you farming? The answer to this should be to make a profit, build net worth and sustain the desired standard of living. When a farmer looks for the answers to these questions, it can provide some of the detail for the planning phase of the project. Focus on profit is essential. Profit will dictate the choices that are made over the long-term and provide for setting of goals in the long-term. A detailed farm plan will help deliver on the reasons for farming.

Planning term

Market prices are, and will be, volatile over the next number of years, especially in the dairy sector. When planning your farm business, this needs to be completed with a five-year term in mind at a minimum, taking account of any short-term adjustments that may be required.

These short-term adjustments can be catered for, especially in terms of cashflow. The plan needs to be a working document and a work in progress, with a review at the end of each year to benchmark progress with the goals that have been set out in the plan.

Land and stock management

Land and stock are the key drivers to the farming system and to the profitability of the farm in the long-term. Be aware of the stock on hand and the costs associated with stock build-up, either through purchase or a breeding programme.

What land is available? Is it owned, leased and rented? What are the costs of this land bank and is this likely to increase? Will additional land be required in year four, five or subsequent years? Land availability and the cost of such land is always an area that causes problems.

Along with obvious costs, such as feed and fertilizer, the plan needs to be cognisant of additional costs that may be incurred, such as additional labour, housing and waste storage, additional contractor charges and others, especially in long-term forecasting.

Cashflow plan

Cash is king. Need I say more? The integral part of any farm plan is the cashflow budget over the five-year period.

This is firstly based on historical accounting data over the previous three to five years. This includes gross and net margin analysis. Fertilizer, animal feed, veterinary, AI, etc, are all evaluated as part of this process.

The output of the farm and the efficiency of the farmer are the key components and usually where the most influence can be achieved. In most cases, the operator is the magic component.

The basic measures of output are kilogrammes sold per cow, liveweight gain, tonnes per hectare in each of the sectors (dairy, beef, sheep and tillage). This baseline is then used to determine the likely output over the five-year period.

It is important to remember that efficiency will usually suffer in the first number of years of expansion, which will affect the margin achieved. This will affect the volume of output, as will the efficiency of the farmer.

Usually the biggest area for debate is the value of output used in the cashflow plan. An estimation of the price per litre of milk, €/kg of beef or lamb and €/t of grain is difficult. However, err on the side of caution.

The cashflow budget must take account of drawings, repayments (old and new) and also taxation. Repayments I will deal with later.

Tax has to be paid. The most difficulty is caused in years of high prices and high profit, followed by years of low prices and profit. In so far as possible, the cashflow projections will account for this where the underlying assumptions are correct.

If not, review at an early stage to correct. Such corrections can include sale of stock, reduction in inputs or seeking interest-only repayments, especially where there is a pinch year in the system. Projecting and identifying such shortfalls are imperative to a correct cashflow budget.

Private drawings are also an essential component. The cashflow projections should take account of any likely increase or decrease in expenditure. What age are the family? What level of schooling? Are children likely to be starting college within the five-year term?

Capital expenditure

Capital expenditure is long-term. The requirement should be based on the level of existing borrowings, the reserves on the farm and the required capital expenditure to meet the required targets. If the cashflow projections are limiting, some capital expenditure may need to be re-evaluated.

In assessing the capital expenditure, the assessment of current status of infrastructure on the farm is essential. Unexpected expenditure on maintenance or new equipment can totally negate the value of the farm plan.

Following this, the assessment turns to new capital equipment or buildings that are required on the farm. When will they be done? What will the cost be and how will they be funded?

Budget for over-runs and don’t forget to include costs such as planning permission and development charges.