Monday, December 12, 2011

Holistic Farm Planning: Financial Management

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This past Saturday I continued with my Beginning Women Farmers class with in an introduction to financial planning.  I'll be honest, financial planning is something that I need a lot of help with.  I want to develop a really good system for record keeping and management before I begin my farm operation because I know that I am much better at systems when they have become habit (rather than struggling to compile notes and doing the bookkeeping only when I've fallen behind).

I read the chapters on financial planning that were assigned for homework and felt totally lost.  I was nervous to attend class, especially because I didn't have any farm figures to bring with me to work my way through the numbers.  I don't even have great personal financial records.  As I said before, I need a lot of help.

Thankfully, the class started at the beginning and I left with a much better understanding.

First off - why is financial planning important?
1. Financial planning helps you to make decisions towards your holistic goals.
2. It helps you to conduct a macro-assessment of your farm, analyze individual enterprises, and assesses potential new enterprises.
3. It helps you plan for the profit you need up front.
4. It helps you to define all farm income streams.
5. It helps you to calculate a cap for all financial expenditures.
6. It helps you prioritize your expenses to invest in.
7. And it also helps you to monitor your plan proactively.

Perfect!  Taking time to develop a farm financial plan will allow me to develop a profitable business, as well as maintain my broader life goals (having a retirement account, going on vacation, etc).

Most financial plans calculate I - E = P (Income - Expenses = Profit).  You plan an income, subtract the expenses, and what's leftover is your profit.  A holistic plan switches things around and calculates I - P = E (Income - Profit = Expenses).  By planning for profit, you put a cap on your expenses and spending and ensure that you have enough money to live out your holistic goals.

The process isn't instant.  Meaning, I can't just plan for profit and get a $1 million mansion in the caribbean (though wouldn't that be nice?).  But with this business mindset and some savings, I could work towards having a vacation home (if that were important to me).

The biggest challenge is limiting expenses.  There are three main types of expenses: inescapable (essential or morally obligated expenses, like taxes and a mortgage), maintenance (regular expenses like electricity, phone, seeds, feed, etc), and wealth generating (solutions to weak links in your business that will help you make money or improve efficiency).  If you can reduce maintenance expenses, you can have more money for wealth generating expenses or for profit.

Overwhelmed yet?  Here are the basic take-aways:
1. Take good notes!  Record keeping will better help you to assess your business and make informed decisions.
2. Plan for profit.  Get an idea of how much money you reasonably need to meet your family needs, build savings, and improve your quality of life.
3. Plan your income.  Then plan your expenses with the remaining funds.  You may have to adjust to make everything work (ie. add a new enterprise, reduce expenses, or reduce profit), but after a few years of planning for profit it'll get much easier.

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