Business Design
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Why Design a Business?
The business component of the farm is important and can be improved. First analyse then improve.
You cannot manage what you do not measure.
Table of Contents
Stages of a Business
There are 5 stages in the life of a successful business:
- Gestation
- Infancy
- Adolescence
- Maturity
- Decline
Each require specific mindsets and skill sets.
Gestation
Beginnings are such delicate times.
This is the first planning and modelling stage of the business.
The term business model refers to a company’s plan for making a profit. It identifies the products or services the business aims to sell, its identified target market, and any anticipated expenses along with the necessary resources and infrastructure.
We use a modified version of either the Business Model Canvas or the Lean Startup Canvas for this purpose.
Infancy
Many businesses never leave infancy – most die there. During Infancy, the business is striving to find a model that works. When discovered, documented and executed, a business may progress to Adolescence.
This is the time for Lean procedures.
Adolescence
During Adolescence, the business develops and documents its systems. It becomes process dependent which is role-based rather than person-based. Kaizen and Kanban procedures are established and documented.
Maturity
Once the Policies and Procedures are established, documented and trained, the business may be classified as Mature.
Kaizen and Kanban processes now tune and streamline the business.
In Maturity the business learns efficiency and scaling and begins to grow.
The task of a mature business is to disrupt itself before others do – to stay way ahead of the competition – and avoid entering Decline.
Decline
A business can become senile and enter Decline if management does not revitalise it regularly. The business model must be current. Markets change, patents expire, competition catches on to your methods. Before a business enters Decline it must be Self-Disrupted.
Farm Business Analysis
You must measure what you hope to manage.
- Key Performance Indicators
- Other Performance metrics
- Bringing the Financials together
- Farm Business Accounting vs Tax Accounting
Market Analysis
Product List
List your products showing:
- how much was produced
- when they are produced
- the income for each
- how much was wasted
In most instances this is best done monthly, but for a constantly producing enterprise like a market garden this should be done weekly or even daily, with a weekly and monthly sub-total and an annual total. Compare them with last year’s results to understand the trends. Knowing your numbers on a weekly or even daily basis will allow you to plan future production with a finer granularity. Previous year’s figures (if available) will guide scheduling this year’s production.
Record daily high and low temperature as well as rainfall. Each year has a different shape which will result in different production and sales figures. These records will make sense of the variance.
Compliance
What licenses and standards do you need for each product? Local, State and Federal government all have their own requirements – not always in agreement.
Are there fees or levies associated? The list of levies by Dept Primary industry is long and unreasonable. Take for example, the Australian Federal levy on agaricus mushroom production is $4.00 per kilogram which is nearly 1/5 of the retail price – paid by the producer. Add to that another $4.00 per kilo of spawn.
Location
Market Size
The size of the market for each product is way past necessary knowledge.
If you are producing too much for the market to absorb, you waste a lot of product – this costs. Include in this equation the production of your competition and you will have a better view of the situation. Depending upon the product, clever marketing can increase your market share.
You may need to consider using some product as an ingredient for a secondary or tertiary product with a higher value. This can increase your product diversity and use up some of your excess in a profitable manner. It is likely that most of your competition will not consider this.
Competition Analysis
Break-Even Analysis
Break-even is possibly the most important of your analysis techniques. It gives you the amount of money needed and number of units that must be sold to cover your costs. Below this number you are losing money. It is not always obvious, so the analysis is required – spreadsheet work.
- Analyse each product showing how many items must be sold to break even.
- Analyse each enterprise showing
- Time to profit
- Cost to profit
Farm Business SWOT Analysis
Accounting Benchmarks
An accounting benchmark is a set of numbers taken from industry results. It will allow you to see where you fit when compared with industry median and average figures.
Your accountant should be able to access benchmark numbers for you if you do not.
These numbers can assist you to identify areas of your business that may need attention.
Resources
- How much land is available?
- What is your financial reserve?
- How many staff hours are available per week?
- What skills do you have?
- What skills do your staff have?
The Management Team
- Who is your management team?
- What skills do they have?
- How much time do they have?
Planning the Business
Any business gains from being planned. A farm business needs to:
- Describe the Business
- Determine business feasibility
- Guide the business – Management & Strategic
- Get the business – Sales & Marketing
- Run the business – Administration
- Do the business – Customer service
Describe the Business
The business description is short and concise. It defines just what the business is and its reason for existence. It then provides a Vision Statement and a Mission Statement.
These statements are not just a set of pretty words. Their purpose is to guide all decisions. If a choice is invalidated by these statements, it is wrong and must be reconsidered. These statements define “the will of the founders“. Keep them prominent so they may be used in documentation by cut and paste.
Determine the Business Feasibility
Marketing Plan
A Marketing Plan will define strategies to engage audiences in order to achieve business objectives.
Sales Plan
A sales plan sets out sales targets and tactics for your business, and identifies the steps you will take to meet your targets.
Record Keeping
The keeping of good records is critical to the success of any business. What you do not measure, you cannot manage.
Don’t just look at the numbers as they stand. Develop a history and chart each of them to aid trend detection. There are seasonal trends to be observed, but the most important is detecting anomalous behaviour. Why has this KPI suddenly dropped or risen and what are the implications of the change?
Components of a Business
I break a business into the following components:
- Guiding the business – This is the management function
- Getting the business – Marketing and Sales
- Doing the business – Daily operations
- Running the business – Administration and Finance
Guide the Business
A forward looking business must respond to improve the current situation. To best do this it uses knowledge and experience guided by an analysis of Key Performance Indicators (KPIs) and Metrics.
KPIs are usually ratios (cost per tonne produced) and Metrics are numbers (number of tonnes produced).
Set your goals
Set the goals for one year, five years and twenty years. Break the goals into projects then break the projects into tasks. You have a strategic action plan.
For each goal include Objective Key Results (OKRs), KPIs and Metrics to measure progress and the level of success.
5 Year Projected Cashflow
Cashflow Analysis is a Strategic tool. It is more important to a business than the overall profit amount.
Strategic Planning
Strategic planning provides the long-term, broad goals of a business.
The difference between Strategy and Tactics is that Strategy is working ON the business while Tactics is working IN the business.
Pricing Strategy
- Premium
- Discount or
- Cost plus margin
A premium strategy places the price equal to or above the normal market price – only valid for high quality.
A discount price tries to make up by volume.
I do not recommend cost plus margin. It is generally a formula that is weak in the market. This technique should be used to determine the absolute minimum price offered. Increase the margin for discount and crank it up well for premium.
People will pay for quality because in the end it is cheaper. Take for example product sourced from afar – the shelf life is mostly used up leaving only a discount option. Your customer will need to waste a higher proportion of the product – this is called spoilage.
If the product is local, the shelf life is intact and the quality is higher – definitely worth a premium.
Tactical and Strategic Planning
While strategy is the action plan that takes you where you want to go, the tactics are the individual steps and actions that will get you there.
Both need to be addressed.
Get the Business
This is Marketing and Sales at work. No business can survive without Marketing and Sales. Even in a small business with one sales event per year, timing and market knowledge can make a considerable difference to sales performance.
I have attended enough stud sales to know that the attendance of the key players is critical to the tone of the sale. They put a base in the prices. That is the pointy end of Marketing.
Do the Business
Operational Planning
Run the Business
It is important to have documented SOP to ensure best practice – and best profit! Your processes are created and improved by Lean, Kaizen and Kanban.
A Lean Business
An Anti-Fragile Business
An anti-fragile business plays the long game.
It will push through events that kill other businesses and come out stronger for its adventure. Primary to its sustainability is a diversity of product. A range of Primary, Secondary and Tertiary products provide diversity and therefore stability.
An anti-fragile business keeps its rules simple and analyses second order consequences as part of its decision making process. It is not risk averse, but uses diversity, layers, redundancy and planning to manage risk.
All risk is calculated and has a mitigation strategy in place backed by sufficient operational and financial planning.
Anti-fragile enterprises share the following design features:
- The businesses are diversified
- The businesses are synergistic
- They prioritise capacity over efficiency
- They leverage human adaptability
- They are innovative and not afraid to fail
A good business plan defines the steps and timeline needed to achieve success. I am not discussing a plan to impress a banker and possibly extract some finance. These are the pragmatic operational steps to achieve your goals.
Risk Management
Risk and Issue management is critical to the survival of any enterprise. If a risk converts to an issue, you have little time to think – it must be resolved NOW before it gets out of control!
This is where the benefits of risk management planning come in. Having a well thought out mitigation strategy is your guide through the maze.
List the risks, assign a rating of 1 to 9 to both likelihood and severity. Multiply these and you have an urgency rating. This gives you the order to create your solutions.
While determining the mitigation strategy, do not forget to include second-order thinking as part of your process. If your solution is not well thought out, you could well create a bigger mess than you already have on your hands.
Business Continuity Plan
The Business Continuity Plan anticipates problems and predefines the best response in detail. It is created after the Risk Management Analysis has completed its first draft and identified the main risks and their mitigation strategies. The Business Continuity Plan versions of your procedures should exist in parallel to your normal operational procedures.
Production
Production lies in the grey area between Farm Design and Business Design. I place production on the business side because it has costs.
Production planning is absolutely necessary and is quite complex.
It needs historical and projected data. Take for example Market Gardening – the primary variables here are demand and season. A premium is paid for early season crops. Mix previous year’s market demand with temperature and rainfall data and you have a system to predict likely demand this year.
Demand is Seasonal
Demand is usually in an inverted Bell Curve with the highest demand opposite the amount produced. This is a flash way of saying that early and late season crops are more expensive than when everybody is trying to sell their bounty – think lettuce and tomato or even better, cherries.
Staying with Market Gardening and Orcharding, we need to know the shape of the year for sales volume and prices achieved. If we are organised, we can feed the starving and avoid the glut.
Planting Timetable
Once we have determined the timing of the market, we look at operational matters like the Days to Maturity (DTM) which will change as we progress through the season. Plants grow slower when they are stressed – this means either side of their peak – too cold or too hot. The DTM changes as we approach the optimum conditions which by the way are not only water and temperature – day length often is more important.
Scheduling production can be quite complex. For each vegetable crop, draw a chart on graph paper with an orange background in the lead in and lead out parts of the year and a green background for the peak season. A plant will need time to germinate, grow some then be transplanted and then grow to maturity defining a harvest date. It is a balance between workload and maximising yield per bed.
We need to have a number of crops in progress so that they have a convenient harvest date each week throughout the season – excepting maybe high season when we let the unthinking growers compete for the lowest prices. At that time we introduce another high priced crop.
We move backwards on our chart by the variable DTM and plant the starts in the greenhouse so that they will be available when needed. Hopefully when a bed has been vacated. Kanban at its best.
Crop Rotation
From historical data we know the shape of the year for each product.
We have a finite number of beds we manage, so we must organise for maximum gain (units and profit).
We also need to avoid mining our beds with heavy feeders and avoid soil borne disease accumulating so we rotate our crops to allow recovery time. We rotate multiple crops around our beds in a 10 year cycle to maintain optimal yield. Some years the beds are heavily fertilised with compost prior to heavy feeders, and others lightly covered – a 3 year cycle.
Other Products
Market gardening is only one enterprise that requires careful planning.
Orcharding is planned over a 2 year cycle as most fruit only grows on a 1 year branch.
Some berries (raspberries, blackberries etc) have a similar system – they crop every year but produce most on a 12 month old cane. Alternating year systems (harvest then mow) grant high production every second year so we schedule 1/2 of the crop each year.
To add a degree of refinement, we consider the 5-7 year La Nina / El Nino cycle of temperature and rainfall.
We also add a fertilisation schedule.
All of the above will vary for different products, but the need to plan all aspects of production will remain.
Distribution Channel
The Distribution Channel commences at the warehouse, and involves
- Marketing
- Sales
- Fulfillment
Once the deal is done, Fulfillment delivers. All must be on the same page.
Planning MUST be done as a whole, individual unrelated schemes will go radically awry and quickly.
Marketing
The analysis phase has shown what you can produce. You now know what your potential customer segments are and a fair estimate of customer numbers in each.
The Marketing Plan defines the steps needed to bring customer awareness of your business and product set to a peak. Different techniques are relevant for different market segments. Business to Business (B2B) sales are very different to Business to Customer (B2C) sales.
Try to use techniques that are memorable and have a reasonable life. A radio ad is 15 seconds and gone unless you repeat it constantly which is costly. The following are possible actions but must be tuned to their target segment:
- Advertising campaigns
- Brochure distribution
- Catalogue campaigns
- Caps, pens etc
- eMail campaigns
- Fridge Magnets
- Snail mail campaigns
- use by the sales team and
- to understand the effectiveness of each
Sales
The difference between Sales and Marketing is that Marketing brings leads to the door and Sales converts them to customers. Their relationship is symbiotic, they cannot function without each other. The bulk of sales people would argue the point however.
A salesperson must know what marketing campaigns are current so that they may approach the customer understanding the reason the customer reached out to them – many reasons, many approaches.
A sales plan will contain a description of each of a list of reasons a customer walks in the door or picks up the telephone. It will define the approach the salesperson will take to gain the best result.
The scripts will be defined in the Standard Operating Procedures for the Sales section.
Fulfillment
Prior to devoting my time to Properly Organic and Designer Acres, I served as a contracted super tech in the bleeding edge of satellite imagery, business management and accounting software, then telecommunication software bringing SMS and Mobile Application Protocol into Australia. I then decided to return to the land. I quickly discovered that apart the shape of the bales and the colour of the tractors little had changed.