1 - Assess the current position of the business.
When preparing a business plan, undertaking a comprehensive review of all aspects of your business helps you to:
- understand the resources and capabilities available
- identify the gaps in resources, capabilities, infrastructure or capital that need filling
- learn from past decisions - the good and the bad.
Key components of your business to review and evaluate include:
- management systems and enterprise mix
- business financial and enterprise production performance
- natural resource management
- marketing plan
- staff management
- risk management
- development and implementation schedule.
Guidelines to analysing the current situation
The first step in assessing your current position is to gather the appropriate information and data. This should include financial and physical information about the business, as well as key profit, social and environmental drivers.
Once the information has been gathered, it needs to be interpreted so you can establish benchmarks appropriate to your enterprise and set goals and objectives.
When analysing the current position of your enterprise, you will need to draw upon the following types of information:
- business performance
- cost of production
- feed supply and feed demand.
This analysis evaluates where the business is, how the business is performing against other similar enterprises and helps identify areas for improvement. This should include both physical and financial aspects of the business. Ideally, data should be collected over, or be available for, at least five years to identify trends and account for items that influence performance, such as drought.
For full analysis, the key information that must be collected includes:
- physical property characteristics, including natural resources and infrastructure
- livestock inventory and trading accounts, including production
- labour use
- financial data from annual accounts, profit and loss statement and statement of annual cash flow
- balance sheet including all assets and liabilities, depreciation schedules and capital expenditure.
Tool 1.01 Farm data questionnaire outlines the data that is required to carry out your business performance analysis. Many formats have been developed for completing this assessment and many consultants and service providers offer benchmarking and business analysis services to assist with this analysis.
Cost of production
Cost of production (CoP) is a key factor affecting the profitability of businesses. CoP, measured in cents per kilogram liveweight, is an indication of the outlay required to produce each kilogram of beef.
Calculating your beef herd’s cost of production is an important step in assessing your herd’s performance and efficiency of beef production. The CoP is a very useful benchmark as it integrates many other benchmarks. A comparison of your CoP will indicate whether you have scope for improvement, or are already performing reasonably well.
Tool 1.02 MLA Cost of Production Calculator has been developed as a ‘do-it-yourself’ tool to standardise this performance indicator. CoP is simple to calculate. Generally, beef herds with a low CoP are more efficient at producing beef and have a lower financial risk when beef prices are low. For the pastoral zone, the aim should be around $1/kg. Anything below this means that you are competitive and the further you go above this, the less competitive you will be.
CoP in the pastoral zone should be calculated as a five year average, rather than a one off annual assessment. A one year result can be misleading because pastoral zone stocking rate and carrying capacity variations mean that production is not consistent. This will have a great impact on your CoP.
Interpret business analysis
Once you have collected data and analysed the business, interpretation of the information is required.
For a start, Cash Flow Budgets are important to identify how much cash surplus is available to fund debt repayments, tax, personal expenditure and capital investment, both on and off the property. Analysis of the businesses balance sheet provides information on the owner’s net worth and trend over time. The Profit and Loss Statement is valuable for benchmarking the business, both between enterprises on the property and in comparison with other enterprises and businesses.
Tool 1.03 outlines a process that can be used to identify economic problems.
Industry benchmarks are readily available to provide a point of reference to indicate how your beef business is performing compared to others in the industry. These benchmarks allow you to:
- quickly check your business health
- identify opportunities for further improvement in your business (comparing your benchmarks to others)
- monitor progress of your business over time (comparing your benchmarks between years).
Check against industry benchmarks
Benchmarking can be either indirect, where beef producers calculate their own performance indicators and compare them against published industry benchmarks, or direct, where individual producers contribute their businesses information into a service which generates the benchmarks for more direct comparison with other producers.
To determine which benchmarks will be relevant to your business, we suggest you start with some of the primary benchmarks in Tool 1.04. At the business level, these will tell you how healthy your business is and identify those areas of the business where you have the greatest opportunity for improvement.
Complete a SWOT analysis
Another useful tool to assist you in analysing and interpreting the information you have gathered on your enterprise is a SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis (see Tool 1.09). SWOT is a simple framework into which you can organise thoughts and analyse your position. It will help to clarify issues and enables you to gain a more strategic understanding of the current situation.
The purpose of a SWOT is to analyse an enterprise’s internal strengths and weaknesses in light of the external opportunities and threats. A SWOT can be completed for the whole beef production enterprise (for example, looking at where the beef enterprise is going over the next five years), or for selected parts of the enterprise (for example, assessing the breeding or finishing program).
A SWOT analysis can be done by an individual but is much more powerful if more than one person is involved because different people will see the enterprise in different ways. The output enables you to:
- know the value of the enterprise as the basis for forward planning
- determine whether goals and objectives are being met and if there are gaps
- know the impact of proposed changes to the enterprise strategy
- justify further investment of resources (time and money).
A key purpose of a SWOT is to assist you in identifying 'critical success factors' that is factors that will enable you to:
- build on your strengths
- eliminate or minimise your weaknesses
- exploit opportunities
- develop strategies to deal with threats
These critical success factors become a key component in formulating your business plan.
Manage the risks
All business decisions involve potential (opportunity) and risks (threats). The SWOT analysis is an ideal starting point to quantify the risks as the basis of developing a risk management plan. Seasonal and price risks are the most obvious for beef enterprises. Less obvious, but just as important, are human resource, environmental and economic risks.
The degree to which any one of these are a threat to a business will vary considerably according to location, production system, financial position, property size and so on. The risk that external factors pose to the business is a combination of the probability of the event, the size of the loss that will be incurred and the longer-term implications for the business should it happen. These things change with time and therefore must be constantly under review.
It is useful when making significant business decisions to carefully assess both the potential and risks.
It is critical that each business does its own risk assessment and quantifies the relative importance of these risks. A business risk assessment (Tool 1.05) helps identify the 12 most common areas of risk. The tool asks the questions you should answer when considering these risks. Do not limit yourself to the questions asked in this template; it is a guide to get you started.
Strategies to manage risk include ensuring you have:
- a low cost structure, including a low cost of beef production, so your business can withstand periods of low commodity prices. This is why a low cost of production is so important.
- a diversified income stream to buffer periods of low prices in one particular enterprise; if alternative enterprises are feasible. The downside of this strategy is that it may complicate your business and increase costs. An alternative to diversification includes developing off-property income sources.
- financial reserves (such as Farm Management Deposits) to withstand periods of drought, low prices or change in the business.
- insurance against risks, which may include financial tools to manage interest rate or commodity price variation.
- management systems to manage production risk. Well designed management systems fit your pasture availability, are flexible to manage good and bad seasons and incorporate a management calendar that allows you to track key reproduction, stock growth and husbandry events. See Tool 1.13 for an overall business management and monitoring system.
- adequate equity to manage down turns in commodity prices while still being able to take advantage of opportunities to pursue business growth.
An acceptable balance between the business ‘potential’ against the ‘risk’ is required and this will vary between individual managers and family situations. If you consciously consider potential against risk each time a business decision is made then the outcome from the decision is more likely to be successful.
A useful process to gauge the risks is to prepare 'worst case', 'best guess' and 'good case' scenarios. This takes more time but, with computer software, these analyses can be run as one. Such analyses are invaluable, not only to see what the best guess might be, but also the upside and downside risks.
What to measure and when
Bringing all of this information together in the initial business planning process will provide valuable insights; however, regular review of this data is a crucial element of knowing the real health of your business.
This on-going analysis of the position of the business can be drawn from:
- regular (e.g. weekly, monthly, quarterly) business meetings to review and update all stakeholders involved in the enterprise. It is important to take notes during these meetings and formalise them as this encourages thought behind what people say and allows these comments to be verified at a later date
- annual use of the SWOT analysis to review the current and future position of the enterprise
- monthly review of cash flow budget and updates of the profit and loss statement
- annual review of profit and loss statement and balance sheet
- annual benchmarking review and comparative analysis, assessment of cost of production (CoP) to evaluate performance and make tactical and operational change
- annual risk assessment to help prioritise the operating risks in your station business.
Use of these methods will form the basis for developing the strategic direction and build an understanding of the levels of planning (strategic, tactical and operational) and the benefits of thorough planning.