Farming Is a Business
You might think that the common denominator among farmers who struggle to grow quality produce and turn a profit is a lack of passion, farming know-how, or hard work. While all of those are important for sustaining a successful farm, the most common reason farmers struggle to grow their farm is that they don’t treat their farming as a business.
Like any other business owner, you need to be passionate about what you’re doing. Still, you also need to review your profit numbers and cultivate a deep knowledge of your customer base to grow your business. You’ll need to start making decisions based on data such as which crops make you the most money and what pain points your customer experiences so you can adjust your business plan accordingly.
Farmers also need to understand what skill sets they’ll need to hire and what functions can be outsourced so that the right people are in the right roles. This helps ensure your farm is running as well as it can. You’ll also need to develop a succession plan, so your farm continues to serve your community in the future.
This guide will walk you through the critical aspects you’ll need to turn your farming passion into a growing farming business.
Develop Your Farm Plan
Create a One-Page Business Plan
Your farm needs a business plan. Many people mistakenly believe that their business plan needs to be a large, exhaustive document totaling dozens of pages. Still, it’s more effective to have a one-page business plan.
Consider this: when a potential investor asks to see your business plan, they’re not going to want to sift through a 40-page document. Instead, they want to get a high-level overview of your business that demonstrates an understanding of your customer base, the value you bring, and your growth plan.
Create your business plan to communicate the following information:
- Customer avatars
- How you plan to build customer relationships
- How you will deliver your product
- Key resources
- Key partners
- Key activities
- Your unique value proposition
- Financial viability
If you want your farm to thrive, you need to know exactly why your customers would buy from you instead of another farmer. This could be something as simple as providing convenience for local customers or something as specific as providing guaranteed safety for a young mother who is worried about e-coli or high-quality produce for a host looking to impress their guests. Defining and communicating this unique value proposition is key to creating a solid business plan.
Get to Know Your Customer
It’s safe to assume that you will be selling your produce to people who live nearby your farm. This will help you to keep the quality high and transport and storage costs low. To build a successful farming business in your community, you need to know everything about your ideal customers near you.
Research the local market before deciding what crops to grow:
- What are local community forums or Facebook pages discussing in regards to fresh produce?
- What kind of produce do local businesses need?
- How much are people willing to pay for produce where you live?
- Which businesses are popular in the area? (This will help you set prices and inform branding and marketing decisions.)
- Are there customer favorites that you can offer unique versions of?
Remember, every customer demographic will want and value different things, so focus on the most profitable ones for you. Seek feedback from your best customers and know that you will not please all customer demographics.
Determine Additional Value Adds You Can Give Your Customers
Many successful farms look for additional products and services that they can offer to increase customer spend. For example, pumpkin farmers create a rustic day out for the local community, complete with wagon rides and food stalls. This creates a value ladder where there are several add-ons that a customer may purchase.
Add-ons like these may be services or products that you offer yourself or ones that you partner with local businesses to provide. Working with the local community offers a chance to leverage additional networks and provide a more attractive experience for your customers.
Build the Right Farm Model
Pick the Right Property
When choosing a location to start your farm, picking the right type of property will significantly impact your business’s success and the quality of your produce. Look for the following property features to give your farm the best chance at success:
- Sandy loam (it’s best to avoid clay soil for growing vegetables)
- Access to plenty of water
- No flood zones
- Good power
- Good internet
- Truck access
- Closeness to necessary supplies
- Proximity to local markets
Outsource the Right Services
When possible, outsource jobs that require specialized skills or equipment outside your business’s wheelhouse, such as accounting and construction. Hiring experts for these tasks will usually cost less than hiring and training someone to do the job full-time.
Remember that when you first start your farm, it can take a while to turn a profit, so your first few months may be completely in the red. You will need staff to manage the day to day operations of your farm, so labor is extremely vital, but you can outsource some of the other technical business functions for a fraction of the cost.
Hire the Right Labor
When you are ready to hire labor, there are a couple of steps that will help you narrow down candidates to the perfect hire:
- Make sure that you are not hiring a job that can be outsourced for the same or lower cost.
- Write the job description and key performance indicators. Be honest about the work and what it entails to ensure you only get suitable applicants. This includes things that may seem self-explanatory, but are important to qualify such as “you will be working in the rain.”
- Give specific application instructions to ensure they can follow instructions to the letter.
- Have multiple interviewers included in Zoom or in-person interviews to pick up on any red flags or good points.
- Look for people to work with long-term, not just an extra pair of hands. Remember that it will take up more of your time and money to hire replacements for the wrong person than it will to hire the right person the first time.
Figure Your Farm Finances
Maintaining Financial Documents
Every farm should have these four key financial documents:
Profit and Loss Statement - This is sometimes called an income statement. Every month you will record the money coming in and going out of the business. It will help you keep track of how much you are spending on different categories so you can adjust the budget where necessary to maximize profit.
Balance Sheet - This lists your assets, liabilities, and income to help you keep track of your earnings.
Cash Flow Projections - Once you have been in business for a year or two, you can create cash flow projections that predict how much money you are likely to make every month. They will be based on the income for the same month the previous year and the contracts and guaranteed business you have lined up for the current year.
Enterprise Budgets - An enterprise budget lays out the fixed costs in your business. These will be things like wages for staff, contracts for equipment rental, etc.
Fund Your Farm
There are a number of options for initial funding for your farm. They include:
- Bank loans – This will be unlikely when you first start out unless you have collateral.
- Crowd-funding – You can receive funding from customers in exchange for credit or for weekly vegetables. Say, ask for $450 worth of funding in exchange for $500 of credit.
- Grants and microloans – Organizations and government agencies sometimes provide funding to small businesses in particular industries.
Set Hourly Rates For Your Own Labor
In addition to the fixed costs of your employees’ wages, you will also need to pay yourself a wage for the work you do in your business. The best way to set your hourly labor rates is to work out what you want to earn in a year and then work backwards. Because it is your business, this can be any number you decide is fair. Some farmers are satisfied with $30,000 per year and maximize the additional profits they invest in their business while some make $100,000 per year.
Set Margins on Wholesale
To make sure you set fair prices, you need to be extremely aware of what it costs to produce your vegetables. From there, work out how much profit you need to make. As a general rule of thumb, 40% profit margin is reasonable for quality vegetables. As long as the quality of your produce is there, you can move acres of vegetables through wholesale.
Wholesale can be very profitable as supermarkets will order large quantities of vegetables from farmers. However, supermarkets are extremely picky about the look and quality of the produce - any excessive discoloration or defects can ruin your relationship with your wholesale buyers.
As an aspiring farmer, you can have all the passion and technical knowledge to produce high-quality vegetables, but if you treat your farming as a passion project instead of a business, you likely will not get flourishing profits for your flourishing produce.
Once you create your business plan, get to know your customer, choose the right location and labor, and learn to evaluate your finances, you’ll be on your way to establishing a farming business that has the potential to grow for years to come.
For more information on starting and growing your farming business, you can hear from expert Michael Kilpatrick in our Masterclass series here.