Create a Business Plan For Your Coffee Farm
Owning a coffee farm is no easy task. With the current coffee price crisis, the ever-present risk of pests and diseases, and unpredictable weather conditions due to climate change, there’s a lot to consider.
So it’s important to prepare as much as you can. A business plan is one tool that can help you identify where to focus your resources and how to plan ahead.
Find out why you should use a business plan and pick up some tips on how to create one.
The Benefits of a Business Plan
It may sound intimidatingly formal to create a business plan, but in reality it’s just a document that outlines where you want to go with your farm. A business plan can help you project costs, identify long-term goals, and detail the steps needed to achieve your aims. It can also be a requirement for securing funding, whether in the form of grants or loans.
“You need a business plan to know where your business is going,” says Isabela Minondo, Sales and Marketing representative at Santa Inés de Medina Coffee Estates in Antigua, Guatemala.
“A business plan that takes into account all costs, not just the obvious ones, would at a minimum let farmers know whether they are operating at a profit or less during a harvest cycle,” says Benjamin Weiner, CEO and owner of Gold Mountain Coffee Growers.
Depending on where you’re based, there may be organizations that can help you develop a business plan. Some government organizations and NGOs provide help, and cooperatives can also be a useful resource when putting one together.
You could also use a professional consultant to evaluate your business and develop a plan with you, though this will likely be a more expensive option.
What to Include in a Business Plan
Business plans are specific to your needs and resources, so there’s no one template or formula that will work for everyone. Instead, there are some key points to keep in mind when putting together your plan.
Who are you, what do you currently offer, and what do you want to offer? Is your coffee commodity or specialty? Where do you want to sell it and are there realistic opportunities to do so?
Think long-term: don’t just consider this harvest but instead ask yourself where you want to be in the next five, ten, and twenty years. In order to get useful answers, it’s also important to evaluate your strengths and be honest about where you lack experience or confidence.
Do you understand who you are selling to, what the market for your coffee is, and how to reach potential customers? How can you promote your coffee to new buyers? What are the unique selling points of your coffee? It’s important that you know your product well so you can target the right buyers and talk about it confidently.
How well do you know your own profit and losses? Do you keep accurate records and do you plan for different scenarios? Your business plan should include your production cost, a profit and loss statement, and a cash flow projection.
Keeping track of your production cost will help you better understand your business and where you spend money. Knowing this can help you make realistic future plans and identify where to invest.
If you know your production cost, you can calculate your break-even point. This is simply how much money you need to make to cover your costs. A break-even point means that you are neither in profit or loss. To determine your break-even point, divide the total fixed costs of production by the price per unit minus the variable costs needed to produce the product.
A profit and loss statement simply records your income and outgoings over a defined period of time. It’s a good idea to create one at the end of each month to see which areas are most expensive, where you can reduce costs, and how much money you are actually making. This document is based on the simple formula of Revenue – Expenses = Profit/Loss.
The cash flow projection shows what finances you expect to flow in and out of your business. It’s important because it indicates when your planned expenses are too high or when you may have a surplus of cash on hand. it can help you decide whether to take out a loan or seek other investment.
You may sell your coffee at a good price but not see the cash paid for six months. When that payment arrives, it may seem like you have a lot of profit, but it’s important to budget for the periods where you don’t have cash coming in.
For example, you may have loan payments, labour costs, and daily expenses to consider. So although you may need new machinery and have the cash on-hand to buy it, take a look at your cash flow projection and evaluate whether you have enough money to cover expenses until your next payment and whether it’s better to wait to make any investments.
To make sure your cash flow projection is accurate, include all commitments such as loan payments or taxes due on a specific date, as well as living expenses.
Don’t confuse the cash flow projection with your profit and loss statement. Rather than recording what has happened in the past, the cash flow projection shows what revenue and expenses are anticipated for a specific period in the future.
How do operations take place on your farm? Can processes be improved or developed for new ventures? Make sure that you fully understand the activities at every level of production and know what equipment and supplies you own.
Are your machines old or in bad repair? Replacements or repairs may need to be factored in to your estimated projected costs.
How many people do you employ and on what terms? Consider how many seasonal workers you need and what rate of pay you offer them. Make sure to include cost of labour in your production cost to better plan ahead.
Be Realistic in Your Planning
When you put a business plan together, be honest and realistic in your abilities and goals. The aim is to keep track of expenses and plans with as much accuracy as possible.
You should also be sure to factor in your cost of living. This includes food, housing, utilities, and daily supplies for your family. A business plan that doesn’t account for daily expenses isn’t a real reflection of your finances.
“When making even the most rudimentary business plan, it is important to take into account hidden costs,” Benjamin says. Examples include food and hygiene facilities for pickers, fuel costs for machinery and transportation, and the baskets or containers used in the harvest. Even seemingly small expenses can add up to make a difference to your bottom line.
You should also include some margin for unexpected events such as an unseasonal frost or outbreak of disease. Isabela says, “Make a budget considering your overall costs and predicted income. Your budget needs to have a 20 to 30% margin of error, depending on your economic capacity.”
Investment & Growth
Business plans should also include details of where you plan to invest or expand. It’s important to carefully consider where to invest profit for the best long-term results. For example, you may want to invest in new infrastructure or machinery. But will you have enough cash on-hand in case of emergency, such as having to buy pesticides or fertilisers if there’s an outbreak of pests or a disease?
Use your cash flow projection to decide whether you can afford to make investments or are better off waiting. Consider how much available cash you need to feel comfortable in case of emergency. If you have a good idea of your cash flow, you can evaluate how much you can afford to invest in new infrastructure. You should also keep in mind that most investments will take a long time to show a positive income.
“In fantasyland, we would all be able to spend whatever we need on any part of the coffee production process to improve it. In reality, however, we need to be extremely careful in how and where we spend money throughout the year,” Isabela says.
“You need to make sure you’re making a profit. So a business plan can really help allocate your expenses properly, depending on what your goals as a producer are.”
Stay Open to Change & Adaptation
Where possible, create alternatives and back-up plans in case something changes. “Always create a plan B and plan C,” says Juan Vargas, the co-founder and Business Director of Fazendas Klem in Minas Gerais, Brazil.
Some aspects are out of your control, such as the international market, but you need to be ready to adapt to likely variables. For example, do you know where to find new buyers if your previous one doesn’t return this year? What happens if your coffee scores higher than you expected in cuppings? How about if your crops are affected by coffee leaf rust or a pest?
All of these events would change your profit and loss scenarios, so you should review and update your business plan. The end goal may remain the same, but the method of getting there might need to be adapted.
“In the coffee market, prices and costs constantly change and even weather conditions are unpredictable,” Juan tells me.
“[Use] the emerging or bottom-up strategy, where you involve the new practical knowledge of your team to share different perspectives to help you solve real world problems. It means the key objectives of your business plan may not change, but the path for it will.”
Even if you don’t experience big changes, it’s important to make sure your business plan stays relevant. Mark a date in the calendar for an annual review, or schedule them more often if you think you need to.
“As the times change, farmers with formal or informal business plans should adapt and re-analyse their business structures and actions,” Ben says.
“We’ve had farmers asking us for higher-cupping varieties because roasters will pay them a higher premium for those coffees. We’ve seen farmers invest in a truck, only to realise the truck isn’t ideal for their part of the mountain – one farmer sold a Jeep to buy several donkeys instead. The key is to analyze and take action before it’s too late.”
Creating a business plan may seem complicated or intimidating, but look at it as a simple outline of what your business is and where you’d like to go.
Ubion Terra is the Managing Director of O’Coffee Brazilian Estates. He says that “with a plan you will define your business purpose, your short and long-term goals, and will duly research and better understand the market environment. [It will help you to] identify the core resources and capabilities you need to operate the farm and will help you to forecast financial scenarios, [which can be] useful for getting loans.”
Talk to other producers, your local cooperative, and any other relevant organizations in your area. Together, you may be able to develop a basic business plan. As you become more confident, you can add more information until you have a detailed business plan that will help you better understand your farm and succeed.