Lesson Five - Developing A Business Plan
Whether your woodlot is for hobby or for profit, you should prepare a business plan for it. It is surprising the amount of revenue generated and the expenditures required even if you have acquired the woodlot for a hobby. If managing your woodlot for profit, your financial success will depend on a solid business plan. A business plan is made up of two components, a woodlot management plan and a financial plan. The woodlot management plan is the steering wheel with which you drive your woodlot and the business plan is the gas pedal controlling the speed you carry out activities on your woodlot.
This chapter discusses the components of both the resource management plan and financial plan. You are lead through the steps of building the financial plan, from assessing the market to operating budgets. Suggestions are given on record keeping systems. Upon completion of this chapter, a step-by-step exercise is located in the Appendix to assist you in developing a business plan for your woodlot
BUSINESS PLAN
A business plan is developed through forecasts - it is a guide to assist us in reaching forecasted results. The most difficult part is the forecasting; that is why people shy away from business plans. Remember, the forecasts are only estimates and the do not have to be exact - all you have to do is get started and you will see very quickly how good yo are at forecasting. It forces you to put your thoughts on paper.
The thought of developing a business plan for a woodlot may seem overwhelming at first, especially when you consider that you are planning for forty or more years in the future! In reality, it does not have to be complicated or overwhelming. If you take the time to forecast in small intervals and frequently update your business plan, it can be enjoyable.
Why do I need a business plan?
A business plan allows you to link your financial goals with your woodlot management plan goals. It also will assist in controlling cost, determine financing, encouraging long term planning, priorizing conflicting goals and calculating return on investment. Developing a business plan is a process in forecasting how the scheduled activities on your woodlot will impact you financially. After you develop an acceptable plan, it will act as a guide for you to manage our woodlot. A business plan needs constant massaging and updating as events change. Developing a business plan is not difficult if you do it in stages as listed on the following pages.
Woodlot Management Plan
The first component of a business plan is the woodlot management plan. A woodlot management plan is a resource development guide. It includes the woodlot owner's goals, identifies the resources on the woodlot, and assists the woodlot owner in reaching his goals by developing the resources on the woodlot.
A woodlot resource plan should include the following:
1. Goals:
Activities on the woodlot will be completed in the context of the woodlot owner's goals, with each activity taking the woodlot closer to the goals. Examples of some goals are: good access, personal recreation, maximizing fibre production, maximizing quality hardwoods, increasing wildlife abundance, and maintaining water quality. These objectives are critical because they will have a significant influence on the management activities of the woodlot.
2. Woodlot Description
Woodlot description can be written or described with a woodlot map. Generally, it is an inventory of what is on the woodlot. It may include the following:
- Boundary lines
- Roads and ponds on site
- Timber - volumes, health and age
- Recreational opportunities and facilities
- Wildlife features - Bald Eagle nesting sites, deer yards
- Special features - rock outcrops, cemeteries, etc.
3. Recommendations:
This section is the action plan, what you plan to do.
4. Woodlot Map (Summary of Description and Recommendations):
The plan should contain a map that will identify the location of the resources on the property. It usually shows forest stands, roads, special features, ponds and boundary lines. It will also indicate the locations of recommended treatments. It is a useful planning tool and can be used to keep track of progress and future activities on the woodlot.
In summary, a woodlot plan will state the woodlot owner's objectives for the woodlot and explain how to achieve them. It does not go into detail on the financial impact of the recommended activities.
Financial Plan
The second component of the business plan is the financial plan. It is the financial guide for your woodlot. It will determine how fast you will carry out the activities that are identified in your woodlot management plan. A financial plan will help you identify the amount of money you can invest in your woodlot. It will also assist you in identifying markets, reviewing the strengths and weaknesses of the woodlot owner and woodlot. It should state clear financial goals, and strategies to reach these goals. Both one year and five year forecasts should be produced. Financial records generated will allow you to monitor the woodlot's progress.
1. Market Assessment (Plan)
A financial plan begins with an assessment of the markets and the products you have to market. Managing your woodlot without markets for the products you generate from the woodlot would be difficult. Without markets there would be no revenues to finance the activities on the woodlot. Market research should identify the potential markets available to you.
The first step is to locate existing markets. The second step is to create new markets. Creating new markets for products on your woodlot requires more effort but may give you a significantly higher return for your product than traditional markets.
When assessing potential markets consider how long has the market been available? Is it stable? Where are the potential markets located? Can you economically deliver forest products to the market?
2. Strength and weakness of woodlot owner and woodlot
The second step in developing a financial plan is to identify the strengths and weaknesses of the woodlot and the woodlot owner. Which will make your plan realistic.
If your plans are not realistic, your financial expectations may fall short. One example of a weakness may be that you are an absentee owner, living in another province and have trouble visiting the woodlot yourself. Another common weakness for some woodlot owners is time or lack of it. Everyone has good intentions; however, time constraints limit the amount of work you can do on your woodlot. Strengths may include owning equipment that can be used to extract forest products or having a woodlot that is located close to a large pulpmill and sawmill or a woodlot that oversees a national park or other beautiful scenery.
Take a few minutes to list some strengths and weaknesses that you may have identified in your situation.
Strengths
Woodlot:
a. (Example: Located close to mill, transportation cost low.)
b. _______________________________________________
c. _______________________________________________
Woodlot Owner:
a. (Example: Own a farm tractor with winch.)
b. _______________________________________________
c. _______________________________________________
Weaknesses
Woodlot:
a. (Example: Located in another County or province.)
b. _______________________________________________
c. _______________________________________________
Woodlot Owner:
a.(Example: Lack of time. Job and family demanding.)
b. _______________________________________________
c. _______________________________________________
These strengths and weaknesses will be used in Appendix I to develop your personal business plan for your woodlot.
3. Financial Objectives
Although difficult, setting financial objectives is crucial in developing a business plan. You need to set a goal to get you started. You may find out later that it is too aggressive or not aggressive enough but at least it is a starting point - in the process you can come back and change your goals.
In fact, you will probably change your financial goals. At first, take your bests shot! Remember, be specific, so that objectives are measurable.
Having measurable objectives allows you to evaluate your progress, and the budgeting will help insure you have the resources to meet your objectives.
An example of a measurable objective would be: "I would like to increase the value of my woodlot by 5 per cent per year and generate approximately $5,000 annually from the woodlot as a second source or income.
List some specific financial goals for your woodlot.
1. ______________________________________________________________
2. ______________________________________________________________
3. ______________________________________________________________
These goals will be used in Appendix I to develop your business plan.
4. Strategic Plan
The fourth step in developing a financial plan is to develop strategies. Strategic plans are methods you develop to meet both your financial and resource related goals, Reflecting on the strengths and weaknesses of you and your woodlot, you can develop realistic strategies to achieve your goals. This is a critical point in your planning process, since it forces you to prioritize goals and decide if they are achievable. Developing realistic strategies will assist you in your operational planning.
Below is an example of a strategy:
Resource Management Goal: (from woodlot management plan): To harvest over mature timber in the next five years.
Financial Plan Goal: Improve the value of the woodlot by 5 per cent per year and generate $5,000 annually. There is an abundance of timber on the property, and you don't have equipment or want to purchase it, your best strategy may be to hire contractors to harvest and market the timber, paying you a royalty (stumpage) for the right to harvest the timber.
5. Operating Plans and Budgets
Once strategies have been developed to achieve your goals, more current planning can begin. One-year and five-year operating plans are common for small businesses. This forces you to put on paper want you want to achieve in the next year, while keeping it in the context of a five-year plan. Below is an example of a five-year operating plan for a woodlot. A five-year operating plan can be derived from recommendations in your woodlot management plan.
A typical five year plan may look like this:
| YEAR |
1 |
2 |
3 |
4 |
5 |
TOTAL |
| Harvest (ha) |
4 |
4 |
- |
4 |
- |
12 |
| Boundary lines (km) |
1 |
- |
- |
- |
- |
1 |
| Roads (km) |
1 |
1 |
1 |
- |
- |
3 |
| Site preparation (ha) |
- |
- |
4 |
4 |
- |
8 |
| Planting (ha) |
- |
- |
- |
4 |
4 |
8 |
| Snowmobile trails (km) |
- |
- |
1 |
- |
- |
1 |
| Camp |
- |
- |
- |
- |
1 |
1 |
After reviewing your five year operating plan, you are able to develop a five-year budget. By talking with local contractors, and forestry professionals you can estimate the revenues (money coming in) and costs (money you pay out). At this stage, these numbers do not have to be exact, they need only be reasonable estimates.
By applying estimated revenues and costs to your five year operating plan above, you can develop a five year budget which may look as follows:
| YEAR | 1 | 2 | 3 | 4 | 5 | TOTAL |
| REVENUE | ||||||
| Stumpage | 9000 | 9000 | - | 9000 | - | 27000 |
| EXPENSES | ||||||
| Boundary | 1600 | - | - | - | - | 1600 |
| Roads | 3000 | 3000 | 3000 | - | - | 9000 |
| Site Prep. | - | - | 720 | 720 | - | 1440 |
| Stock | - | - | - | 1120 | 1120 | 2240 |
| Planting | - | - | - | 1067 | 1067 | 2134 |
| Trails | - | - | 2000 | - | - | 2000 |
| Camp | - | - | - | - | 4000 | 4000 |
| Total | 4600 | 3000 | 5720 | 2907 | 6187 | 22414 |
| Revenue - Expenses | ||||||
| +4400 | +6000 | (5720) | +6093 | (6187) | +4586 | |
The five year plan, although not a cash flow forecast, will give you a sense of what cash resources will be required each year. It will also indicate if the activities you are planning are profitable and if the results meet your financial goals. If not, (as in the above example) you can change you strategies, or modify both your financial or resource plan goals and produce another five year budget until your action plan meets both your financial resource management goals.
From your five year operating plan, you can develop your one year operating plan. These can be completed month by month, seasonally or for the whole year. The one year operating plan should be more detailed and accurate than the five year plan.
ONE YEAR OPERATING PLAN
|
|
Spring
|
Summer
|
Fall
|
Winter
|
Total
|
|
Harvesting
|
-
|
-
|
4
|
-
|
4
|
|
(ha)
|
|||||
|
Boundary
|
4
|
-
|
-
|
-
|
4
|
|
lines (km)
|
|||||
|
Roads (km)
|
-
|
1
|
-
|
-
|
1
|
From your one year operating plan you can develop a one year budget. Try to be as accurate as possible when developing a one year budget. You should call markets and suppliers for current prices. A one year budget generated from the action plan above may look like this:
|
REVENUE Harvesting (Four ha have been cruised, there is supposed to be 350 cords). |
|
| A contractor has offered $30/cd in one lump sum payment as stumpage (the right to harvest the wood). | 10,500 |
| Right-of-way harvest | |
|
50 cords @ $20/cord
|
1,000 |
|
Total Revenues
|
$ 11,500 A |
| EXPENSES | |
| Boundary line- | |
| A local surveyor will establish one | |
| kilometer of boundary line | 1,500 |
| Road construction- | |
| A local road construction contractor | |
| gave me an estimate for building the | |
| road: however, I must harvest the | |
| right-of-way myself. | |
| Road Construction | 1,800 |
| Culverts | 500 |
| Gravel | 800 |
| Total Expense | $4,600 B |
| Surplus | $6,900 (A-B) |
Developing operating plans and budgets are critical. They force you to put your plans on paper and generate projected financial results which you can compare to your financial goals. If the results are not acceptable to you, you can change your strategies or your goals.
Business plans need constant updating, review your business plan at least once a year. Events will happen that will cause you to change your plans and strategies. You can bet on it. However, if you use the above process you can forecast how these changes will impact your financial health.
RECORD KEEPING
General records are not part of the planning process however, proper record keeping allows you to compare what you forecast to what you actually complete. Keeping records is not exciting; however, it is the only way to know if you are meeting the financial goals set out in your financial plan.
To have good records requires a system to keep track of the records generated during operations. Establish two sets of records; one we will call General records and one we will call Financial records. These types of records to be kept in these categories are discussed in more detail below.
General Records
General records include the records on the woodlot that are not financial. You do not need an elaborate filing system to hold these records. However, a small filing cabinet would be appropriate; if unavailable, a filing box would do the job.
General woodlot records tend not to be annual records. These are records you would like at your finger tips from year to year; therefore, a place has to be allocated in your filing cabinet to contain them year after year. Some example of general files are listed below:
1. Title of Property
A file should contain information such as the deed, certificate of title, a survey map, and boundary line or right-of-way agreements.
2. Woodlot Management Plan
A file folder should contain your woodlot management plan and a copy of all maps relating to activities on your woodlot.
3. Technology
File any new information regarding technology that may pertain to your woodlot. You may not use it today; however, there may be a need for it in the future.
4. Woodlot Owners Association
Retain information on associations, cooperatives, etc.
Financial Records
Financial Records are usually annual records. The calendar year is usually used as a reporting period. At year end, they can be taken out of the filing cabinet and stored in a more permanent location such as a vacant room in the house, basement, etc. For very small operations this may not be necessary, and they should be kept in your filing cabinet. You should keep these files for at least seven years, but longer if possible.
Most of the time, financial records are used to calculate income for taxation purposes. However, financial records can also be used to assist you in the management of your woodlot. This type of record keeping is sometimes termed "managerial accounting."
A financial record keeping system should be simple in the beginning with flexibility to grow and develop with the business. The simplest form of financial record keeping is a system that keeps track of revenues and expenses. This system requires a calculator, four file folders, and a synoptic journal which can be purchased at any stationary store. This system allows you to develop a statement of income (Income Statement). Comparing your one year budget to your Income Statement will allow you to compare your forecast to how you actually did financially.
The general journal will be used to record all financial transactions, as indicated in the illustration. It is simply a lined scribbler with columns. The columns allow you to record the date of transaction, whether it is a revenue or expense, and the amount. It may be useful to group revenues or expenses into categories such as timber, recreation, roads, boundary lines, etc. To simplify record keeping, you should record on a cash basis in your general journal.
 |
|
Figure 32.
A general journal. |
As needs require, you may want to record income and expense on an accrual basis - it is suggested you consult an accountant to set up your books for accrual recording. There are a few more accounts to keep track of. The only difference between accrual and cash accounting is the time when you record the revenues and expenses in your journal.
Cash basis is recorded when you receive the money or pay the bill, while an accrual basis the transaction is recorded when you earn the revenue or occur the expense.
Once your general journal is prepared, you should label file folders for accounts receivable, accounts payable, revenue and expenses.
These file folders will be used to retain the sources documents of your financial transactions during the year.
Note, we will have an ‘accounts receivable' folder and an ‘accounts payable' folder to put sales slips and invoices in until we get paid or pay for them, at which point we will record them.
Accounts Receivable
This folder contains the invoices you issue. The invoice will be kept in the folder until you receive your payment at which time you will pull it out and place it into your revenue folder.
Accounts Payable
This folder will contain any invoices that are sent to you. They can be kept in this folder until you pay them when they will be placed in the expense folder.
Revenue
This folder will be used to contain all account receivable invoices and sales slips that you have received when you are paid for the products. These are the source documents for income transactions - they are a critical document for any record keeping system. Before inserting them into this folder in alphabetical order, the transactions should be recorded in the synoptic journal.
Expenses
This folder will be used to contain all accounts payable invoices that you have paid and payments records. These are source documents for expense transactions - as with revenue, they are critical documentation for any record keeping system. Before inserting them into this folder in alphabetical order, the transactions should be recorded in the general journal.
All bills should be paid with cheque and revenues be deposited into a bank account. Cheque books and deposits slips generate good records.
Accurately recording the revenues and expenditures will generate an income statement, which can be used to make comparisons between actual and budget income statements.
SAMPLE INCOME STATEMENT
| BUDGET | ACTUAL | |
| Revenue | ||
| Harvesting | $10,500 | $10,500 |
| Right-of-way harvest | $1,000 | $1,000 |
| Total Revenue | $11,500 | $11,500 |
| Expenses | ||
| Boundary lines | $ 1,500 | $ 1,550 |
| Roads | $ 3,100 | $ 3,250 |
| Total Expense | $ 4,600 | $ 4,800 |
| Budget Surplus | $ 6,900 | $ 6,700 |
The totals in this example indicate the year wasn't quite as good as the financial forecast. By reviewing the individual accounts, the reason for the difference can be found.
This simple system to keep track of financial records has two purposes:
1. Revenue and expense information is readily available to compare to the budget, and you can be used to assist in reviewing this year and planning for next year.
2. Records of transactions are available to prepare your year end tax return.
Other statements discussed on page 42 can be used to enhance record keeping and managerial accounting; however, they are not required to get you started.
FINANCING
Once you have developed your annual operating plan, to meet your financial goals, and record keeping system, thought must be given to financing the operations. If you have a pool of cash available, you may not have to give much thought to this. However, most people do not have cash waiting to be used.
Cash is required by businesses to pay weekly expenses such as wages, monthly expenses such as goods and services used, interest, insurance, etc., and yearly expenses such as taxes.
Where do I find the cash to run my business: (woodlot)?
1. Sales
One of the best ways to generate cash is through sales of products from your woodlot. Unfortunately, woodlot owners cannot always sell enough products to meet all their obligations.
2. Borrowing
a) Suppliers of goods and services - most suppliers give you 30 days to pay their invoices. In fact, they are lending you money for 30 days. Most businesses use their suppliers as a source of cash; however, this form of financing has to be managed properly or you will upset you suppliers and it may end up costing you more in late charges or loss of services.
b) Family and friends - family and friends are a source of cash when needed; however, the loan should be treated in a business-like way with a note being generated and an interest rate attached. It is a win-win situation when it is handled properly. The borrower raises money for operations, the family member of friend places their money with a secure investment and receives an appropriate interest rate for the use if the money.
c) Financial Institutions - borrowing short term money from financial institutions is a good source of cash to run your business or woodlot. Two common sources of financing are:
1. Short term note - the financial institution lends you a lump sum of money and you promise to pay it back in a certain period of time, with interest.
2. Line of Credit - the financial institution will pre-approve a credit limit, which you can borrow against when you require money to operate your business. A line of credit is becoming the method of choice by most business owners because they only borrow and pay interest on the money they use.
If borrowing with a line of credit from a financial institution, they may require you to do a cash flow so they can identify the times of the year you will require the money. This is not a difficult task.
Cash flow forecast
This is a forecast of money flowing into and out of a business. The forecast is developed by making assumptions on how long it will take to receive money generated from your sales (I.E. 30 days, 60 days, etc.) and how quickly you pay your bills. By using the annual budget, you can predict your cash flow and identify times during the year when cash will be short.
If you expect to have a lot of activities happening on your woodlot and do not have cash to meet the commitments, you may want to develop a cash flow forecast. You should consult an accountant or book keeper to get you started.
A financial institution may also require a list of what assets the business (woodlot) has and what liabilities the business (woodlot) owes. The financial institution requires this to get a feel for the business' ability to pay back the loan. A common way is in the form of a balance sheet.
BALANCE SHEET
The balance sheet is a statement that shows the financial position of a business (woodlot) at a particular point in time. It lists the assets, liabilities and worth (equity) of the business (woodlot). It gives leaders an idea of what the business is worth and allows you to track your investments.
In the example below, we see that the Burt Smith woodlot as of December 31, 1996 is worth $32,000. This amount is calculated by subtracting the liabilities from the assets of the woodlot. The amount ($32,000) is also referred to as the Equity. Equity is the book value of the business (woodlot). It may not reflect the actual value, since the only way to calculate this is to obtain a detailed appraisal of the assets or sell all the assets and pay all the liabilities. What is left is the actual figure the woodlot is worth.
Book keeping systems will generate a balance from your daily transactions. These skills can be picked up at a book keeping course.
|
BURT SMITH- WOODLOT
Sample Balance Sheet December 31, 1997 |
|
| Assets | |
| Cash | $2,000 |
| Receivables | $6,000 |
| Bare land | $10,000 |
| Timber Value | $25,000 |
| Total | $43,000 |
| Liabilities | |
| Payables | $1,000 |
| Loan | $10,000 |
| Total | $11,000 |
|
Equity = Assets- Liabilities
|
|
|
32,000=43,000-11,000
|
|
Cash is money in the bank account of the business (woodlot)
Payables is money owed to suppliers
Receivables are moneys owed to the woodlot by buyers
Loan is long term loans used to purchase the woodlot
Bare land is the value placed on the bare land
Timber Value is the value of timber on the woodlot
Equity is the book value of the business (woodlot)