Adapting and Planning for Farm Businesses in Uncertain Times

Farms and agribusinesses are not immune to a variety of shocks and business disruptions that can occur. In fact, it could be argued that farms and agribusinesses are more vulnerable than many other small businesses. If you and or your spouse were to develop a life-threatening illness tomorrow, would your farm business be at risk of collapsing?  What would happen if your most valuable employee were to walk off the job?  Do you have a plan to notify customers if your product is contaminated? What will you do if market prices drop by fifteen percent? What happens if your computer crashes and you lose your financial records? Do you have a social media policy for your business?  These situations illustrate some of the risks that farm businesses can face.

Farms and agribusinesses can be impacted by production, marketing, financial, legal, and human resource (Marshall and Alexander, 2005), and even social media risks. It is likely that any operational farm has experienced a business disruption in the form of the recent pandemic (COVID-19), a recession, a market downturn, a natural disaster, or even the effects of climate change. However, little is known about how farms are managed through the recovery process.

Farms are specifically vulnerable to weather-related (production) and human resource (people-related) risks. However, many risks can be minimized or avoided with proper planning. Proper planning is not limited to contingency planning. It also extends to being prepared overall in the business, such as having an updated business plan and set of financial records stored in an accessible place and having updated business contacts and passwords in a secure location.

Formalized contingency planning and efficient management can improve business performance and minimize damages when your business has an interrupting event. Benefits of contingency planning can include: allowing you to focus on the right proprieties in your family and business, allowing the business to function during the illness or absence of a key person, and giving employees a better opportunity to plan their own lives.

What is a contingency plan? A business contingency plan is a set of procedures that defines how a business will continue or recover its critical functions in the event of an unplanned disruption to normal activities. No other process does a better job of making a business assess its operations and processes. It’s a structured exercise of planning what to do when key operations are not available. The following components are included in a contingency plan:

1. Risk Assessment. The risk assessment component of plan allows businesses to identify and exclude activities in the business that expose the business to unacceptable risk. The risk assessment increases the likelihood that you will select the best possible combination of risk management strategies.
2. Business Impact Analysis. During this step of contingency planning, you analyze the impact that events could have on your business in terms of operating impact (loss of the business or operating efficiency), financial impact (loss of customers, business credit rating, increased cost of temporary help, or cash flow problems), and legal impact (unfulfilled contracts with suppliers, customers, and/or vendors). During this phase, you need to identify the critical functions within the business to fully analyze business impact. For any event that you can see occurring in your business, consider both probability and consequences so that you can decide which strategy to use.
3. Risk Management Strategies and Tools. Be sure to document procedures for handling an incident (i.e. who performs what critical business functions). You should have a checklist for employees that details the procedures for each critical business function and for handling financial issues. There are four main strategies for dealing with risk:
   1. Risk avoidance requires a business to take actions to evade risky situations.
   2. Risk reduction includes businesses taking actions that build an extra degree of safety into a situation with an identified level of risk.
   3. Risk anticipation (retain the risk) promotes self-insurance.
   4. Risk transfer depends on the use of insurance.
4. Risk Management Goals. Goals provide targets to aim for and provide a basis for evaluating business performance. Be sure to involved family and key employees in the planning process to create a sense of group ownership in the business goals.
5. Document the Plan. Write down the plan, share it with family and employees, and update it annually.

Contingency planning may initially seem like a large ask in terms of focused time, but when (not if) your business experiences a disruption, you will be glad that you have your plan.

This article was adapted from “Contingency Planning for Your Farm Business” by Renee Wiatt and Maria Marshall, found in PIFB Quarterly Newsletter, 2021 Winter Edition (https://ag.purdue.edu/department/agecon/fambiz/newsletters.html).