Holistic Management Financial Planning

This power point guides you through the Holistic Management Annual Financial Planning process and reviews the Holistic Goal and financial testing questions.

1. What information does the gross profit analysis give you to evaluate an enterprise? Why is that important?
2. What is the purpose of doing a cash flow budget and how can the information be used in managing a farm?
3.Why calculate both a beginning and a projected ending net worth in the planning process?
4. What elements could comprise an increase in the net worth of a farm?
5. Describe the difference between being profit oriented versus production oriented?

In this year’s class, we used student examples to work through the testing questions.  Then she went through a review of section 5 from the binder – Healthy profits, which is also covered in the workbook.

Topics of the day included:
Making financial decisions toward your holistic goal
Planning for profit
Prioritizing expenses to maximize investing in the areas that need it the most (addressing the weakest link in the production chain)
Analyzing your enterprises
Monitoring your plan (usually monthly) and proactively making necessary changes along the way to get where you want to be

Next we discussed the difference between financial planning, management and accounting, and reviewed the testing questions again.

We tested the question “Should I buy a rototillar?”
One of the farmers gave the background for the decision, then we ran through the testing questions together.

1. Cause and Effect – Does this action address the root cause of the problem? Our answer was yes, it answered the root cause of her problem – they didn’t have enough labor to do all the jobs she needed to get done. Note: the answer would be different depending on the holistic goal for the decision makers.
2. Weakest link – this was an issue of the weakest link being a resource conversion problem
3. Marginal Reaction – which action provides the greatest return in terms of my holistic goal for the time and money spent? In this case, the alternative considered, was to rent a smaller rototiller as needed instead of buying a good one.
4. Gross Profit Analysis – when comparing two or more enterprises which of these enterprises contributes most to covering the overheads of the business? This one didn’t apply because we weren’t comparing two different enterprises.
5. Energy source and Use – Is the energy or money used in this action derived from the most appropriate source in terms of your holistic goal? This depended a lot on how the decision makers view sustainability, and what is in their quality of life statement and how those things relate to how they want to use energy ex. solar or human power versus petroleum based.  Similarly, how they defined their desired relationship to money and debt, for example, the decision makers would need to decide if they were comfortable getting a loan of money from family, vs. taking a draw from their savings, or getting a loan from a local bank versus a big bank who will use their interest to leverage even more money that supports other bigger businesses that may destroy the environment by using your interest to offer a loan to a huge mining corporation.
6. If we take this action will it lead toward or away from the future resource base described in our holistic goal?

At this point, many questions started coming up and it turned out that people didn’t quite get enough information last time about what is included in the “future resource base.” We discussed several ideas of what is or isn’t included in the future resource base, the complexity of all the jargon. We slowed down a bit, and came to the conclusion that the main point is just that understanding the components is a good goal for this course, and not necessarily focusing on all the details and nuances at this introductory level.

We then took a look at the next steps for the rest of the afternoon in financial planning:
1. review progress towards your holistic goal,
2. assess starting net worth
3. plan income
4. plan profit
5. define weak link per enterprise
6. plan and sort expenses (WIM)
7.cash flow
8. assess ending net worth
9. plan, monitor, control, replan

A review of the steps in the financial planning process are:

Step 1. assess progress toward holistic goal and the concept, including Logjams.

At the start of each year, you complete an annual financial plan and to identify if there are any logjams, you need to ask the questions: Is there anything keeping us from making SIGNIFICANT progress toward our holistic goal? (Across the operation).

If so, it gets first priority for time and money. This is a wealth generating expense. Often can be leadership, attitude, etc.

Step two – begin with outlining your Net Worth, total assets and total liabilities. Put the date on it. Homework – find out the details and actual values for the worksheets on network.

The first question that came up was do you include your non-farm job income in your annual financial plan. Our discussion led to us realizing that you can have separate plans for a business and for your life, but if your holistic goal includes your business decisions and how they impact your life, then you should look at both your personal finances and your business and/or consider the business as one of potentially many enterprises.

From there, we began to work on our individual net worth sheets.
Next we filled out a worksheet with all our monthly income expected for 2011.

Step 4: Planning for Profit, we discussed all the ways to keep as much profit at the end of the year. From shrinking debt, and minimizing expenses, especially maintenance expenses.

We stated what profit we reasonably wanted: ex. I want a profit of 10% of $56,000 (total expected income). For: Savings (buffer), Investing (wealth generating or addressing key problems like logjams)
Increased Net Worth and Improved Quality of Life.

After you have addressed log jam expenses you need to invest some of that profit in, you identify the weak link in each of your enterprises.

After you have outlined the expenses for the year by month, then you reduce your expenses as much as possible to the point that you can accomplish your planned profit, or determine that you will need to find a way to accomplish additional income generation so you can reach that profit you want.