Factors to Consider When Starting an Agricultural Business

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					   Factors to Consider When
Starting an Agricultural Business
Profitability

Questions to Ask:
  –   Does this enterprise have promise to deliver large
      enough revenue relative to the investment
      required?
  –   Can I build in special competitive factors that can
      enable profits to be durable over time?
  –   Is there considerable up front cost to be incurred?
                        A PRIMER for selecting enterprises for your farm
          Profitability     Resources       Information      Marketing      Enthusiasm           Risk

         PROFITABILITY 1
         Use this worksheet to estimate a budget for the proposed enterprise on a per acre, per head
         whole enterprise basis. This generic budget worksheet can be used for crops or livestock.

Budget   Gross Returns
         Amount                          times Price                      equals

         Cash Costs
                             Quantity
         Seed                            times   Price                    equals
         Fertilizer                      times   Price                    equals
         Lime                            times   Price                    equals
         Pesticides                      times   Price                    equals
                                         times   Price                    equals
                                         times   Price                    equals
         Feed                            times   Price                    equals
         Vet supplies                    times   Price                    equals
         Mineral                         times   Price                    equals
                                         times   Price                    equals
         Fuel                            times   Price                    equals
         Electricity                     times   Price                    equals
         Water                           times   Price                    equals
                                         times   Price                    equals
         Hired Labor                     times   Price                    equals
         Machine Hire                    times   Price                    equals
                                         times   Price                    equals
         Mkt. Fees                       times   Price                    equals
         Packaging                       times   Price                    equals
         Transportation                  times   Price                    equals
                                         times   Price                    equals
                                         times   Price                    equals
                                         times   Price                    equals
                                         times   Price                    equals
                                         times   Price                    equals
         Total Cash Costs

         Gross Returns minus Total Cash Costs equals Return over Cash Costs

         This is the amount left over to pay loan payments, depreciation on capital assets, investmen
         owned capital, payments for family labor, and a payment for management and risk taking.
              Annual Cash-flow
                A PRIMER for selecting enterprises for your farm

            Profitability           Resources    Information   Marketing    Enthusiasm       Risk

     PROFITABILITY 2
     Use this worksheet to estimate the amount and timing of cash flowing into and out of the business. One table is for a typical year, the other is for projects whose cas

     Annual Cash Flow Budget (Typical year)
     Item                              Jan           Feb          Mar           Apr          May           Jun           Jul          Aug           Sep
1           Beginning Balance
2 Product Sales
3 Service Revenues
4 Capital Asset Sales
5
6
7            Total Cash Inflow

 8   Purchased Inputs
 9   Labor
10   Utilities
11   Capital Asset Purchases
12
13
14   Total Cash Outflow

15   Net Cash Flow (7 minus 14)
16   plus Loan Proceeds
17   minus Loan Payments
18    Ending Balance
                  Long Run Cash-Flow
                A PRIMER for selecting enterprises for your farm

            Profitability           Resources    Information    Marketing   Enthusiasm       Risk

     PROFITABILITY 2
     Use this worksheet to estimate the amount and timing of cash flowing into and out of the business. One table is for a typical year, the other is for projects whose cash flows wiil vary each year.

     Long Run Cash Flow Budget for Multi-Year Projects
     Item                             Year 1        Year 2       Year 3        Year 4       Year 5        Year 6        Year 7       Year 8        Year 9       Year 10       Year 11      Year 12
1           Beginning Balance
2 Product Sales
3 Service Revenues
4 Capital Asset Sales
5
6
7            Total Cash Inflow

 8   Purchased Inputs
 9   Labor
10   Utilities
11   Capital Asset Purchases
12
13
14   Total Cash Outflow

15   Net Cash Flow (7 minus 14)
16   plus Loan Proceeds
17   minus Loan Payments
18    Ending Balance
Financial Versus Economic Feasibility

   The difference between being able to make
    an economic profit and being able to cash
    flow the enterprise.
   Depreciation and Loan Repayment
Economic Feasibility
Break-Even Analysis (Volume)


Breakeven Volume                   Total Fixed Cost
                           ( Selling Pr ice  Variable Cost Per Unit )



Breakeven Volume                 $25,000               25,000 Units
                              ($2.50  $1.50)
Break-Even Analysis (Sales)


  Breakeven Sales                  Fixed Costs
                        (1    Variable Cost   / Sales Pr ice



  Breakeven Sales               $25,000             $62,500
                         (1    $1.50 / $2.50
Risk


Questions to Ask:
 –   Is this enterprise adaptable to my area?
 –   Are there significant sources of production risk?
 –   Are there significant sources of financial risk?
 –   Are there significant sources of marketing risk?
Risk

   Types of Risk
    –   Market (Price)
            Supply
            Demand
    –   Production
            Weather
            Insects
            Disease
            Equipment Breakdown
    –   Financial
Start-up Resources

   What are the Sources of Capital?
    –   Debt
    –   Equity
   How Much Capital is Required?
Start-up Resources

   Commercial Bank Loans
    –   Loan Proposal
            Loan Request
            History and Nature of the Business
            Management
            General Information
            Financial Information
Start-up Resources

Five C’s of Credit
   Character
   Capacity
   Capital
   Collateral
   Conditions
Start-up Resources

   Venture Capital Funds
   Revolving Loan Funds
   Federally Guaranteed Loans
   Certified Development Companies
   Government Grants
   Public Offering of Securities
Factors To Consider When Choosing a
Business Structure


    The Most Common Business Structures
     –   Sole Proprietorship
     –   Limited Partnership
     –   Business Corporation
     –   S Corporation
     –   Nonprofit Corporation
     –   Limited Liability Company
     –   Cooperatives
          Comparison of Business Types

                 Proprietorship            General               Limited          Corporations              LLC               Cooperatives
                                          Partnership          Partnership

Method of      Owner commences         Created by            Created by          Charter issued      Charter issued by      Charter issued by
Creation       business activity       agreement of the      registration with         by            the state under        the state under
                                       Parties               the state under     the state under     Statutory              Statutory
                                                             Statutory           Statutory           authority                    authority
                                                             authority           authority


Entity         Not separate from       In some cases , can   Separate from       Legal entity,       Legal entity           Legal entity
     Status    owner.                  be separate from      limited partners,   separate and        separate and           separate and
                                       owners.               not usually         distinct from       distinct from the      distinct from the
                                                             separate from       owners.             member/owners.         member/owners
                                                             the general
                                                             Partners


Liability of   Owner is 100%           Unlimited liability   Limited liability   Shareholders        Members enjoy          Member is liable
Owners         liable for all debts.   for all partners.     for limited         liable only to      Complete limited       only to extent of
                                                             partners only.      extent of paid-in   liability similar to   paid-in capital.
                                                                                 capital.            that of limited
                                                                                                     partners.
     Comparison of Business Types
                Proprietorship         General                 Limited          Corporations            LLC              Cooperatives
                                      Partnership            Partnership

Duration      Same as owner        Terminated by          May be perpetual      May be            May be required      May be perpetual
                                   agreement of                                 perpetual         to specify term
                                   partners, or by a                                              of years; must be
                                   partner’s death,                                               99 years or less
                                   withdrawal or
                                   bankruptcy

Transfer of   May be sold at any   Generally, sale of     Limited partner       Shareholders      Operating            Membership
Interest      time                 partnership interest   may sell interests;   may sell or       agreement            limited to
                                   terminates the         general partners      transfer shares   defines              agricultural
                                   partnership; may       may not sell          of stock          restrictions, if     producers and
                                   create new             interests without                       any, to              may be further
                                   partnership.           consent of the                          transferability of   limited by charter
                                                          others, depending                       a member’s
                                                          on the by-laws or                       interests
                                                          charter
Control       By owner             General partners       Limited partners      Shareholders      The company is       Members elect the
                                   each have a direct     have no               elect the Board   owned by its         Board of Directors
                                   and equal voice in     management rights     of Directors      members and is       which sets policy
                                   management unless      or control            which sets        managed by its       and appoints
                                   expressly agreed to                          policy and        members or by        officers
                                   otherwise                                    appoints          elected
                                                                                officers          managers; an
                                                                                                  Operating
                                                                                                  Agreement
                                                                                                  governs policy
Comparison of Business Types

            Proprietorship       General             Limited      Corporations          LLC           Cooperatives
                                Partnership        Partnership
Capital    Limited to what     What the           What the        Based on          Raised by the     Based on
           the owner raises    general            limited         issuance and      members           equity
           himself             partners can       partners and    sales of shares   themselves        contribution of
                               raise              general         of stock                            members and
                               themselves         partners can                                        debt
                                                  raise
                                                  collectively
Taxation   Profits are taxed   Profits are        Profits are     Double            Profits may be    Limited tax
           to owner as an      usually taxed      usually taxed   taxation;         taxed to each     exemption in
           individual          to each owner      to each         corporate         member            some cases
                               as agreed in       general         profits are       similar to a      when profits
                               contract, or all   partner and     taxed to the      partnership, or   allocated to
                               share equally      each limited    corporation;      the company       members.
                               whether or not     partner as      shareholder       •may be taxed
                               distributed        agreed in       profits in form   as a
                                                  contract        of dividends      corporation
                                                                  are taxed as
                                                                  they receive
                                                                  them

				
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posted:9/2/2011
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