Get documents about "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
