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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
"Factors to Consider When Starting an Agricultural Business"