Adding New Enterprises: The Financial Aspects Dr. Alex White Virginia Tech axwhite@vt.edu...

Adding New Enterprises:The Financial Aspects

Dr. Alex WhiteVirginia Techaxwhite@vt.edu540-231-3132

So, You Want to Add an Enterprise Lots of opportunities!

Products Alternative crops, medicinal crops, organics, etc.

Services Freezer meats, catering, landscaping, custom work

Take advantage of markets But, treat it like a business

Treat it Like a Business? Identify a need for your product/service

Do this before starting production!! Clearly define your target market

Develop customer profiles Clearly define your business goals!!

Why are you in this business?

Other Business Aspects Legal organization

Sole Prop., Partnership, LLC, C-corp, S-corp Labor needs and availability

Develop written job descriptions Risk management

Insurances, protocols, etc. Liability insurance is a must!!

Still More Business Aspects Marketing – the 4 Ps

Product, Pricing, Promotion, Place Critical for small businesses!!

Contingency Plans (Plan B, C, D) Helps you react to or avoid potential problems

And Finally… The Financial Aspects

The Financial Aspects Profitability

Ability to generate profits Short run and Long run

Breakeven Analysis Cash Flow

Can you meet your cash outflows? Making the Decision

Financial and non-financial factors

Profitability The ability to generate profits (Rev – Costs) Crucial for long-term success! Need to identify all costs associated with the

new enterprise Enterprise Budgets – products

Ginseng, blackberries, pumpkins, hair sheep, etc.

Job Cost Estimates – services Freezer meats, catering, consulting, landscaping, etc.

Enterprise Budgets Listing of all revenues and costs

Associated with a particular enterprise Looks at profitability

Cover Variable Costs (VC) in short run Cover Total Costs (TC) in long run

Allows for Breakeven Analysis Powerful tool!!

Identify potential management strategies

Pumpkin Enterprise Budget Look at the information

Revenues Variable Costs Fixed Costs Analysis

Return Above VC Return Above TC Breakeven Price and Yield

Using an Enterprise Budget Should you grow pumpkins this year?

For the next 10 years? What can you do to improve the profitability? How much operating capital will you need for

5 acres of pumpkins? How much labor do you need for 5 acres?

Other Examples Ginseng – 4-year production process

Blackberries – 15-year process

Basically the same process Identify the inputs, the costs, the returns

Job Cost Estimates Great tool for “pricing” your services Common in contracting, landscaping Similar to Enterprise Budgets Binford Tool landscaping example

Freezer Meat example

Cash Flow Statement Cash flow is “King”!! Need to be able to meet your cash outflows Very powerful tool for managers Allows you to determine:

Operating capital needs When to schedule your payments Your top 5 expenses How to “manage” your cash flows

Cash Flow Examples Long form – more detail

Short form – “quick and dirty”

Using a Cash Flow Statement What changes would you make to this

operation?

Evaluating the Decision Look at the “Goods” and “Bads” Partial Budget

Powerful decision making tool Looks at change in profits due to changes in an

operation Helps you consider impact on overall operation Non-financial factors!

Partial Budget Evaluate a change to an operation

Adding an enterprise, increasing/decreasing, buying machinery, changing rations, etc.

Only consider factors that will change!! Good Side

Added Revenues and/or Reduced Expenses Bad Side

Reduced Revenues and/or Added Expenses

What a Partial Budget Tells You The NET CHANGE in profit

NOT the actual profit If net change is positive, financially it makes

sense to make the change If negative, you will be reducing your profits

if you make the change Other (non-financial) factors?

Partial Budget Examples Diner – no longer open for breakfasts Buying spray equipment vs custom hire Growing more hay, less sheep Adding 1 acre of ginseng Direct marketing livestock vs send to market The list is endless!

Partial Budget Exercise 1. Growing 2 acres of coriander

2. Replacing 2 acres of grass hay with 2 acres of coriander

So What? BEFORE you get into business

Do some homework on the business Look at all aspects, not just financials!

Examine the profitability AND cash flow Breakeven and Sensitivity analyses

Partial budgets help you think it through Think about the non-financial factors!!

Use your analysis to make a sound decision

Where to go for Help Local Extension Service

WVU, VT, NC State, Ohio State, MD Production materials May have economic materials

Don’t count on it for medicinal plants!

Other Producers Lenders

Possible experience with enterprise

More Help (Maybe!) Alex’s Small Business Management course

Comprehensive business plans as student projects

Copies of Excel spreadsheets Great management tools Excellent for sensitivity analysis Email Alex at: axwhite@vt.edu

Parting Shots Don’t forget:

Marketing Risk management & legal organization Contingency plans

Must cover VC in short run TC in long run!

Enjoy what you do – that’s worth a lot!!