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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: [email protected]
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!!
