factors to consider when starting an agricultural business

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?

Budget

A PRIMER for selecting enterprises for your farm

Profitability Resources Information Marketing Enthusiasm Risk

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

Gross ReturnsAmount times Price equals

Cash CostsQuantity

Seed times Price equalsFertilizer times Price equalsLime times Price equalsPesticides times Price equals

times Price equalstimes Price equals

Feed times Price equalsVet supplies times Price equalsMineral times Price equals

times Price equalsFuel times Price equalsElectricity times Price equalsWater times Price equals

times Price equalsHired Labor times Price equalsMachine Hire times Price equals

times Price equalsMkt. Fees times Price equalsPackaging times Price equalsTransportation times Price equals

times Price equalstimes Price equalstimes Price equalstimes Price equalstimes 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, investment on owned capital, payments for family labor, and a payment for management and risk taking.

Annual Cash-flowA PRIMER for selecting enterprises for your farm


PROFITABILITY 2Use 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.

Annual Cash Flow Budget (Typical year)Item Jan Feb Mar Apr May Jun Jul Aug Sep

1 Beginning Balance2 Product Sales3 Service Revenues4 Capital Asset Sales567 Total Cash Inflow

8 Purchased Inputs9 Labor

10 Utilities11 Capital Asset Purchases121314 Total Cash Outflow

15 Net Cash Flow (7 minus 14)16 plus Loan Proceeds17 minus Loan Payments18 Ending Balance

Long Run Cash-FlowA PRIMER for selecting enterprises for your farm


PROFITABILITY 2Use 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 ProjectsItem 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 Balance2 Product Sales3 Service Revenues4 Capital Asset Sales567 Total Cash Inflow

8 Purchased Inputs9 Labor

10 Utilities11 Capital Asset Purchases121314 Total Cash Outflow

15 Net Cash Flow (7 minus 14)16 plus Loan Proceeds17 minus Loan Payments18 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 Volum e Tota l F ixed Cost

Selling ice Variab le Cost P er U nit

( P r )

Breakeven Volum e Units

$ 2 5, ,

($ 2 . $ 1. )

0 0 0 2 5 0 0 0

5 0 5 0

Break-Even Analysis (Sales)

Breakeven Sa les F ixed Costs

Variab le C ost Sa les ice

( / P r1

Breakeven Sa les

$ 2 5, $ 6 2 ,

( $ 1. / $ 2 .

0 0 0 5 0 0

1 5 0 5 0

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

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 GeneralPartnership

LimitedPartnership

Corporations LLC Cooperatives

Method ofCreation

Owner commences business activity

Created byagreement of the Parties

Created byregistration with the state underStatutoryauthority

Charter issued by

the state underStatutoryauthority

Charter issued bythe state underStatutoryauthority

Charter issued bythe state underStatutory

authority

Entity Status

Not separate from owner.

In some cases , can be separate from owners.

Separate fromlimited partners,not usuallyseparate fromthe generalPartners

Legal entity,separate anddistinct fromowners.

Legal entityseparate anddistinct from themember/owners.

Legal entityseparate anddistinct from themember/owners

Liability ofOwners

Owner is 100% liable for all debts.

Unlimited liabilityfor all partners.

Limited liabilityfor limitedpartners only.

Shareholdersliable only toextent of paid-incapital.

Members enjoyComplete limitedliability similar tothat of limitedpartners.

Member is liableonly to extent ofpaid-in capital.


LimitedPartnership


Duration Same as owner Terminated byagreement of partners, or by a partner’s death, withdrawal or bankruptcy

May be perpetual May be perpetual

May be required to specify term of years; must be 99 years or less

May be perpetual

Transfer of Interest

May be sold at any time

Generally, sale ofpartnership interest terminates the partnership; may create new partnership.

Limited partner may sell interests; general partners may not sell interests without consent of the others, depending on the by-laws or charter

Shareholders may sell or transfer shares of stock

Operating agreement defines restrictions, if any, to transferability of a member’s interests

Membership limited to agricultural producers and may be further limited by charter

Control By owner General partners each have a direct and equal voice in management unless expressly agreed to otherwise

Limited partners have no management rights or control

Shareholders elect the Board of Directors which sets policy and appoints officers

The company is owned by its members and is managed by its members or by elected managers; an Operating Agreement governs policy

Members elect the Board of Directors which sets policy and appoints officers



LimitedPartnership


Capital Limited to what the owner raises himself

What the generalpartners can raisethemselves

What the limited partners and general partners can raise collectively

Based on issuance and sales of shares of stock

Raised by the members themselves

Based on equity contribution of members and debt

Taxation Profits are taxed to owner as anindividual

Profits are usually taxed to each owner as agreed in contract, or all share equally whether or not distributed

Profits are usually taxed to each general partner and each limited partner as agreed in contract

Double taxation; corporate profits are taxed to the corporation; shareholder profits in form of dividends are taxed as they receive them

Profits may be taxed to each member similar to a partnership, or the company•may be taxed as a corporation

Limited tax exemption in some cases when profits allocated to members.


factors to consider when starting an agricultural business

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