Adding New Enterprises: The Financial Aspects Dr. Alex White Virginia Tech

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

 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 Alex

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!!