Al and Nan had discussed the idea off and on for years. Now, with the farm operating efficiently, they thought some extra income and new work experience for the family’s nearly adult children would be valuable. This could be the right time to diversify their dairy farming operation and start an artisanal cheese dairy.
Like most farmers, however, Al and Nan had been struggling with a less-than-inspiring economy and the ensuing financial challenges. They didn’t want to put their farm operation at risk in pursuit of a new business venture. They wanted to be confident their new venture would be profitable.
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The chief motivation for most farmers who diversify into a business separate from their farming operation is, quite simply, increasing revenue. Since farming is so capital intensive, it may be challenging to expand the operation without taking on significant debt. Diversifying into a new line of business can also offer the added incentive of utilizing available labour or other resources.
Ultimately, however, a new business needs to make financial sense. A thoughtful, planned approach can test the financial feasibility of a concept and thereby greatly enhance its chances of success. If you’ve been toying with the idea of diversifying into a non-farm business, consider some of the following steps to test whether the concept is likely to offer a financially viable outcome.
Don’t rush the process. It’s better to take several weeks or months to launch a successful enterprise than only days to launch one that’s unsuccessful.
1. Formulate a viable concept
Diversification can take a wide variety of forms, such as manufacturing farm equipment or processing farm products like Al and Nan. Distributing farm equipment or supplies is another diversification route. Or setting up a retail operation such as a roadside market, or establishing a tourism business with farm vacations or educational visits.
If your business idea is unformed, it may help to consider it from a few angles. Typically, successful diversification makes effective use of resources — land, labour, management or capital — just as successful farming does. Thus you may want to consider ways to leverage your existing farm assets to build profits. Do you have people with specialized expertise or skills, for example, which could be transferred to a new venture? In Al and Nan’s case, Nan had been experimenting with cheese making at home for several years and has acquired quite a bit of knowledge about the process, along with contacts in the dairy industry.
It’s also insightful to consider trends related to agriculture and food. What are businesses or consumers buying these days? Nan, for example, knew that demand for artisanal cheeses was rapidly increasing.
2. Determine your goals
It’s important to review your goals for your family, your farm operation and the proposed venture to ensure they’re aligned. You don’t want to find out after months of investing time and money that a key participant does not support the venture. Sit down with all of those who would be involved or impacted by the new venture and have a frank discussion.
3. Inventory needed resources
In order to determine where underutilized farm resources may be leveraged, inventory the resource requirements of the new business. Consider land, water, facilities, equipment, skills, labour and time. Also identify available funds or credit as well as contacts such as friends, advisers, suppliers and customers.
It’s also important to consider the cyclical nature of a proposed business to ensure that it can be synchronized with the farm operation.
4. Identify potential legal obstacles
Be sure that you are on the right side of the necessary rules, regulations and bylaws for a new business. These issues must be addressed early on to ensure you eliminate or minimize potential legal risks. Consult a lawyer and insurer regarding municipal bylaws, food regulations, licences, permits, insurance and other potential legal issues.
5. Determine demand
Market research is essential in order to determine whether there is in fact demand for what you want to sell. It will also integrate with your planning about how much you will need to sell and at what price in order to be profitable.
You’ll want to find the answers to the following questions: who would buy your products? How many potential customers are there? What are the trends for the types of products we are considering? Are any other companies offering what you would? What share of the total available market could you capture?
There are numerous sources from which you can gather your own information, including repu-
A Thoughtful, Planned Approach Can Test The Financial Feasibility Of A Concept And Thereby Greatly Enhance Its Success
table online sources, the library, Statistics Canada, your local chamber of commerce, and provincial agriculture representatives.
6. Plot the complete operation
In order to acquire a complete picture of the costs involved in the proposed venture, document the steps from start to finish. What’s involved in marketing, selling, producing and delivering your product or service?
7. Assess potential profitability
Once you know all of the resources and steps involved in the new venture, you need to determine whether it will be profitable. Depending upon the complexity of the proposed enterprise, you can use financial software to project income and expenses for one to three years or ask your farm accountant for assistance.
8. Determine affordability
While the projected income statement for the proposed business may look profitable, it’s also vital to determine the affordability of the enterprise. Depending upon the type and size of operation, startup costs and operating expenses for the first few months could include:
Building costs, including improvements
Administrative expenses such as licences, permits, rent, fixtures, furnishings, computers, cash registers, copier, phone, utilities, insurance, furniture, office supplies
Cost-of-production expenses such as fixtures, equipment, supplies, packaging, inventory, warehousing, shipping
Sales and marketing expenses
Payroll
Legal and accounting fees
Costs to service loans and leases Too many new business owners underestimate the amount of capital they need to get a business up and running. In order to be successful, it is important to be realistic about not only startup and operating costs, but also the amount of time it may take before the business is generating profits.
By this point in your evaluation, you’ll have a pretty clear picture regarding the financial viability of the proposed enterprise. Thus the next step will be to determine whether you will be able to finance and structure the new venture. We’ll address that topic in the next issue of COUNTRY GUIDE. CG
Coralee Foster is a partner of BDO Canada LLP (www.bdo.ca)and chair of the firm’s agricultural group. She provides accounting, taxation, succession, estate planning and consulting services to clients including agribusinesses and primary producers. You can reach Coralee in the Mitchell, Ont. office at [email protected]or 519-348-8412.
