Presentation on theme: "Adding New Enterprises: The Financial Aspects Dr. Alex White Virginia Tech 540-231-3132."— Presentation transcript:
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!!