Now that you’ve got an idea of why you want to get into farming and what your agbusiness will look like, you need to start considering the financial potential and feasibility of this enterprise. In this section we will look into the components required to perform a high level financial analysis.
Determine Financial Feasibility
No matter your goals, thinking through the financial potential and requirements are critical and should be considered early in your start-up process. You may not have a lot of details yet but you should at least do a high-level check to ensure that your business idea makes sense from a financial perspective. Based on your business idea, calculate the following:
Estimate Start Up Costs
Make a list of all the things that you will need to purchase in order to get your business started and estimate how much it will cost to purchase each item. Some of the things you may need include:
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Potential Revenues, Production Cost, and Profit
Think about all the ways your business will make money. Estimate how much you can make and how much it will cost to grow each crop, make the value-added product, or provide the service that you plan to offer.
Definitions:
- Revenues: How much money you earned; also known as Sales or Income
- Direct Costs: Expenses related to growing, making your product; also known as Cost of Goods Sold
- Gross Profit: Revenues minus Direct Costs
- Operating Costs: Expenses relating to the maintenance and administration of the business operations; also known as Indirect Costs, Overhead Costs or Fixed Costs
- Operating Profit: Gross Profit minus Operating Costs; also known as Profit
Crops
For each crop you plan to grow, determine the following for a standard area:
- How much time will the crop take in the field from plant to harvest?
- How much product yield do you expect for each planting? Keep in mind, a percentage of every crop will be visually less appealing and possibly unsaleable, or it might be perfectly fine but you don’t sell it in time and it goes bad, etc.
- What average price do you think you can get when you sell your product?
- How much will it cost to grow each crop per planting (include growing-related costs like seeds, pest management, irrigation, packaging, labor)?
Note: you can base this on any standard area (i.e. bed feet or acreage).
Example:
| Weeks in Bed | Salable Yield Per Planting | Average Sales Price per Pound | Cost Per Planting | |
| Salad Mix (100 Bed Feet) | 9 | 75 pounds | $5.00 | $70.00 |
By collecting this, you can determine:
| Equation | Calculation | |
| Potential Cycles Per Year | Weeks in Year / Weeks in Bed | 52 / 9 = 5.8 |
| Potential Salable Yield for Year | Yield Per Planting x Cycles Per Year | 75 x 5.8 = 435 |
| Potential Revenues Per Year | Yield for Year x Average Sales Price | 435 x $5 = $2,175 |
| Estimated Direct Cost to Grow Per Year | Direct Cost Per Planting x Cycles Per Year | $70 x 5.8 = $406 |
| Estimated Gross Profit Per Year Per Bed | Revenues Per Year – Direct Cost Per Year | $2,175 – $406 = $1,769 |
When you do this for each crop you plan to grow, you can compare which crops are more profitable than others. If you also estimate labor time, you can compare how much labor time each crop will require and determine how many labor hours you will need for your operation. The best information will be that which you can gather from your own experience but there are also a number of resources available though a simple web search.
CTAHR has a number of publication on their website including “Production Costs of Selected Vegetable Crops in Hawaii” which was published in 1999 but can be a good starting point:
https://www.ctahr.hawaii.edu/oc/freepubs/pdf/AB-13.pdf
UC Davis has a number of cost and return studies for fruit, vegetable, field, tree and vine crops, and animal commodities:
https://coststudies.ucdavis.edu/en/current/
Value-Added Products
For each value-added product you plan to make, determine the following for each batch/recipe:
- How much finished product is produced?
- What is your package size?
- How much does it cost for all ingredients in the batch/recipe?
- How much time will it take to make each batch?
- How much will you pay for labor?
- How much kitchen time is required?
- How much will you pay for kitchen time?
- How much does packaging cost?
- What average price do you think you can get when you sell your product?
- How much research and development time went into the development of your product?
Example for one batch of hummus production:
| Amount of finished product produced | 37.5 pounds |
| Package size | .5 pounds |
| Total ingredient cost | $67.10 |
| Labor time | 113 minutes |
| Labor cost per hour | $15.00 |
| Kitchen time | 2 hours |
| Kitchen cost per hour | $25.00 |
| Packaging cost per unit | $.90 per item |
| Sales Price | $4.50 |
By collecting this, you can determine:
| Equation | Calculation | |
| Number of units per batch | Amount of finished product produced / Package size | 37.5 / .5 = 75 |
| Total ingredient cost per unit | Total ingredient cost / number of units per batch | $67.10 / 75 = $0.89 |
| Total labor cost per unit | Labor cost per hour / 60 minutes x Labor time / number of units per batch | $15.00 / 60 x 113 / 75 = $0.38 |
| Total kitchen cost per unit | Kitchen cost per hour x kitchen time /number of units per batch | $25 x 2 / 75 = $0.67 |
| Total cost per unit | Ingredient cost per unit + labor cost per unit + kitchen cost per unit + packaging cost per unit | $0.89 + $0.38 + $0.67 + $0.90 = $2.84 |
| Gross Profit per unit | Sales price per unit – cost per unit | $4.50 – $2.84 = $1.66 |
| Gross Profit per batch | Gross Profit per unit x number of units per batch | $1.66 x 75 = $124.50 |
Services
For each service you plan to offer, determine the following:
- How much will I charge for the service?
- If group related, how many average guests per group?
- How many hours will it take to offer the service, including planning and prep time?
- How much will you pay for labor?
- What will it cost to offer the service?
Example for an agritour:
| Tour price | $25 |
| Average number of guests | 15 |
| Labor time per tour | 3 hours |
| Labor cost per hour | $15 |
| Other costs to offer tour (food samples, sticker take-away) | $15 |
By collecting this, you can determine:
| Equation | Calculation | |
| Potential revenues per tour | Tour price x average number of guests | $25 x 15 = $375 |
| Direct Cost per tour | (Labor cost per hour x Labor Time) + Other costs | ($15 x 3) + $15 = $60 |
| Gross Profit per tour | Revenue per tour – Direct Cost per tour | $375 – $60 = $315 |
| Gross Profit per guest | Gross Profit per tour / number of guests | $315 / 15 = $21 |
Estimate Operating Costs
Think about all the expenses you will occur in order to operate your business. Estimate how much it will cost for each item per year. Some of the things you may need include:
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Include any expenses that you can think of that were not included in your start-up or crop/value-added/service costs.
Estimate Profit
Based on your business goals, think about how much money you can make. Project for at least 5 years or until your business starts to make money. Although it may not be exact at this point, it will at least give you an idea of the financial feasibility.
Example:
proj incomeNotes About Financial Feasibility
Remember that much of this step involves estimates and assumptions. The better your estimates, the closer you can get to a realistic number. Note the following:
- Harvest estimates can be determined from experience, seed catalogs, publications, and by asking other farmers.
- Similarly, sales price estimates can be determined from experience, observation (how much is it selling for at the farmers’ market or supermarket), or by asking other farmers, buyers, or consumers.
- Although you may be able to grow/make/offer a product, sales and marketing are critical to ensure you can sell them. Many new farmers may sell a percentage of their harvestable crop. That percentage will increase as markets are developed.
- Farming is difficult to control! Regardless of how well you estimate, weather, pests, disease, and more may get in the way. Farmers need to be resilient and learn how to deal with the unexpected.
- Scaling and experience can help reduce costs. With experience, many farmers learn how to be more efficient which will help save your business money. Don’t be afraid to ask for advice and continually learn from others.
- Think about how you will get paid. If you are not including labor costs in your estimates because you are doing the work, you may consider a portion of the Gross Profit to be your personal income. However, it is a good practice to include your labor hours in your estimates as it will allow you to make better management decisions about your labor requirements going forward and give you a better idea of the labor demands associated with each crop.
- Keep in mind, your costs of your saleable product will also carry the growing costs associated with the product you aren’t able to sell due to damage, appearance, or just were not able to sell in time.
- If you have a specific financial goal, you can start with that number and work backwards. For example, how much salad mix will you need to grow if you want to have $50,000 in operating profit (not including startup costs):
| Profit Goal | $50,000 |
| Estimated Annual Operating Expense | $5,000 |
| Revenues per bed of salad mix | $2,175 |
| Profit per bed of salad mix | $1,769 |
| Pounds of salad mix per year per bed | 435 |
| Number of Beds Needed | $50,000+$5,000= $55,000/$1,769= 32 beds |
| Sales Needed | $2,175 X 32 = $69,600 |
| Pounds of Salad Mix That Must Be Sold | 32 beds X 435 pounds per year per bed = 13,920 |
Based on this, you can develop a plan on how to sell 13,920 pounds of salad mix per year.
Additional Resources to Determine Financial Feasibility
Get personalized help from:
- GoFarm Hawaiʻi AgBusiness: https://gofarmhawaii.org/gofarm-business-services/
- Hawaiʻi Small Business Development Center: https://www.hisbdc.org/
- The Kohala Center: http://kohalacenter.org/business