Anchoring new business ventures
From the perspective of Paul Dietmann, who is an emerging market and business planning specialist with Badgerland Financial, there are 10 points to consider when thinking about developing a new enterprise.
Such enterprises could include the development and sale of value-added products, an agritourism venture, organic production or a start in farming, Dietmann told his audience at a breakout session during agritourism workshop that served as a prelude to the 2016 annual convention of the Wisconsin Farmers Union. The Wisconsin Agricultural Tourism Association was a co-sponsor of the workshop.
Dietmann, who has been with Badgerland for four years, previously served as an Extension Service agent in Sauk County and in a position with the Wisconsin Department of Agriculture, Trade and Consumer Protection.
Approach the idea of a new business by creating an enterprise budget on an Excel spreadsheet to examine the economic feasibility of such a venture, Dietmann advised. This would include a realistic but conservative estimate of cash flow; the ability to make payments and to provide income for the entrepreneur(s); and a comparison of the opportunity cost of engaging in some other income-producing activity, he explained.
The next step would be to write a simple and short business plan (no more than a few pages) that "tells the story" of why customers should be attracted to the business, Dietmann said. Identify the risks and be knowledgeable about finances when approaching a lender about obtaining the capital needed to launch the business. To help with that step, download the template from the agplan.umn.edu website, he suggested.
Before making any firm commitments or investments, check on any zoning restrictions or other regulatory items that pertain to a site, obtain insurance information, have a business structure and arrange for accounting procedures, Dietmann said.
Start with enough working capital to cover the business opening costs and the anticipated first-year operating expenses or a minimum of 15 percent of the expected gross revenue for the year, he advised.
Keep capital costs low until a strong client base is established, Dietmann pointed out. As necessary or appropriate, consider leasing rather than building facilities and contracting for services. Be aware of the rate of return on one's investment and, at a minimum, complete a balance sheet every January as a tool for a financial analysis.
Flexibility is key element in all aspects of a business — multiple sources of capital, reacting to market saturation, reaching different customer bases and repurposing buildings and equipment.
Once a business is operating, strive to build a strong credit bureau service rating score, Dietmann continued. A score of 670 is minimal, 740 is acceptable in general to lenders, only 13 percent of potential borrowers have a score of above 800 and a business default rate of 50 percent is predictable for borrowers with a score of below 600.
Count on some "tough early years" in a new business venture, but establish a good payment history, limit borrowing to 30 percent of the available credit, develop long-term ties with lenders and use multiple types of credit if necessary, he said.
Although it might sound counter-intuitive, Dietmann said it is appropriate to replace equity with new debt if that would serve to expand the business and thereby boost the rate of return on investment to a higher one than the interest rate on borrowings.
In addition to financial institutions, Dietmann noted that today's sources of funding include family and friends; programs administered by the U.S. Department of Agriculture and its Farm Service Agency; county government revolving loan programs; the Women's Business Initiative Corp.; the "Slow Money" project; the "crowd funding" idea; and the "kiva zip" loan program.