This blog post was originally published under our previous brand, Vuna Agri-Shop during August 2019. I first put this blog post together based on numerous queries I received about starting a small agricultural or farming business. It took me a short while to find a suitable example that could be used to illustrate the principles involved. The example I chose was a setting up a small-scale live chicken business.
This is a business type that many people in rural areas are doing in practice already but it is always good to begin with the following key principles.
If you can't sell it, don't produce it
The first step in starting any business is always to look at what you can sell in the market. One needs to conduct a market analysis to find more about what is being sold and at what price. A bit of research into the poultry industry reveals that:
Chicken is still our most consumed meat in the country - South Africans eat more chicken than other meats combined each year. So, there is demand for the product;
Producing live broilers for live sale is not as easy as it seems as the product generally costs more than the frozen product you can buy at the nearest supermarket chain store. This is due to the scale at which commercial producers can produce the product at as the threat of cheap imports coming in from Brazil or the USA which creates price pressure on the local market;
To keep an adequate output of birds each year, one needs to aim to sell one’s flock over a 1 – 2-day time period; and
One needs to pay attention to the features one’s potential customers are looking for. Are they looking for greater volume of meat or do they prefer lower volume and chicken that is suited to boiling (like spent hens or indigenous chickens).
Circumstances will vary in each local area so it’s best to get out into the community/local area and confirm the following:
Where is the market(s) for live chickens?
How big is the market (how many customers will purchase, how frequently)?
What are the preferences of the market? What type of chicken do they like and how do they like to prepare it?
What are the prices is the market currently paying for a live chicken? Does the price vary during the year/season?
How does the market prefer the products to be presented?
What are the best ways to advertise the product to the market?
If we continue the example of live broiler chickens, market prices for live birds range from R70 each in periods of low demand and can go up to R130 each in periods of high demand like the November/December months. On average I normally work on a live bird price of R80 each. In agriculture, most things are cyclical - broiler chickens that are used for the live chicken market grow from day old to +-2.2kg in about 6 weeks. So, 100 chickens will give you about R8,000.00 in revenue each cycle depending on how many chickens you are able to sell. It is normal to expect some chickens will die during production – a typical mortality rate of 5% is common.
Step 2: Understand your product value or supply chain
The second step is to understand the value or supply chain for the product. A product value or supply chain is made up of several activities where a product is transformed from one form to another from production through to the end user or consumer. If we use the chicken example again - for a live chicken business one needs chicks, feed that covers all phases of their growth, water, light and medications. Can one find all these items close to where the business is located? What is the price? Do I need to get transport for the inputs? This step will also require quite a bit of research.
Based on business size of 100 chickens, we estimate (2019 prices) the following input costs (per cycle of 6 weeks):
Day-Old Chicks R1,000.00
Starter Crumbles R600.00
Grower Pellets R1,020.00
Finisher Pellets R640.00
Medication pack R450.00
Total costs R3,710.00
Note: these input costs exclude cost for housing the chickens.
Feeds costs make up the bulk of the costs in a chicken business – make sure only high-quality feeds are used in a broiler business.
Also remember that if the inputs can be easily accessed, others are probably already doing the same thing. One need to be sure that one can produce the same or better product at the same or better price to remain in business over time.
Consumers (or the end user) are an important part of the supply chain and their willingness to see value in a product is what ultimately determines the business case for that product. An important question in the chicken business example is then how do I get my chickens to market and once at the market, how do I present or advertise the product so that customers will see value in what I'm selling?
Step 3: Estimating capital requirements
Capital or money that is required to invest in a business to get things started is essential to any new business starting up. Capital is required to fund things that are needed upfront, before sales can start, to see the business through its first production cycles and years of production. A live chicken business is a straightforward business which make estimating capital requirements quite easy. To start a chicken business, you will need:
Housing for your chickens which includes any feeding/drinking equipment. This can be homemade to save costs or can be an off the shelf solution;
A secure shed or room that is well ventilated;
A safe electricity connection and lighting (if needed); and
Cages to transport the live birds to market (if needed).
An important consideration that many start up businesses forget to provide for is ‘working capital’. Working capital is the initial investment in production stock that needs to be made to get the business through its initial start up phase until cash flows are positive. Normally an estimate of working capital to cover the first 6 months of production is considered adequate. In the case of live chickens, the returns are much quicker than most other businesses so provision for 3 cycles should be enough.
Applying this to the live chicken business example (assuming 100 chickens, power available, no cages to transport birds):
Capital - R4150.00 (plastic moulded chicken coop which includes feeders and drinkers);
Working capital – provision of input costs for 3 cycles at R3,710.00 per cycle = R11,130.00.
Total start-up capital required: R15,280.00
So, what does the projected cash flow for the first 3 cycles look like? I’ve produced the following table to help show what this looks like. Based on the assumptions used, the business will be cash positive and will have paid off the initial capital investment of R4,150.00 by the 2nd production cycle. This indicates that this is highly profitable business and that working capital for 3 cycles is more than enough to get this business up and running.
Step 4: Develop a basic business plan
Before starting any business planning process, I recommend spending 20 mins watching an important video. It is a TED (Technology, Education and Design) Talk by Simon Sinek titled, 'How great leaders inspire action'. You can watch this video clip below.
Applying the thinking from Simon’s video which he calls the ‘Golden Circle’ a good business plan should always aim to answer 3 simple questions:
Why does your business exist? What is your vision and mission and are these clearly stated? What do you want to achieve? What are your core values?
How does your business function or operate? Who does what and how do they do it? What tools or methods of production do you employ?
Whatdoes your business sell? How do you communicate your message to customers?
Remember – always start with WHY!
A business plan should bring all the elements together and from that plan one should be able to develop a cash flow which shows the projected business income and costs over time. I always recommend having someone read over a business plan once it is complete – first prize is someone with some knowledge of the industry the business intends to operate in. Second prize would be someone who can read and write well and can understand the principles of the business. Another set of eyes always helps!