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Starting A Food Business continued... page 4
* Capital intensity: Is your business characterized by high fixed costs or high variable costs?
* Start-up costs
* The level of inventory
* The level of accounts receivable
* Sales forecast
Consideration of these factors will determine the financing needed. Analysis of cash flow is critical to the success of the enterprise. Projected financial statements (Income Statement, Balance Sheet, and a Cash Flow Statement) allow for the determination of the amount of and the timing of additional funds that will be needed. The next step is to consider the sources of this funding.
Financing can be from internal or external sources. One can use personal funds to begin the enterprise and expect sufficient cash to be generated from operations (internal financing) to meet cash needs. Most likely, external funding will be required. This financing can be equity financing (the use of an owner's personal funds, or the sale of partnership interests or corporate stock) or debt financing (the sale of bonds, equipment financing or commercial loans). Most start-ups will seek to obtain external financing from a commercial bank. As stated above, a business plan is likely to be a requirement to obtain a loan from a commercial bank. At a minimum, projected financial statements of the enterprise will be required-as well as a personal financial statement of the owner(s).
The projected financial statements must present a clear, detailed picture of the expected operating results and cash needs of the enterprise. When asking to borrow money, remember that banks or investors require a fairly substantial equity investment (on the order of 20-25% of total financing, increasing with increased perceived risk). The cash flow projection should indicate a comfortable cushion with respect to debt service; earnings should be projected as some multiple of the amount required to make principal and interest payments on the debt. The financial history of the owner(s) should be clean; in most start-up cases, the lender will require that the debt of the enterprise be a personal obligation of the owner(s) as well.
Commercial banks are often unwilling to loan money to a start-up business. In this case, it may be possible to arrange for some government or other agency to guarantee your debt. This guarantee allows the commercial bank to pass along the risk to the guarantor. The most important resource here is the U.S. Small Business Administration, and the business plan is a required part of the process.
U.S. Small Business Administration
2120 Riverfront Drive
Suite 100
Little Rock AR 72202-1747
501/324-5871
www.sba.gov
While the marketing and financial considerations are extremely important, a clear discussion of operations, management talent and other resources available is important in formulating the business plan. The business plan is an invaluable way to determine the enterprise's potential. Free brochures and consulting on starting a small business is available at the Sam M. Walton School of Business at the University of Arkansas.
Lance Sexton
Center Director
Small Business Development Center
Sam M. Walton School of Business
140 Reynolds Center
Fayetteville, AR 72701
479/575-5148
http://waltoncollege.uark.edu/sbdc
The Institute Of Food Science and Engineering
The Institute of Food Science and Engineering will provide assistance for a nominal fee to existing or entrepreneur food processors on the technical end of the business. The Institute can assist you with labeling, taste panels, equipment and ingredient suppliers, processing layouts, refining an idea etc. Visit the Institute of Food Science and Engineering web-site at www.uark.edu/depts./ifse. There is also a web-site/ newsletter for food processing at www.uark.edu/ua/foodpro.
The Institute of Food Science and Engineering
2650 North Young Avenue
Fayetteville, AR 72704
479/575-4221
seideman@uark.edu
A more detailed discussion of the above topics can be found in starting a Food Processing Business. This 3-ring notebook can be purchased for $40 through the Cooperative Extension Service.
To order the notebook starting a Food Processing Business-MP 436: -
Send $40 for the book and $1.00 shipping/Handling fee to the following address. Make checks payable to Cooperative Extension Service. There are also a number of free extension publications on the extension web-site under "Publications". See the extension web-site at "www.uaex.edu"
C.E.S.Business Office
P.O. Box 391
Little Rock AR 72203
501/671-2161
There is another notebook available entitled "Agriculture; Getting Adding Value to Arkansas started". It goes into product development, innovation resources available etc. It is for sale for $10 through the Institute of Food Science and Engineering (see previous address).
Conclusion
Having a solid idea for starting a food processing business is a good start, but knowledge of the regulatory, production, marketing and financial aspects of starting such a business is an integral part of the overall process.
(Acknowledgement is given to Dr. D. Robert Davis, author of MP 325, Getting Started in the Food Processing Business. Much of the material in this article was adapted from that publication.)
Dr Steve Seideman is an Extension Food Processing Specialist, Cooperative Extension Service, University of Arkansas. Dr Pam Brady is a Food Specialist with the Institute of Food Science & Engineering. Mike Heilman is the Program Coordinator for the Institute of Food Science & Engineering, and Dr. Justin Morris is the Director of the Institute of Food Science & Engineering. For article feedback, contact Steve at: seideman@uark.edu
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