Common question, “I have $20,000 to start the farm with, where should I spend it?”. When starting out farming there are so many different things needing attention and all of them cost money. Costs start to overrun, animals die and before you know it, the capital is gone. The fear of mis-spending your precious capital is valid. Spend it wrong the first time and your back to square one. It’s a gamble and the money is on the house!
There are distinct areas where you can spend money when starting.
- Infrastructure. Land, fences, water systems, concrete, roads, large machines, etc.. Big expensive stuff.
- Operations. Field shelters, animals, feed, fuel for machines, helpers, processing costs, etc..
- Marketing. Farmers market set ups, farm stand, literature for the farm, advertising, website and your time are big here.
In my observation 90% of the advice out there and action taken by “newbies” is in the first two. Getting a piece of land, a certain animal, or what have you. I feel this is incorrect and I will outline my case and you decide.
Investing on Infrastructure or Operations before commencing business is betting an untested product against the market. You’re taking action on a variable set of data points interpreted through your own emotions and desires, projected forward in speculation. Literally a Hail Mary pass into the future. Hopefully it will pan out, but many times not. Is there a way to get closer to some kind of certainty before pulling the trigger?
Inside your business you are continually turning capital over. Paying the expenses, paying yourself and hopefully profiting are the result of excess cash spun off by the turning of capital through your business.
The easiest analogy for me to understand this process is to imagine an engine. The size of the engine (business) is determined by your assets and equity. The firing of the cylinders, rotation of the crankshaft and turning of the axles is representative of your operational pace and caused by the flow of money (fuel) through your business engine. Progress forward is when everything is functioning properly and generating cash flow. This is traction. Traction is how your business grows and capital is the fuel.
Turning the engine over occurs every time a product travels through your system from the time money is spent on it until it returns as cash again. This starts by the birth, purchase or planting of a new “product”. If raising meat chickens and you have pre-sold all of them this turning process takes eight weeks. With pigs six months, cows two years, etc.. Market gardening is anywhere from two to 8 months. Of course, if you have to hold product in a freezer this can all take longer to close the loop back to cash.
Everytime cash flows through your business – provided your numbers are set correctly – you generate new equity. Remember our initial 20K? Hypothetically, if you’re running a 20% profit margin, every time you turn your engine over it should kick out $4,000 of new capital into your business.
Separate discussion but worth mentioning here is that setting pricing correctly is so critical at this point. Underpricing is an all too common tactic employed by newbies either by intention or ignorance to get some quick sales going. This hurts you in the long run as cost continue to draw down equity until there is none left. Also, often this new money is quickly chewed up by growth, over paying one’s self or losses by death or wastage.
Infrastructure and Operations are non-cash flow generating components. Meaning they do not produce cash. Necessary for the creation of your product for sure, but in and of themselves not putting cash from customers hands into yours. If you spend your 20K on infrastructure and operations you still haven’t turned the engine over. You’ve built the chassis and put some air in the tires but the engine hasn’t started yet.
That brings us to Marketing.
Marketing is the foundation of a successful farm. Selling things at a profit. Meeting and surpassing customer’s expectation and subsequently returning them to your product again and again. A humming business engine runs on marketing.
I propose focusing in on the marketing side first. Here’s why.
- Time. Time is the RPM’s of the motor. A pig takes 6 months to grow, a cow 2 years, a chicken 2 months. This is after you have gotten some infrastructure in place. It could be up to 2 years before that first rotation of the engine happens. Marketing should pull production up instead of being pushed by over-production. When marketing is first, your product will fly out the door instead of sitting in the freezer, or worse, tossed on the compost.
- Risk. Investing into a system and waiting up to 2 years is risky business. What if the animals die? What if disease wipes out the crops? What if, what if. There’s a lot. Meanwhile, that’s your 20k out there carrying all that risk of catastrophe. On a greater scale, you must evaluate the overall risk of starting a farm to begin with. What to produce and what will sell? Many farmers struggle to sell truly high quality products because they live in a 30K median income area. The product simply is out of the price range. Starting with marketing answers these questions quickly.
- Reactivity. Nothing lets you know what sells better than actual SALES. Knowing what the market is receptive to and ready to spend money on will give you a lot more confidence when developing appropriate Infrastructure and Operational components. You already have a PROVEN market. Likely whatever you thought would be a good idea initially will be proven false in the first couple of years.
“That’s great”, you might be saying, “but if I don’t have the farm set up and running how will I have anything to market?”
Most areas will have a farm or many farms similar in ideals to your own. They are already up and going on the Infrastructure & Operational side and likely would be open to wholesale pricing you some product. With a focus on marketing you can shift the assumption of higher operational risk off onto far more experienced farmers while you get your act together.
I know this may sound heretical to advocate not producing all your own product but consider a few points here from someone who’s been in the trenches full time for the last 8 years and in the “biz” for the last almost 20.
- Most people care more about the product integrity than the actual production location. Explaining your process to the 5% who actually ask about it in a straightforward manner elevates you above the suspicion of foolery.
- You customers are buying YOU, not your product. If you listen to what customers say to their friends about your farm it’s actually more about you than the chicken. They trust you and if you have integrity about a product sourced from elsewhere they likely will fall in line. I can prove this point 100%. Show up at any farmers market with the absolute best 100% GMO-FREE, heritage, free-range, sung to sleep each night chicken and be a total jerk to everyone who walks up to your table. Not one person will buy from you. Conversely, act professionally, friendly and engage each person as if they are all that matters to you at the moment while moving them to a sale and you will leave with empty freezers. The difference? YOU. Great marketers know this and capitalize.
- Above 90% of start up farms fail in the first 5 years and everyone of them started with Infrastructure and Operations. Maybe it’s time to try something different?
- A personal anecdote. We carry several products from other farms. Honey, eggs, clarified butter and produce boxes. I don’t think we’ve ever had a customer upset that it wasn’t from us. Be careful about deceiving yourself over your own farms’ exclusivity being some great marketing point. It isn’t.
Here’s what I would do if I was starting out with $20,000 to start my farm business with. Focus entirely on marketing. Get a sharp looking Farmer’s Market rig set up, your website, social media and print media up and going. Be ready to sell. Do all this for about $10,000 of your $20,000.
With the remaining $10,000 find established farms producing the product you hope to grow someday and purchase whole carcasses from them. Many larger farms will sell two cows or 6 pigs at a significant discount over the retail price and would welcome a steady volume of wholesales. Eggs can enjoy a premium mark up coming from a larger producer out in the country by bringing them to a downtown market in a larger city.
Establish a tight window on your money turning over. No more than a month at a time from purchasing eggs, a pig or a cow to when the product is sold and the cash is back in your pocket. Turn this capital over and over and over.
Let’s look at some numbers on this concept.
Here’s a hypothetical breakdown based on our own numbers:
Live 300 lb pig: $500
Put into high end cuts and value adding the sausage through a delicious Sausage, Egg & Cheese muffin should transform this one hog to $1500. An 93% increase. For the sake of expediency here, I’m not going down the line on products or into the weeds on the numbers but you get my drift. Let’s assume for the sake of this conversation that after marketing expenses and so on, you are turning capital over at that same 20% margin. Your $10,000 engine is cranking off $2,000 extra everytime you market $10,000 in product.
Again for simplicity, let’s assume you GET AFTER IT with your weekend farmers marketing ( friday night market, two saturday markets and 1-2 on sunday. Whatever it takes!) you should be able to turn that every two weeks, or if in a metro area on fire for these products, perhaps every single week? Now we’re talking some serious revenue generation!
Lets average it out. $7500 in sales every week for fifty weeks out of the year. $375,000 in sales and if you hold that profit margin you initial $10,000 seed capital has earned you a new $65,000!! ( $7500 x 20% x 50 weeks – initial 10k )
Too optimistic? You’re right, stuff happens in the first years that blows sales numbers down. Let’s cut everything in half. $3750 a week in sales, $187,000 annually, $27,500 in new capital. That’s still almost triple you initial capital and dang good for an annual return.
Looking at that you probably wonder like I did, “$27,500 isn’t half of $65,000, whats up? Ah, friends, here is the crux. Remember, every time you turn the capital over it kicks profits. This is where the importance of all this comes into play. Half the rotations is exponentially less profit. Scale and compounding interest wins. One billion dollars at .01% annual interest earns more money than one million at 90% annual interest.
Do we take two years with the cows to rotate the capital or do we take one week with the actual steaks? Marketing gives you that option.
- Start with marketing.
- Shorten and Simplify the process.
- Turn Capital over as rapidly as possible.
- Ensure your prices produce profit.
My goal here is to perhaps break out of the conventional wisdom that a farm has to start with some fence and some animals. All that stuff is good but the marketing is where it all comes together and the actual money is made. I am convinced that when starting out the inherent risks of entrepreneurship are greatly lowered when the cash flow cycle is shortened and simplified.
By removing two of the three components of a farm from the start up cycle you have a greater opportunity to find what will fit in your market, cut your teeth on the most critical element and build your initial capital up to the jump off point of your own physical farm operations.