It has come to my notice that many start-ups, investors and even the so-called experts confuse profitability with viability. They often use profitability as a key metric for success in agribusiness venture. First thing they will ask ‘Is this agribusiness venture profitable?’ and the response they often get is, ‘Of course, the agribusiness venture is profitable’, which is true. Virtually, all agribusiness ventures is profitable but the question we should ask;
Is this agribusiness venture viable?
What then is the difference between profitability and viability?
Profitability is the ability of an agribusiness venture to generate profit. Profit is earned after total costs or expenses have been deducted from total revenue or income. Profit is a positive figure but when it’s negative, it’s a Loss. However, Viability is the ability of an agribusiness venture to generate profit (positive figure) over a sustained period of time. A viable agribusiness venture is one that is able to make profit year after year. However, not all profitable agribusiness ventures is viable.
Profitability will attract you to business but viability will keep you in business
We have so much focused our attention on profitability while leaving viability. Little wonder you see agribusiness start-ups of less than five years folded up. It is high time we started doing viability analysis for our agribusiness venture. The following are key parameters for agribusiness viability.
Key Parameters for Agribusiness Viability
Target Markets (TMs): TMs are market segments or potential customers that will buy your products or services. Farmers, processors or cooperatives should have major target markets for their products and services. Never go into agribusiness without adequate target markets information. Also determine the best selling prices and sale volumes for your products and services for different markets. While some products will be for special markets, another will be for general markets. Production should be market driven.
Minimum Production Level (MPL): MPL is the minimum level of production at which agribusiness venture is profitable. This is the level we can say you are doing agriculture as a business. Above this level, there is tendency for higher cost, revenue and profit. Below the level, the agribusiness venture will yield no/less profit or only break even. The people operating at this level are Hobbyists or Experimenters. Examples include oil palm trees on 2 plots; 200 layers fed with packaged feed in battery cage system; greenhouse tomatoes on 120 square meter, etc.
Cash Flow (CF): CF relates to how cash flows in and out of agribusiness venture. Cash is the life blood of an agribusiness venture. As Customers is King so Cash is King. Building a solid cash flow requires creativity, innovation and experience. Companies can and do go broke while making profits. Most profitable agribusiness ventures tend to have cash flow problem (negative cash balance) due to Long Gestation Period and Long Term Assets Acquisition. It will be reasonable for agribusiness start-ups to rent certain equipment, land, space/building and other long term assets instead of outright purchase. Nevertheless, some agribusiness ventures will require outright purchase of long and short term assets. You may need to lease your building space or equipment or offer your services to other start-ups to generate more cash. You need to think of how to generate revenue (Cash inflow) to pay bills (Cash outflow) when your agribusiness venture has not started selling.
Good Management Practices (GMPs): GMPs are various practices geared toward productivity, efficiency and sustainability of an agribusiness venture. GMPs can be Good Agricultural Practices (GAP), Good Manufacturing Practices (GMP), Good Management Model (GMM) or Good Personnel Management (GPM). The fact that you or others failed in one agribusiness venture or the other does not make the venture less viable. Scan your management practices. Some profitable agribusiness ventures has failed just because they lack good management practices that cut across all levels.
Finally, it is important to note that agribusiness venture is not a quick-rich scheme. It requires Patience, Persistence and Perpetuity (3Ps).