It has come to my notice that many start-ups, investors and even the so-called experts confuse profitability with viability. They often use only profitability as metric for success in agribusiness venture. First thing they will ask ‘Is this agribusiness venture profitable?’ and the response/reply 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 only 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 the key metrics for agribusiness viability.
The Key Metrics 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 like Farmers Market, Supermarkets, Organic Markets etc., another will be for general public markets. Production or farming should be market driven.
Minimum Production Level (MPL): MPL is the level at which agribusiness venture will give optimal yield or output or profit. This is the level we can say you are doing agriculture as a business. Obviously, above MPL, there is tendency for high initial startup cost, low cost of production per unit/batch/hectare, high efficiency, high revenue and high profit. Below the MPL the agribusiness venture will yield no/less profit or only break even. The people operating below MPL are Hobbyists or Experimenters. Examples include oil palm trees on 2 plots; 200 layers fed with branded feed in a battery cage system; greenhouse tomatoes on less than 100 square meters, etc.
Cash Flow (CF): CF relates to how cash flows in and out of agribusiness venture. Cash is the life blood of any agribusiness venture. As Customers is King so Cash is King.
Building a solid cash flow requires learning, 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. For example, integrating short-term vegetable cultivation with tree crop or layer bird farming will help improve the venture cash flow.
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.
Learn from your own and other mistakes, learn good practices and adapt to your own working condition and develop your own best practices. Some profitable agribusiness ventures has failed just because they lack good management practices that cut across all levels.
In conclusion, it is important to note that; Viable agribusiness is built on Capital Knowledge, Cash Flow (not profit), Good Management Practices, Reliable Market, Patience, Persistence and Perpetuity.