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In organic businesses you have a conversion period. Usually you cannot sell the product as certified organic during the first one or two years. At the same time you have all the costs of putting field staff in place, an ICS, certification, and you probably have to pay the farmers some premium to motivate them.
This means that the first two years are almost always a period in which you make a loss. Example of a profit and loss calculation.
Once you are able to sell certified organic product, the situation looks better. However, often you will have expanded from the initial producer base to a larger one, which requires additional resources for extension, ICS and certification.
First time marketing costs may also be higher than in a consolidated situation. In the third or fourth year, when you are able to sell larger volumes of your product as certified organic you should be approaching the break even point.
Most organic businesses turn profitable within years. The length of the conversion period, the complexity and the overall size of the business are the major determining factors see chapter "Organic Business Guide"The time needed to set up an organic business.
Break even of costs and revenues; new investment. In the following years you try to make the business more efficient, by optimising your cost price and marketing approach. This is when you start earning money. However, when reaching the initial break even point, you should already start thinking of adding another product or investing in scaling up your operation Figure Sensitivity analyses Table 5: Example of a sensitivity analysis.
Cost calculations are normally based on real costs existing business or assumptions start-up business. It is good also to analyse what happens when one or more of the factors changes considerably. This could be positive or negative changes. Typical changes are fluctuations in the currency exchange rate, but also higher or lower yields or changing market demand.
A shortage of the crop may increase local prices above what you have planned to be the organic premium price. Increases in cost of diesel and energy have surprised many businesses in the recent past, so if you want to reduce your risks, you need to make a sensitivity analysis.
This means that besides the normal case you calculate a best and worse case scenario. Table 5 provides an example of a sensitivity analysis. It is unlikely that all these factors will change for the better or the worse at the same time. You can also calculate worst and best case scenarios for each single factor.
Cash flow management Table 6: Example of a cash flow calculation. For any business activity it is important to plan your financial needs in order not to have a working capital shortage at a crucial time in your production or trade process, which would block your business activities.
Throughout the year there are significant changes in cash flow. The best way to get insight into your financial needs is by planning your incoming and outgoing cash flow on a monthly basis Table 6. You have to pay your office staff and the field officers on a monthly basis.
Some organic businesses provide their farmers with inputs, like seeds and organic fertiliser at the start of the season. It can be quite an investment and it may take 10 months before that money comes back on to your bank account. You normally need most cash to pay the producers upon delivery, while you will only receive payments from your clients quite some time later.
You will need to bridge the period between expenditures and revenues, for which you require extra working capital. As money is expensive interest the smaller that amount and the shorter you need it for, the better. Cash flow predictions, like the one provided in Table 6, are also used to request a trade loan from a bank see chapter "Financing your organic business".
Monthly liquidity of an organic vegetable business example.Page 4 of 26 II. Executive summary Write this section last! We suggest you make it 2 pages or less. Include everything that you would cover in a 5-minute interview.
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If you want to apply for a loan, investment or other external finance, a fully-fledged business plan is clearly needed.