Small businesses routinely fail in every industry segment, but what causes small farms to fail? This article shares reasons why small farms fail, so you learn what not to do so that your farm thrives.
So, starting a business is a risky venture, right? And it doesn’t really matter what sector you start a business in. If you start a restaurant, and insurance or law practice, a car wash or even a marketing agency, there’s a pretty high probability that you’re going to fail.
That’s just a fact. But let’s just examine the reasons why these business fail. And actually, the agriculture sector has a much lower failure rate after 5 years than most industries.
For example, 50 or more of agriculture businesses are still going after five years, whereas only about 36 of construction businesses make it the long. One of the reasons that many farming businesses make it that long and go much longer is because they are subsidized. Not by the government, but by the farmer, who is most often working a second job so that the farm can work. That’s cool if that is what you want to do. But, again, that is more of a hobby farm and not really a farming business.
So let’s get right into them.
Here are reasons why small farms businesses fail
1) They approach it as a lifestyle and not as a business
You see, many people are attracted to farming because they love the notion of the lifestyle. They want to farm or grow produce. Or have a collection of animals, and they want to spend their days in the sunshine, producing something with their hands and being out on the land.
But is that how you would approach a business opportunity? Is that the opportunity you would pitch to an investor or a bank? That you want to go work with your hands in the soil and have some animals? Of course not!
Because a business approach means identifying the market first. And that’s very different from what most farmers do, who start simply because they want to grow things. So they treat selling and marketing as an afterthought. A business is a business because it has customers that buys from it. So you always start with the market in mind.
Produce what the market will buy and that you can sell. Sell at an attractive profit margin. That means focusing on high value crops and products. But there are many farm enterprises that are not high margin or high value.
2) They choose low-end profit streams
In these cases, the math just doesn’t work, because the farmer chose either a low margin product or is targeting a very cost-conscious consumer. While a local store can pull off that strategy, at least until Shoprite buries them, that’s only because they achieved enormous scale, efficiency and supply chain integration.
Those are not benefits you are likely to achieve as a small farmer. So it’s real difficult in small-scale farming to make it on the price dimension and, let’s be honest here, there’s no business opportunity selling to people who don’t have money.
So target opportunities with segments who do have disposable income and select farm enterprises that don’t have such a low barrier to entry. Because if you choose something that is easy and cheap to get into, even if you achieve some level of success, it won’t be difficult for others to emulate.
So it’s imperative for any small business to choose a business model focused on high profit margin enterprises that targets customers who have the means and willingness to purchase what you’re offering. Which is very important for farmers.
But how do you know if you’re producing a high margin farm product?
3) Poor/non-existent accounting
As farmer or entrepreneur, you must wear many hats, we all know that it can be overwhelming at times.
Ideally you have an accounting background or can hire an accountant, but let’s face it. Most small farm businesses don’t. They may rely on a Certified Public Accountant, for occasional help like yearly taxes, but the day to day accounting falls in their own laps. Too often, they don’t know what to do, so accounting is just as much an afterthought as marketing is. They don’t set up proper systems for measuring everything and properly allocating overhead or fixed expenses.
They just buy the feed, buy the seed, get to work, go to market and hope they have money at the end of the month. So the farmpreneur or farm owner doesn’t know what the real cost of production is, what the real fully-allocated profit margins are by product line, by customer segment, by go to market approach and so on. They don’t know where they should be investing more, and where they should cut back. So the numbers are bad. With bad numbers or no numbers, you’re flying blind.
We get emotionally attached to these enterprises because, we enjoy it. We like the work. But if you had an accounting push an analysis in front of you that showed how much money you were losing for all the time you put in and how much you could be earning if you focused instead on another enterprise you would make the switch in a hurry.
That’s what good, solid accounting can give you. So don’t make that mistake. Know your numbers in detail from day one.
4) It’s under-capitalized from the start
It lacks a cash cushion. Now, this is the reason WHY you need attractive profit margins. Why you MUST have attractive profit margins. Because there’s a cyclical nature to business. If you think your farm is recession proof, you haven’t been through a real recession.
But even if there’s not a recession bad things can and will happen over time. You suffer the loss of a key distributor. Or, there is the entrance of a new competitor that creates price pressure or forces additional advertising investments. These things happen in any business, so a business has to amass enough earnings over time to weather these storms. Beyond business cycles, farming is impacted by drought, disease, storms and other calamities. Many people want to get into farming and they don’t have much money. Farming is a business like any other, and if you expect to be successful in any business, you’ve got to have operating capital and cash reserves.
If you don’t have it, get it! Don’t complain about it. If you don’t have money, get out and earn some and save it first.
5) Lack of focus or trying to do too much
With farming, it’s not only easy to venture into countless enterprises, it’s almost like a drug. With livestock, you get some chickens then rationalize adding pigs, cows, sheep, goats, rabbits, even donkeys and duck to the mix.
Before you know it you have got a petting zoo. Only you are not operating a petting zoo, are you? This goes back to the accounting issue of not knowing what’s profitable and what’s not, but also to not treating the farm as a business. Not starting with the market in mind.
So the good news is that if you can market positively with a vision for positive solutions and change, it will be music to people’s ears, and it will differentiate you as a farmer. This is where AgroDomain comes in to help you in the business of buying and selling of your farm produce, inputs and machinery without middle men interference.