How to avoid failure in agribusinesses

If you start a restaurant, a law practice, a car wash or even a marketing agency, there's a pretty high probability that you are going to fail. The same applies to agribusiness. That's just a fact!

However, what many do not know is that chances for failure in agribusiness appear lower compared to other industries.

More agriculture businesses stand beyond five years, compared to construction businesses, among others. Well, this is just my analysis – I could be wrong – but then, I could be right too.

I have discovered that the reasons many farming businesses make it that long and go much longer are because they're subsidised – not by the government, but by the farmer, who is most often working a second job so that the farm can function.

Nonetheless, all is not that rosy in farming too. Such businesses tend to falter and fail as well as I will attempt to demonstrate below.

- Farmers approach it as a lifestyle and not as a business You see, many people are attracted to farming because they love the notion of lifestyle. They want to farm or grow produce. In other instances, they 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. The above reasons are great, but is that how you would approach a business opportunity? Is that the opportunity you'd pitch to an investor or a bank? 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 or produce things like milk, herbs and cheese.

So, they treat selling and marketing as an afterthought. Now, that's a mistake. A business is a business because it has customers who buy from it. So, you always start with the market in mind.

Most importantly, you need to produce what the market will buy – and that you can sell – at an attractive profit margin. That means focusing on high-value crops and livestock.

Farmers often 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. Moreover, while large companies can pull off that strategy, that's only because they achieved enormous scale, efficiency and supply chain integration. Sadly, these are not benefits you're likely to achieve as a small farmer.

So, it's really 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.

If you choose something 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 target customers who have the means and willingness to purchase what you're offering.

How do you know if you're producing a high margin farm product? That leads straight into the third reason.

Poor or non-existent accounting

Look, as a farmer or entrepreneur, you must wear many hats. We all know that. However, it can be overwhelming at times – actually, it is overwhelming all the time. Ideally, you have an accounting background or can hire an accountant, but let's face it. Most small farm businesses don't. Too often, farmers 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 the market and hope they have money at the end of the month. You know it's true, don't deny it.

So, the 'farmpreneur' 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 going 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, and with bad numbers or no numbers, you're flying blind.

Next week, we will look into even more reasons agribusinesses fail.