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| Jimbo’s
Jumbos: A primer on small business planning Cary Griffin and David Hammis Rural Institute, University of Montana Journal of Vocational Rehabilitation Volume 17, Number 2, 2002 Copyright© IOS Press Reprinted with permission Abstract. This article is a composite of several small businesses owned and operated by individuals with significant disabilities. The article presents a case study type review of the major activities and considerations when designing an enterprise. Keywords: Self employment, rural rehabilitation, small business development, SSA Work Incentives 1.Introduction Self employment is booming across the United States with estimates of over 20 million Americans working in home-based business and the self employment rate growing at over 20% annually. Between 1990 and 1994, micro-enterprise (businesses employing 1 to 5 workers) generated 43% of all the new jobs in the United States [1,8,9]. This cultural and economic shift towards individual opportunity presents another promising career option to individuals with significant disabilities [2,10,12,17]. Approximately 2.5% (5,000 people) of Vocational Rehabilitation closures are for self-employment, and the numbers are growing daily [1]. Numerous agencies such as Vocational Rehabilitation, Developmental Disabilities, and Mental Health in various states, including Montana, Colorado, New York, California, Washington, et al., are exploring policy and funding mechanisms to increase self employment opportunities. In order to succeed, though, there has to be a concerted effort to train and re-train staff charged with supporting individuals seeking self employment. Without this significant investment, community resources that exist to assist all citizens will go untapped; community re- habilitation agencies and VR counselors will be over- taxed due to the intensity and complexity of some business ventures; and consumers may be denied career advancement that is certainly possible [11]. Self employment is not for everyone. It is a personal choice that should be balanced by a variety of life circumstances, including financial position and funding, availability and quality of business and personal supports, and the viability of the business idea. Just as in supported employment, the driving ethic remains that everyone is ready to work and it is the responsibility of rehabilitation professionals to provide or facilitate the supports that make success possible. In some cases, allowing the person to experiment with different career options is the greatest support we can give. There do appear to be certain indicators of success probability in self employment, however. For instance, many small business owners learned their trade and understand the market because they worked for someone else first. Still, because so many people with disabilities never get the chance to have a typical job first, self employment presents a unique opportunity to create an employment circumstance specifically tailored to their personal situation, degree of mobility, speed of production, stamina, health, and accommodation needs. Again, someone’s disability should not determine their fitness for self employment. Rather, each situation is assessed to point out the need for supports such as financing, skills training in specific tasks, tooling and/or assistive technology, etc., in the same manner that any entrepreneur requires supports in their areas of weak- ness. Typical business folks out-source accounting, marketing, sub-component manufacturing and other functions that they either cannot handle themselves or find they do not enjoy [7]. Implementing self employment as an emerging technique with individuals with significant disabilities involves substantial attention to minimizing the fears of the prospective business-owner and the rehabilitation and local small business development professionals charged with assisting them. The success rate of small business is surprisingly high, despite widely accepted folklore to the contrary. The Small Business Administration, in fact, reports that over 79% of small business is still operating after the initial 5 years. And, the long term trend in employment is away from major corporations to growing job opportunities in smaller firms [15, 16]. Self employment and small business are a defining characteristic of America’s economic landscape. 2.Self employment advantages over wage employment Most Americans work for someone else. Those of us in the human services field may also be the least likely advocates for self employment because of our attraction to the non-profit work of public-sector employment and perhaps due to a less recognized aversion to the competitiveness and unseemliness of the for-profit world. Ours is a world of assisting, helping, and protecting, whereas our field sometimes views capitalists as cold, uncaring, and self-interested. All the same, the world of business affords individuals the economic civic rights that can leverage equitable participation in the greater community, and the status and self-determination that comes from self employment may prove to be liberating for many individuals. Self employment provides a number of advantages over working for someone else. First our economic environment is such that self- employment is growing substantially. Statistically it is the largest market segment of new and expanding employment opportunities. Second, self-employment offers the only substantial options available under our Social Security and Medicaid/Medicare systems, even after passage of the Work Incentives Improvement Act, to accumulate personal wealth and manage income in a way that is predictable and personally adjustable. Almost without exception, people with disabilities in the U.S., receive SSI and/or Social Security Disability Insurance, and Medicaid or Medicare benefits. Under Medicaid and SSI regulations an individual beneficiary can never accumulate more than $2000 in cash resources (i.e. total of all cash on hand and in checking, savings, stocks, bonds, whole life insurance policy face values, etc.), unless the cash resources are sheltered in a restricted irrevocable trust managed by someone else, or in a Plan for Achieving Self Support (PASS). A small business owner on Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), Medicaid or Medicare, can have unlimited funds in a small business checking account for legitimate operating expenses as defined by the IRS and SSA rules as Property Essential for Self Support (PESS). A small business owner can accumulate operating cash and other business capital resources and accumulate unlimited net worth in the business and even creates the possibility to eventually sell the business and use the revenue to purchase a home, for instance. Self employment creates the opportunity for increasing individual wealth. Wage employment has no comparable opportunities. Third, self-employment works for people with disabilities because Social Security benefits provide a financial cushion, income for survival, during the business start-up phase and often through the life of the en- tire business. The cash flow analysis for any business must include a Breakeven Analysis – the point when the business generates enough income to cover expenses. For a small business owner without a disability, who has no other source of income as a back up, the business must breakeven and provide survival income as well. However, most people with disabilities have SSI/SSDI benefits to cover daily living expenses, so the business does not need to generate survival income; it simply has to reach the breakeven point. Vocational Rehabilitation and other employment ser- vices may go to Small Business Development Centers (SBDCs) and the Small Business Administration (SBA) for preliminary and final review assistance with business plans (they rarely write the business plan which is why technical training to rehabilitation personnel and consumers appears critical). It is important to note that the developing cash flow analysis and profit analysis requires a knowledge of the Social Security and Medicaid/Medicare regulations which typical SBDCs and SBA advisors do not have. For instance, if the fixed cost to sell a product is $100 per month, and the cost per item sold (cost of purchased wholesale product) is 50% of the selling price and the selling price per item is $8.00, then the breakeven point per year is $2,400 per year in sales or 300 items. Profit analysis shows that if $6,000 worth of items are sold (750 items in a year), then the profit for that year is $1,800 or $150 per month. However, if the person is on SSI which is reduced $1.00 for every $2.00 earned after the first $85, then the SSI monthly check is be reduced by $32.50 per month or $390 per year. This $390 can be projected and SSI will reduce his benefits each month based on the projections, or it can be paid back to SSI as an over- payment at the end of the year when the business taxes are filed. If it is projected, SSI reduces the check, and if the cash flow is unbalanced due to seasonal sales, then in some months he may be unable to meet his living expenses. His discretionary net personal profits are reduced from $150 per month to $117.50 per month due to the interaction of the SSI system rules. SBA and SBDC staff generally do not know these regulations and need technical consultation when factoring the interactions of SSI/SSDI checks and self employment income. SSI does not balance net self- employment income on a month by month basis, but by law has to divide the entire year by 12 in order to perform its reduction calculations. This is a significant benefit to self-employment that is not present in wage employment, and allows for large fluctuations in in- come that do not impact benefits or Medicaid monthly. Another significant advantage to SSI rules and self- employment is the fact that if the business is exceeding projections to SSI, and the owner chooses to reinvest the excess profit back into the business, the “reduction” interactions with SSI can be controlled avoiding an SSI overpayment while simultaneously growing the business. This is not an option with wage employment. Fourth, self-employed people with disabilities may have access to alternate sources of capital to build their business. Conventional small business loans and investors for business start-ups are difficult to acquire. Banks prefer not to make small business loans unless substantial resources are available as collateral. To access loans the business and business plan often have to be well developed and show high growth potential. Wealthy individual and/or “angel” investors are the exception rather than the rule. Fifth, self-employment for people labeled “most severe” works. At first glance, self-employment appears to be beyond the reach of people with such labels. Under- standing the person in her home, community, and day to day context of living reveals opportunities for self- employment. Self-employment can closely match the small business owner’s preferences, gifts, and unique contributions. Self-employment allows for the creation of a finely matched work opportunity designed specifically for someone that does not fit standard employee molds while respecting context and natural supports for a unique, profitable, and viable form of community employment. Sixth, while approximately 150,000 individuals traditionally served by community rehabilitation pro- grams (CRPs) are now wage earners through supported employment, almost 400,000 people remain in day pro- grams that need new avenues to address community employment [14,18]. Self-employment offers people career advancement through increased wages and integration with suppliers, customers, and mentors. Finally, self employment offers individuals the opportunity to schedule their work day to a large ex- tent around their personal productivity, personal goals, symptom cycles, and personal schedule. Self employment can be a tremendous job accommodation that is customized to an individual’s unique circumstances, location, abilities, resources, and dreams [11,13]. 3. Planning as a real time activity Business planning serves a multitude of functions. The process makes one think critically about every aspect of a business launch; it reveals unknowns that can both relieve and increase generative anxiety (tension that leads to better ideas); it identifies support, educational skills, and networking needs and resources; and it provides an opportunity for others to visualize the dream and thereby offer their support, encouragement and critiques [6]. There are many appropriate and functional approaches to small business planning. One such process was devised by the author, working in collaboration with Rosalie Sheehy-Cates, the Executive Director of the Montana Community Development Corporation. This planning map provides one structured but non-prescriptive method of thinking through the development of a business plan. As an example, the fictional case of “Jim” serves as a primer for small business development. Upon meeting Jim an individual profile and benefits analysis is completed that identifies family, community, and other supports for employment and social integration including an analysis of benefits from Social Security, Medicaid, Medicare, Section 8 Housing, Food Stamps, Vocational Rehabilitation Services, and Medicaid Waiver Services as applicable. Such profiles can be adapted from the forms available from Marc Gold Associates [5] and Virginia Commonwealth University [4]. Once this information is collected, further exploration of the person’s career goals occurs. If, for instance, Jim wants to raise chickens and sell eggs, which is the case in this scenario, a thorough exploration of the tasks can begin. Typically this involves a substantive visit, with Jim, to an egg farm to assess the tasks to be performed, gather market and supplier information, and to judge the concept’s viability. An on-the-job assessment, or a job in this farm, if practical, may be the first step to long-term career satisfaction. Remember, most self employed individuals learned their business by working for someone else. In this fictionalized case, though, there is no egg farm nearby, so judgements based upon available support potential, and Jim’s past work history are required. Jim’s profile indicates that he is a 25 year old male with Down Syndrome. He lives with his parents, John, age 71, and Martha, age 68, at 1625 Bitterroot Lane in Stevensville, Montana. His father is a retired farm supply truck driver who once ran an egg farm on their property before his day job became too taxing; his mother recently retired as a nurse’s aide at the local nursing home. Jim’s younger sister recently graduated from high school and lives with her husband in Oregon. Jim lives in the family home which is situated on 20 acres 3 miles outside of town. The property features a small horse barn, a 3 car garage and workshop, and a large chicken coop. The family owns 2 horses, a dog, 3 cats, has several water wells, and irrigation rights. Jim has a Wednesday through Saturday job in town at Wagon Wheel Pizza, and his folks drive him back and forth daily. He works from 4 pm until 6 pm and earns $5.35 per hour for a total gross monthly income of $171.20 per month, considerably below even conservative estimates of potential earnings. Jim also receives a monthly SSDI check, as a disabled adult child on his father’s work record, of $700 per month, and has Medicare and Medicaid coverage. He continues to receive Medicaid due to the fact that he lost his SSI check at age 19 when his father retired and Medicaid is continued due to fact that the only reason he lost his SSI check was due to receipt of his SSDI based on his father’s retirement. He pays his parents room and board of $400 per month, and the family is worried about Jim’s ability to care for himself when his parents are no longer able to support him. Jim’s benefits analysis reveals the opportunity for Jim to utilize a Plan for Achieving Self Support (PASS), from the Social Security Administration where he could set aside $680 per month in a PASS for a number of years to achieve a work goal of earning more than his current income in his current field of work or an almost unlimited choice of work goals including self employment goals. Setting aside $680 per month in a PASS generates $8,160; 2 years generates $16,320; and potentially a PASS could be developed for an unlimited number of years as long as the time required was reasonable in light of the particular work goal. Jim enjoys his work, likes his co- workers, and has mastered dish washing, busing tables, and various food prep tasks. Jim is physically healthy and strong, but he has limited and slurred speech, has a peripheral vision problem, and cannot pass the driver’s test in Montana. There is no public transit, the local economy is one of the poorest in the United States, and job opportunities are few. Jim did spend two years in the local sheltered work- shop following his receipt of a Certificate of Attendance at the local school where he was in a Special Education Resource Room. After the first year, in the workshop, Jim began being agitated and bored. The Job Developer helped Jim get the job at Wagon Wheel and that solved the immediate problem, although he has stated many times he wants to do farm work or be outside. Jim is no longer receiving extended employment services however, but can qualify for limited case management support if he desires. Jim has never been served by the state Vocational Rehabilitation office. Every morning, Jim and his father feed the animals and do a variety of chores around the property. Recently, Jim and his father have discussed the old chicken coop and what they might do with it. John is interested in making a little money to supplement his retirement, but also wants to be able to relax. If John was to start a business, even a partnership with his son, the tax liability might impact his retirement payments. Martha would also like some additional income, but doesn’t want to be tied down by a full-time commitment. Together, they all begin to discuss the egg business as John’s sole proprietorship. John and Jim spend a few hours on the Internet researching the present day egg business. Ten years ago there were a dozen small producers in this valley alone, but all of them ceased operations. Their research revealed the following: In the western United States, white shelled eggs from Single Comb White Leghorns are preferred; fresh shell eggs are the best sellers for retail, but there are new markets opening up for hardboiled eggs and eggs for cattle feed; Montana ranks near the bottom in egg production so most of the eggs sold in the state, and in neighboring Idaho and Eastern Washington are imported from other states (this importing drives the cost up to the retailer and the customer); the average per capita annual consumption of eggs is 256.4 and growing; in the year 2000 there are 750 egg operations in the United States compared to 10,000 in 1975 due to the impacts of agribusiness; most egg producers have flocks of 75,000 to 5 million layers, whereas the family’s coop will hold 3,000 chickens; in 1999, 193 million cases of eggs were produced: 30% went to the food processing industry, 55% to retail, 14.5% to foodservice sales, and .5% were exported, mostly to neighboring Canada. The family also found small-scale production recommendations and statistics on the Web. The coop needs to be maintained at a temperature ranging between 57 and 79 degrees with a relative humidity between 40% and 60%; that Leghorns consume roughly a 1/4 pound of feed per day; that feed costs approximately $8 per hundred wholesale (Jim’s dad can buy wholesale); and that new chickens are needed every 60 days with a replacement cost of $64 per 100 chicks. To start the business, the coop will need four cold storage units (converted refrigerators available used), a thorough rebuilding of the gas heaters, a new hot water heater, two new exhaust fans, some minor electrical upgrades, new lights to stimulate egg laying, a business license, and an agreement with a local wholesaler who will buy the eggs. The preliminary research is encouraging so the family visits the local Small Business Development Center and together they rough-out a business plan. They start with an Executive Summary of Jimbo’s Jumbos, LLC, that provides an overview of location, production, markets, profitability estimates, capital needs, etc. Then, they use the Small Business Start-Up Flow Chart to guide the business plan design as follows. The scope of this article limits the extent of the plan below and a discussion of probable tax liability, but serves as an example of abbreviated content for a business plan. 3.1. Product White shell eggs for local retail sale, utilizing a lo- cal distributor. Production is estimated at 5,729 dozen eggs per month, almost all of which will be Grade AA Large. Average wholesale price negotiated with Montana Ag Distributor, Inc., is $.72 per dozen. The waste byproduct will also be sold to Trapper Peak Fertilizer, who also hauls from the egg farm, at approximately $200 per month. 3.2. Potential and feasibility Thorough research has been undertaken via the Internet; through a visit to a family egg producer in Utah; and through the Missoula Small Business Development Center. Current facilities, with the renovations included in this plan, are sufficient to house 3,000 laying hens and replacement brood stock. A ready local market and distribution channels exist to sell the product and byproduct. The company is being organized as a C-Corporation in Jim’s name, although John will provide assistance. With John’s expertise and experience in egg farming, and with Jim’s ability to perform most of the work with John’s supervision, the venture is deemed feasible. 3.3. The 3 Cs 3.3.1. Customers Direct sales of eggs are to Montana Ag Distributors, Inc., which is entering into a one-year exclusive contract for eggs at $.72 per dozen. The contract specifies that Montana Ag Distributors will provide bulk cartons for the eggs and will make pick-ups on Monday, Wednesday, and Friday of each week. Jimbo’s Jumbos is not required to grade or sort the eggs, but must maintain the eggs in refrigerated cartons according to Department of Agriculture regulations. Montana Ag Distributors sells the eggs to local supermarkets and restaurants, that in turn advertise them as local products. The secondary customer is Trapper Peak Fertilizer that will haul chicken waste from the farm monthly and will pay Jimbo’s Jumbos approximately $200 for the product in bulk. 3.3.2. Competitors The market niche Jimbo’s Jumbos is exploiting targets 1) the paucity of local producers of fresh eggs; 2) savings to retailers based on reduced transportation and interstate commerce costs. There are no other local producers. However, agribusiness could under-sell Jimbo’s Jumbos if they grew to threaten their market, which seems highly unlikely given the small volume of eggs produced. 3.3.3. Capabilities At present, Jimbo’s Jumbos can produce approximately 825,000 eggs (68,750 dozen @ $.72 for a gross of $49,500; this amount varies slightly with rounding) annually without additional space. The present coop has sufficient nesting stations for 3,000 birds while allowing them to be uncaged within the area. If layered cages (and some automation discussed later) are in- stalled (at an estimated cost of $15,000), an additional 3,000 hens can be added with minimal additional labor or facility costs. These cages and automation will be added in Year 3 if the first 2 years are successful and the market can absorb twice the production. Fig. 1. Small Business Start-up flow Chart
3.4. Marketing mix 3.4.1. Niche/target As noted above, the niche for Jimbo’s Jumbos is “local high quality eggs” at competitive prices. Full attention will be given to satisfying their sole and exclusive buyer, Montana Ag Distributors, who market and sell the eggs to the end-user. 3.4.2. Distribution Local sales through Montana Ag Distributors significantly reduces marketing and transportation costs. 3.4.3. Promotion Advertising of eggs is minimal due to the availability of Montana Ag Distributors and their longstanding network of retailers. However, because local sales provide all revenues, Jimbo’s Jumbos will invite retailers to tour their operation, and will distribute a fact sheet about their eggs and natural production techniques (no growth hormones, etc.) to each retailer. They also offer a money back guarantee to all retailers if any eggs are found to be of poor quality. Broken eggs are the responsibility of Montana Ag Distributors. 3.5. Operations 3.5.1. Tools and equipment The start-up operation requires the purchase or renovation of several items (see Table 1). 3.5.2. Suppliers All supplies, equipment, and inventory are available locally. Chickens and brood stock are available from Montana Ag Distributors, Inc., at $64 per 100. These chickens are replaced every 60 days after reaching laying age, at which time Montana Ag Distributors buys the mature chickens for slaughter and provides replacement chicks at $32 per 100. Grain is available wholesale from John’s former employer at $8 per hundred pounds purchased in bulk 1,000 pound lots. Utilities are provided through Montana Power Company and are estimated at $2,400 annually. Veterinary services are available from several local sources and medicines are available via the Internet, at an average estimated cost of $600. Table 1 Start-up operation: Tools and equipment
3.5.3. Training John is teaching Jim the trade. Also, various Internet sites keep producers up to date on the latest growing and production procedures. Vocational Rehabilitation has offered to provide job coaching assistance if Jim needs the service through the local community rehabilitation program. 3.5.4. Contingencies A variety of potential problems have been identified by the SBDC, although all appear to be of minor concern. The first is the fluctuation in the commodities markets that may make the fixed price of Jimbo’s Jumbos to Montana Ag Distributors much lower than other buyers might offer. However, the guarantee of sales at a fixed price provides some stability and assurance of product turnover. The other big concern is the weather. A prolonged cold spell or hot spell could kill chickens if adequate heat or cooling is not provided. The mechanical systems as planned are adequate under normal conditions, but production insurance is advisable to cover inventory losses, lost sales, and associated damages to Montana Ag Distributors. 3.5.5. Production plan The operation is scheduled to begin on July 1. John will teach Jim the daily tasks and will handle inventory control, contracts, bookkeeping, etc. Jim’s primary duties will be feeding and watering the hens; scraping waste into the waste auger that transports it to the bin behind the coop; removing the eggs and storing them in the refrigerators (the average chicken produces 275 eggs per year, therefore daily production will equal approximately 191 dozen @ $.72 or $137.52 gross daily/$50,195 annually); monitoring the thermostats; washing the floors and equipment. 3.6. Financial plan 3.6.1. Cash on hand Jim has a savings account with $1,100. And he receives a monthly SSDI check for $700, plus he is covered by Medicare and Medicaid. Once production begins he will quit his current job. 3.6.2. Assets The family owns the property outright, valued at $250,000. The coop, un-renovated, is valued at roughly $50,000. This is not Jim’s property, but is being pro- vided for free by the family. A tax attorney will be contacted to make certain farm income tax issues are covered in the final business plan. 3.6.3. Work incentives and funding With the assistance of Vocational Rehabilitation, Jim has applied for and received a Plan for Achieving Self Support. His monthly SSDI payment of $700 minus the $20 exclusion, left $680 per month from his SSDI for the initial establishment of a PASS account. Based upon a 24 month PASS, and the net self-employment income projections in his business plan, his PASS will generate $23,760 towards the business in the 1st two years. During the 1st year of the business Jim will set aside $1,320 per month in his PASS account each month ($680 from his SSDI check and $640 from his net self employment income of $1,360 per month). In year two he will set aside $660 per month. Year two is reduced because of the intentional elimination of his SSDI check at the end of the 1st year of his business. Throughout the 1st two years Jim will be eligible for the full SSI check of $512 per month and retains the $20 exclusion from his SSDI check for a total of $532 per month to pay his room and board, and regular living expenses. He will also retain $660 per month from his net self employment income (gross wages) for a total monthly living income of $1,192 per month. After the first two years, when Jim’s PASS is completed, Jim will no longer receive cash SSDI or SSI benefits each month but will still be considered eligible for SSI and he will have Section 1619(b) Medicaid health insurance coverage, plus an additional 6 years of premium free Medicare coverage due to the 1999 Work Incentive Improvement Act Medicare extension. The first 2 years of the business will concentrate on Jim learning the business and growing a reputation for quality eggs. In the 3rd year, an investment of $15,000 will be made to automate the feeding systems, the heat- ing and air conditioning systems, and the waste removal processes that will double production and reduce the manual labor involved. Jim will use some of the PASS for start-up costs (some purchases will be made on credit or reimbursed to his father), an interest free loan from his parents, and Vocational Rehabilitation is covering the balance. The SBDC also has loans avail- able for the 3rd year expansion if profitability is proven. The start-up costs are included in Table 2. The costs of equipment may be amortized over its useful life, but for this brief illustration, full cost is borne in the first year. Table 2 Start-up costs
3.6.4. Revenue Eggs sales are estimated at $49,500 annually (68,750 dozen @ $.72). Chicken waste sales are estimated at $2,400 annually ($200 per month). Total gross revenue is projected to be: $51,900. Using a straight line approach to costing, the business actually makes money because he pays himself an owner-operator salary based on $8 per hour for 5.5 hours per day, seven days per week (38.50 hours). His annual net self employment income or gross wages are $16,060, making total expenses $51,585. Revenue from products is $51,900. PASS, VR, and parent’s loan are not counted as income. Revenue minus expenses yields $315 undistributed self employment income for year one. Since Jimbo’s Jumbos is organized as an LLC, Social Security and the IRS consider all of the net business income as Jim’s countable and taxable income, even if the LLC does not distribute all of the income to Jim. In this case Jim received $16,060 in gross wages (before tax wages) or net self-employment income of $16,060 plus the additional net self employment income of $315 in undistributed net income for a total of $16,375 net self employment income (or gross wages) before taxes. Jim uses up his 9 Trial Work Period (TWP) months (for his SSDI check) during the first year of business since no subsidies or impairment related business expenses can be used to reduce the number of hours worked and net earnings Jim receives monthly during TWP months. Jim also exceeds SGA in the 10th, 11th & 12th month of year one, after his TWP, due to his work effort of over 40 hours per month. By the end of the first 12 months of business Jim loses his SSDI check intentionally, and amends his PASS to utilize only of his net self employment monthly income (less the $85 SSI income exclusions) to pay off the principle payments on his business loan from his parents during year two of his business. His PASS is amended to use $660 per month of his net self-employment income to pay off the remaining $7,920 owed on his business loan during year two. Following this logic, in Year Two, costs are now $35,120 (the same as Year 1 minus $8,400 in equipment and assuming costs remain stable), plus the same wages of $16,060 for a total cost of $51,180. Gross sales income remains static at $51,900. Undistributed net self employment income for year two is $ 720. With Year 3 comes the investment in automation and expansion. The renovations are covered through the PASS, but operating expenses for 6,000 chickens almost double; Jim goes to 40 hours per week. Income for Year 3 is projected based upon 6,000 chickens laying 275 eggs each, or 1,650,000 eggs per year. At $.72 per dozen, revenue is estimated at $99,000. Plus, waste sales double to $4,800 per year, for a total gross revenue projection of $103,800. A profit of $21,960, enough to begin a payment schedule to reimburse Jim’s parents for the $15,000 expansion loan, pay income taxes, and to begin paying rent on the coop. Table 3 Year three
3.6.5. Breakeven analysis A variety of scenarios can be constructed from these estimates and projections. In this straight-line example, the breakeven point occurs in the first year. But, if the equipment was amortized, which might have tax benefits and Social Security advantages, the breakeven point could be delayed for a year or two in order for Jim to build equity in the company. This is where each circumstance deserves individualized attention from an accountant or Small Business Development professional. A simplified monthly sales break even analysis could be quickly developed as a planning guide from this example that would show the fixed costs each month are $550 (from chart above for utilities, phone, etc.) and variable costs are $.42 per dozen eggs sold (from chart above for cost of chickens and feed). From the fixed and variable cost information, it can be calculated that 1833 dozen eggs per month at $.72 per dozen will yield a total sales of $1,319.76 for the monthly sales break even point, (not including equipment amortization). Gross Sales: 1833 Dozen @ $.72 = $1319.76 Costs of Goods Sold (variable costs) 1833 @ $.42 = $769.76 Fixed Costs: $550 per month = $550.00 Fig.2. Break even chart. 3.6.6. Do, check. act This is the customer service and product improvement component of the plan and of operations. As the business grows and matures, attention must be paid to improving processes, reducing production costs, in- creasing revenues, etc. The plan should include the methods and timelines for such actions. For instance, the automation of some processes and the addition of labor was a planned activity at Jimbo’s Jumbos, which made volume sales possible. Other items Jim should consider include: negotiating a better price for eggs; negotiating a better volume-driven price on bulk feed and chicks; expanding product lines into industrial eggs or specialty eggs for gourmet shops. 4. Conclusion While this is a greatly abbreviated overview of the business planning process, it does serve to illustrate a model for approaching a rough draft business plan to begin the exploration for financing, production concerns, and market potential. In most cases an examination of reaching Substantial Gainful Activity (SGA) for Social Security is advised (as in any employment situation), a review of payroll and property taxes, and the role of family farm income should be undertaken during the planning phase. References [1] Access to Credit, Small Enterprise,
Big Dreams, Frederick, MD: Access to Credit Media Project (Videotape),
1998.
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