Guide to Evaluating and Choosing a Natural Resource-Based Enterprise

J

Jonathan S. Kays , Regional Extension Specialist – Natural Resources, Maryland Cooperative Extension
18330 Keedysville Road, Keedysville, MD 21756, (301) 432-2767 ext. 323; jkays@umd.edu

This guide is being developed as an extension publication by the Maryland Cooperative Extension and will be made available from the Natural Resource, Agricultural, and Engineering Service (NRAES). (607) 255-7654. You can find them on the web at www.NRAES.ORG.

Maryland Cooperative Extension offers other information and publication on natural resource income opportunities at www.naturalresources.umd.edu.

Why Use This Guide?

Each year, farm and forest owners consider starting nontraditional enterprises using renewable natural resources, such as forests, wildlife, and water, as well as cropland. (The word enterprise is used loosely to refer to anything from a serious business venture to a hobby that may someday develop into a business.) Some landowners are traditional farmers looking to diversify their existing operation. Others are new property owners. Their aim may be to produce a sustainable source of income over a long term. Or they may just want to be good stewards of their forest’s resources. However, many of their efforts are less than successful-or fail altogether-because before they evaluated and chose an enterprise they neglected one or more of the critical steps in decision-making or business planning: assessing their personal and family resources goals, assessing their lifestyle, and assessing their land resources. Equally important, they often lacked necessary technical, business, and marketing skills.

Before considering an alternative enterprise, landowners need to first get their forest resources evaluated and a forest stewardship plan to guide them in the long-term management of their forests. After that, time and effort can be committed to developing other rural enterprises.

The aim of this publication, therefore, is to supply the tools and the approach that will enable landowners to utilize a decision-making process that will assist them in getting their forest resources under management and then making their enterprise assessment. In many cases, the principal manager is more enthusiastic about the enterprise ideas than the rest of the family. This publication will stress that the principal and the others involved must work as a team, with each person pulling his or her own weight.

What are Possible Natural Resource Income Opportunities?

This guide focuses on the following three types of alternative rural enterprises:

Dealing with the Forest Resource First

Contact a professional forester to develop a forest stewardship plan for your forest resources. New and old landowners often overlook this essential step and make forest management decisions that result in poor harvesting practices, low economic returns, and serious damage to wildlife, aesthetic, and recreation resources.

Most landowners lack the knowledge to carry out a timber harvest by themselves. It is best to contact a consultant forester to act as your agent in the sale. The consultant will mark the trees to be cut, solicit competitive bids from prospective buyers, and develop the contract with the logger, usually getting all money up front. The consultant will be present on the site as the sale proceeds and make sure the contract provisions are followed. The 10-15 percent commission charged by many consultants is more than recouped by increased revenues from competitive bidding of the timber and the peace-of-mind resulting from having a knowledgeable forester looking out for your interests. Contact your state forester for a list of consultant foresters in your area and ideas on how to select a forester.

Chart 1. Compound Rate of Interest for Trees of Different Diameter and Growth Rates

 

Number of Years to Grow One Inch in Diameter

Rapid Growth <---------------------------------> Slow Growth

Diameter of tree

2

3

4

6

6

18.1

12.1

9.1

6

12

8.7

5.8

4.4

2.9

14

7.4

4.9

3.7

2.5

16

6.4

4.3

3.2

2.1

18

5.7

3.8

2.9

1.9

Sieving Out Your Ideas for Rural Enterprises

After you get your forest resources in order it is time to turn to other rural enterprise opportunities. Lots of landowners may think of themselves as entrepreneurs, but many fail to realize their goal. In fact, many people never even set goals. Although motivation, self-reliance, and interest are essential, such personal qualities by themselves are not enough. You will have the greatest chance of success if you realistically assess your goals and resources as well as your marketing, production, and financial capabilities. Then you will be able to base your decision to start or abandon an enterprise on the best available information..

The process of evaluating and choosing an enterprise can be likened to a sieve filtering sand. The sand poured into the sieve corresponds to the ideas you generate before you do much serious thinking or research. The filtering process corresponds to the process of gathering information about your ideas and evaluating your personal and family goals. From here, a few of the ideas emerge as possibilities worth pursuing. This leads to the decision-making stage from which you are able to develop the components of a business plan.

 

In selecting one or several ideas over others, balance your objectives against the reality of the available resources and markets. Practicing diversification--having several enterprises that are compatible with one another--will give you more flexibility and opportunity than by concentrating on just one. However, start small and then expand. Once you select an enterprise or enterprises, develop a rough business plan for each, which includes addressing basic business and marketing concerns included in this workbook. In following this process you move further down the sieve, refining your ideas.

The key component of this assessment is the development of an enterprise budget, which requires that you estimate your costs and revenues for one year, one season of operation, or whatever length of time is necessary to produce a crop. This simple tool will help you to determine if the enterprise will be profitable or not given all the assumptions you must make for costs and revenues. This is the stage when many people rethink their ideas. Although the more demanding an enterprise is, the more complex the business plan will be, all of the business, financial, and marketing components in the workbook must be addressed. After going through this process, you will be able to go into the venture with your eyes open and have a good idea of what--or what not--to expect.

Many individuals who go through the various steps of the sieve process of enterprise development abandon their ideas along the way. Typically, once individuals become aware of what is involved in an enterprise--the time, resources, and possible financial return (which is usually lower than expected)--they either abandon their effort or look at other options that could be more compatible with their objectives. For example, landowners who do not live on their property realize that their idea will not work unless they live on the land. Landowners who have the modest financial objective of paying the property taxes or who just wish to pursue a hobby may opt for a less intensive venture than the landowner who wants an enterprise to generate significant income.

In the end, landowners who base their enterprise decisions on what they learn going through the sieve process will generally be more successful than landowners who bypass the process.

The Real Life Process of Decision-Making Involves Making these Real Choices!

In leading you through the process of evaluating and selecting an enterprise that is compatible with your life situation, we will look at each of the following steps in the sieve or business-planning process.

Reality Check: Is the rest of the family with you?

A family business has to take into account the needs and opinions of all family members. Too

Table 1. Reality Check: Is the rest of the family with you?

Our family spends too little time together

Agree

Disagree

I really enjoy working hard to make the natural resource enterprise a success

Agree

Disagree

I’m very enthusiastic about our new natural resource enterprise

Agree

Disagree

A new business is too much for us to handle now.

Agree

Disagree

I too often sacrifice the things I like to do for the sake of our current activities

Agree

Disagree

I am not worried about having enough spending money

Agree

Disagree

Being able to work the land is more important than having lots of money

Agree

Disagree

The family should always come before the business.

Agree

Disagree

I believe we could handle some financial risk with our new enterprise

Agree

Disagree

I am more interested in the enterprise as a hobby rather than a serious business venture.

Agree

Disagree

It’s more important for the children to work the land than to have lots of activities.

Agree

Disagree

I feel like my opinions and feelings about the new business are taken seriously.

Agree

Disagree

Adapted from: Schuck, N.G., W. Knoblauch, J.Green, and M. Saylor, 1988; Hilchey, 1998.

often in family-run or home-based enterprises the principal manager is much more enthusiastic about the idea than the rest of the family. This can spell trouble. For example, many forest

plantations, originally planted with Christmas trees, have had to be abandoned because the landowner assumed wrongly that a spouse or child would help with the pruning, mowing and other management activities. It is imperative, therefore, that you and your spouse, children, parent, or whoever will be involved in the enterprise address the statements posed in the adjacent table. Then, wit the responses in mind, talk with your family or team.

Goals and Characteristics of Various Types of Entrepreneurs

Entrepreneurs must have or develop a number of skills-record keeping, financial, and marketing skills; interpersonal skills; and skills in production and management. Evaluating each individual’s strengths and weaknesses will make it easier to decide who should handle what task and what additional educational or training may be necessary. Therefore, it is important for you and your team to go through the statements below. Then, with the various responses in mind, talk with your team about the proposed enterprise choices.

Table 2. Goals and Characteristics of Various Types of Entrepreneurs

I like to work with machinery.

Agree

Disagree

I like to work with crops.

Agree

Disagree

I like to work with the forest.

Agree

Disagree

I like to keep records and I feel I am well-organized.

Agree

Disagree

I would enjoy people coming on our property and making them feel "at home" as part of a home-based business.

Agree

Disagree

I like work real hard for a few months, then take a few months of rest.

Agree

Disagree

I like to have a steady workload over the entire year.

Agree

Disagree

I would to supervise workers.

Agree

Disagree

I would be good at sales because I enjoy seeing a satisfied customer.

Agree

Disagree

I would like the business to be compatible with my status as a landowner who’s primary residence is not on the property.

Agree

Disagree

I believe the sustainable management of forest and wildlife resources for pleasure and profit is a worthwhile.

Agree

Disagree

The most important quality of the new enterprise(s) is the ability to make a good profit.

Agree

Disagree

Source: Schuck, N.G., W. Knoblauch, J.Green, and M. Saylor, 1988; Hilchey, 1998.

As you assess your goals and skills, it helps to consider which broad category of entrepreneur you fit into. Experience has shown that landowners tend to fall into one of the five categories. Which one best represents you and others to be involved in the enterprise?

Family Labor and Management Resources

Initial Assessment of Resources, Goals & Objectives, and Possible Enterprises

Now that you have considered your family and personal goals and skills, and started to seek information on possible enterprises, complete this initial assessment as a family. It will help you to focus your thoughts and target those things most important. Many of the resource items will be covered more completely when the resource inventory assessment is completed in the following sections.

  1. Provide a brief description of your property: a) distance from home; b) location; c) acreage in different uses (forest, cropland, pasture, pond); d) number and type of structures; e) access; and; f) other important information. Long and short-term goals you and your family hope to achieve by starting this new enterprise? Will you be involved as resident or absentee landowners?
  2. Name up to five enterprises you are considering. What is your experience or background with these types of enterprises?
  3. List the family members who would like to be actively involved? What types of responsibilities will each take on?
  4. How much time will you and your family have available for your new enterprise?
  5. If you already run a NR-based business, what are your goals over the next 3-5 years for the enterprise you are currently involved in?
  6. ___ Maintain at about the same level ___ Cut back some. How?
    ___ Expand. How? ___ Get out altogether.
    ___ Other: ____________________

  7. What are your financial goals for this new enterprise? For example, once established, what amount of your family living income do you expect from the following sources?

Current farm/forest enterprises _________
New enterprise                            _________
Non-NR employment                  _________
Other                                             _________
Total                                              _________

Adapted from: Schuck, N.G., W. Knoblauch, J.Green, and M. Saylor, 1988.

Effect of Residency Status

In our example, the Smith family lived on the property. If the Smiths lived 1-1/2 hours away from the property, however, this would have a profound effect on the options that they could pursue. Residency status--whether resident owner or absentee owner--is a crucial consideration for landowners. Living off-site has the following implications:

Site Assessment and Inventory

Once you have some ideas for enterprises, plus a good idea of your goals, carefully assess all of your resources. Your assessment will likely spark some totally new ideas and change your opinion of some of the ideas on your current list. While you can do part of your assessment from your couch, walking over the property with the help of a natural resource professional, such as a forester or Extension agent, will help you discover opportunities that you may not have been aware of. (Time available from resource professionals is scarce. Be prepared with your assessment of resources, goals, and responsibilities in order to make the best use of their time.)

Resources are divided into two main types for the site assessment:

1. Land and natural resources: When most people are considering assets they think of resources such as houses, other structures, equipment, and cropland. Few, however, consider the economic value of their natural resources, such as timber, wildlife, water, and intangibles such as scenic beauty. Evaluate these resources realistically; each could be the basis of an enterprise opportunity.
2. Physical and personal resources: Each person involved in the enterprise can contribute personal skills and experience, which are valuable assets in themselves. Skills in producing a product or service and in marketing, communications, computers, bookkeeping, and organization all have value and need to be considered.

Now, it is time to complete an inventory of your resources. Before you start, however, obtain a map of the property that identifies fields, forests, and water and the location of structures, roads, and other physical resources. A map allows you to mark the location of natural resources and make notes as you walk the property. You can purchase an aerial photograph of the property for a nominal fee from the county office of the U.S. Dept. of Agriculture Farm Services Agency (formerly the Agricultural Stabilization and Conservation Service). The agency is typically listed in the blue pages of the phone book, under U.S. Government. If you have an existing forest or farm management plan, use the map included with the plan. Continue to seek educational information about your enterprise ideas and measure your ideas against your available resources.

Inventory Your Land and Natural Resources

1. Agricultural Land Resources: Cropland and Pasture
Contact your county Extension office or the state Natural Resource Services office for assistance.

II. Natural Resources

A. Forest

Contacted a state forester for assistance.
What non-timber forest products are present on the property (mushrooms, ginseng, floral plants, vines, etc)?

B. Wildlife

Contact your state wildlife biologist for assistance.

C. Intangible Resources

List unique locations on your property, with aesthetic appeal, that can be developed for recreational enterprises. These would include rivers, streams, scenic overviews, rock cliffs, wetlands, etc.

  1. Water Resources

Quality and utility of ponds, streams or springs for recreation or production enterprises.

Inventory Physical and Personal Resources

1. Buildings: Houses, Barns, and Other Structures

List size, age, condition, and the cost to convert or upgrade structure for use in the enterprise.

II. Machinery and Equipment

For each piece of equipment (tractor, chain saw, wagon, rototiller, backhoe, bulldozer, etc.) list make, horsepower, age, condition, attachments, or other relevant information.

III. Use of Byproducts of Farm/Forest Operation

IV. Available Labor and Management Resources

Time for management and labor involved in an enterprise must come from the team members or from outside sources. Develop a table based on the heading below to help team members determine how much time they have available during each quarter of the year for management and labor activities. The time available can either be on the weekend or during the week. Completing this table will help you look at your time more realistically and see if the enterprises you are investigating are compatible with the time you have available.

Management and Labor Resources

Hours by Season and Time of the Week

Resource Person

Total hours available

Jan-Mar

 

Apr-June

July-Sept

Oct-Dec

Under

utilized

Weekday

Weekend

Week

day

Week

end

Week

day

Week

end

Week

day

Week

end

Management

Labor

Potential Labor Sources Outside of Team

V. Financial Resources

VI. Special Skills Commonly Overlooked

Choosing An Enterprise

By now you should have a good idea of your resources and the assessment should help you identify possible enterprises you wish to pursue. Comparing the relative merits of one enterprise over another will help you to decide what types of enterprise is the best match for your resources.

As an example, the Smith Family has chosen five possible enterprises and eight criteria for judging how compatible each choice is with the family goals and resources. The table below shows the Smith Family has ranked their choices on a scale of 1 to 10, with 1 being least compatible with the criteria and 10 being most compatible. You can make a similar table and add the criteria most important to you. This exercise might show that the highest ranked enterprise might not necessarily be your personal first choice. Also, you may decide to pursue more than one enterprise to diversify your efforts. After you have selected the enterprise(s) you wish to pursue, you can then move on to the next section to assess the marketing and financial concerns for each.

List 5 enterprise ideas. Rate each on a scale of 1-10

Forest Products

Grapevine Wreaths

Hunting Lease

Ginseng

Pumpkins

Compatible with residency status

10

8

10

9

3

Preferred by family

9

6

7

9

3

Meets financial goals

9

9

5

10

9

Make use of under-utilized physical resources

4

9

8

6

8

Makes use of under-utilized management & labor resources

8

6

5

3

6

Potential market exists

10

5

9

10

6

Use of farm and forest by-products

9

9

3

7

5

Family financial resources available

10

8

10

7

8

TOTAL

69

60

57

61

48

Adapted from: Schuck, N.G., W. Knoblauch, J.Green, and M. Saylor, 1988.

Planning Your New Enterprise

After you have selected the enterprise(s) you wish to pursue, assess the marketing and financial concerns for each enterprise. The exercises that follow are intended to help you to: 1) define your product or service, 2) determine what marketing resources are available, 3) assessing your marketing options, and 4) analyze and understand your competition.

What Am I Selling Anyway?

Before you can market something, you have to know something about the product features, service features, marketing season, and benefits to the consumer. Describe below the product and/or service you are selling in your own words, and the benefits to the user in about 50 words. If more than one enterprise is being considered, how do they integrate or work together? Explain?

Who are My Customers?

You will need to choose your target market carefully and develop a marketing strategy to reach it successfully. Use whatever resources you can to find the following information about your target market.

Local Marketing Resources

Please list your local marketing resources. Use specific company names and contacts if possible.

Marketing options

List three marketing options and provide the pros and cons of each approach.

Market Research Techniques

Market research is needed on past & future trends in production, consumer demand, and price for your product or service. To gather this information will require some level of research. You can use the following techniques: existing data from a variety of publications, personal observation, contacts with existing businesses, and surveys of potential buyers and sellers.

Understanding Your Competition

Who your competitors are, the specific types of buyers they serve (their target market), and their competitive strengths & weaknesses will help you define your own position in the marketplace. Your direct competitors are those businesses who are supplying the same types of products as you are to the same potential customers. Indirect competition is any other type of product which customers might buy instead of your. Make it your business to find out all about your direct and indirect competition.

Examine Legal, Regulatory, and Liability Issues

Determine Labor and Management Needs

Estimate the number of hours or days of labor required to start and maintain the enterprise, Is the business seasonal or year round? Is the labor and management only available on weekdays, weekends, or both? Determine if and how the time needed to manage this business might conflict with other obligations. If conflicts exist, state what they are and how you plan to handle them.

Enterprise Budget – Startup Costs and Profit Potential

It is now time to address the production and financial management planning for your new enterprise(s). Will the enterprise you are considering actually make money, and how much? Many individuals start an enterprise never completing this step only to find out much later than the business will never make enough money to compensate them for their efforts. First, determine the costs of producing your product(s) or service(s). Then do some basic financial management planning.

What Will it Take to Produce Your Product or Service?

Will the Enterprise Be Profitable?

The enterprise budget is the most common financial tool used to determine the profitability of alternative enterprises. An enterprise budget projects the cost of the operation for a given period (typically one year or season of operation) and compare this figure to potential sales. Variable costs are costs that take place each year (labor, food, etc), while fixed or overhead costs such as buildings, equipment, signs, and long-term improvements can be charged over a number of years. The different between the two is your profit. The budget may look very different depending on the type of enterprise and circumstances of the situation. Every landowner has a different set of circumstances, commonly known as "assumptions," that set the background for their individual situation. Therefore, when you are examining enterprise budgets to find one that suits your needs, you will likely have to change some of the values and factors given your own set of assumptions. To provide you with a selection of models to choose from, examples of four enterprise budgets for selected natural resource income enterprises follow. (Numbers in parentheses in the text refer to numbered lines in the corresponding budget.).

Cash Flow Budget

Projects the timing of cash inflows and outflows. It breaks down a business into monthly or yearly increments to assess when additional capital is required for expenses and when revenues can be expected. Lack of adequate cash flow is a major reason why businesses fail in the long-term.

Example of an Enterprise Budget:

Fee Fishing Enterprise Budget

FEE FISHING ANNUAL ENTERPRISE BUDGET

ITEM

UNIT

QUANTITY

PRICE

TOTAL

VARIABLE COSTS

CATFISH

POUND

800

1.00

$800

TROUT

PER FISH

350

2.20

$770

PORTABLE TOILET

PER MONTH

7

70.00

$490

Electricity

per Month

7

10.00

$70

WEBSITE AD

YEAR

1

150.00

$150

ADVERTISING

MONTH

7

139.00

$973

INSURANCE

YEAR

1

500.00

$500

PERMIT

PERMIT

1

25.00

$25

LABOR (10% COMMISSION WHEN WORKING)

COMMISSION

0.1

1000.00

$100

BAIT

DOZEN

450

1.00

$450

SODAS

EACH

500

0.25

$125

HOTDOGS

EACH

250

0.50

$125

CHIPS

EACH

250

0.25

$63

MOWING

EACH

10

10.00

$100

Flowers, herbicide, miscellaneous

YEAR

1

100.00

$100

TOTAL VARIABLE COSTS LISTED ABOVE

$4,840.50

FIXED/OVERHEAD COSTS

BUILDING (10-YR LIFE)

2500

10%

$250

LANDSCAPE IMPROV (5-YR LIFE)

400

20%

$80

GRAVEL (5-YR LIFE)

250

20%

$50

SIGN (5-YR LIFE)

150

20%

$30

FISHIING POLES (5-YR LIFE)

80

20%

$16

Water testing equipment (5-year life)

150

20%

$30

Used refrigerator (5-year life)

100

20%

$20

TOTAL FIXED COSTS LISTED ABOVE

$476

GROSS INCOME

DAILY FISHING FEE

PER PERSON

1500

5.00

$7,500

FISH KEPT CHARGE (10% of total fisherman)

PER FISH

150

5.00

750

BAIT SALES

DOZEN

450

2.00

900

POLE RENTAL

UNIT/DAY

100

2.50

250

SODA

EACH

500

0.50

250

HOT DOGS

EACH

250

1.00

250

CHIPS

EACH

250

0.50

125

TOTAL GROSS INCOME

$10,025

TOTAL VARIABLE AND FIXED COSTS LISTED ABOVE

$5,296.50

NET INCOME OVER VARIABLE COST LISTED ABOVE

$5,184.50

NET INCOME OVER VARIABLE & FIXED COSTS LISTED ABOVE

$4,728.50

Developing the budget allows you to plan an enterprise that will actually make money or abandon or improve an idea that is unrealistic; before you put money into the venture. Regardless of the enterprise, work up an enterprise budget using the best information available along with your best judgment. Any computer spreadsheet program can be used to develop an enterprise budget.

The Big Decision: Start or Abandon the Enterprise

At this point you should have all the basic information you need to make a well-informed decision about whether or not this enterprise will make it out of the sieve. By now you may have abandoned many ideas. If you have gotten this far, however, your chances for success are pretty good.

Before you decide, it may be beneficial to do some test production or marketing of your product or service. If you are growing something, you may want to do some trials for a growing season. If you are marketing a service or unique product, you may want to do some test marketing in potential markets. Be aware that what a person says they will pay for a product or service is different than what they may pay in reality.

Some Final Thoughts

As you develop and implement your own ideas make sure you consider the following:

Sources of Information, Advice, and Counsel

The time required to chase information is valuable, but the need is constant. Knowing where to look and how to get information is a cost-saving practice.

The Internet provides a great resource. Below are a few websites to get you going.

SBA (Small Business Administration) http://www.sbaonline.sba.gov
SBA outside resources http://www.sbaonline.sba.gov/hotlist
U.S. Gov. websites http://www.utdallas.edu/utdgeneral/news/New%26Info/govRes.html
State Cooperative Extension http://www.reeusda.gov/1700/statepartners/usa.htm
Rural Dev. Business Programs http://www.rurdev.usda.gov/rbs/index.html
U.S. Dept. of Commerce http://www.doc.gov/
National Assoc. State Development Agencies http://trade.wa.gov/nasdalist.htm
USDA Forest Service State & Private Forestry Programs http://www.fs.fed.us/spf/coop/
State Foresters http://www.stateforesters.org
National Agroforestry Center http://www.unl.edu/nac/
Forest Landowner's Guide to Internet Resources http://na.fs.fed.us/pubs/misc/ir/index.htm
Special Forest Products http://www.sfp.forprod.vt.edu/regions/eastern.htm
Maryland Cooperative Extension http://www.naturalresources.umd.edu
ATTRA (Appropriate Technology Transfer for Rural Areas) http://www.attra.org
Missouri Alternative Website http://agebb.missouri.edu/mac/

References: