Aquaculture business planning

So you’re considering an aquaculture business?

Remember the old saying: most people do not plan to fail, they simply fail to plan.

Introduction

The success of an aquaculture farming venture will primarily be determined by its ability to operate as a profitable business.

No two businesses are exactly the same and therefore a business plan specifically addressing your production and marketing matters needs to be developed first alongside selecting a suitable site for the aquaculture farm.

The business plan will need to demonstrate sound reasoning for your aquaculture business and the justification for financial support from a bank or other funding/grants body. Its importance cannot be over-stated as potential investors or financial institutions will use it to evaluate the business.

A Commercial Farm Development Plan (CFDP) is required under the Fisheries Management Act 1994 as part of the application for an aquaculture permit. The requirements of the CFDP will be predominantly addressed by the business plan developed for your aquaculture farm. Therefore, the business plan can either be used to complete the CFDP or if it addresses all of the matters within the CFDP, it can be submitted as your CFDP.

The business and its structure

Sole proprietorship is common for NSW aquaculture enterprises but there are also partnerships/family and company run aquaculture farms.

You should seek advice from a business planner, accountant and/or legal advisor about the options and potential of different business structures and how they may affect an aquaculture business at different phases of development.

Marketing feasibility

The aim of commercial aquaculture is to maintain a profitable business.

To put it simply, you need to produce sufficient quantities of marketable product and receive a price greater than the production costs.

A marketing plan is a core part of the business plan, and getting it right can fundamentally influence the businesses profitability.

The domestic market

The main areas of the domestic seafood market are:

• Live seafood market - Generally returns higher prices than chilled product, has the added value of freshness but can have a degree of risk/costs associated with harvest, holding and transport;
• High volume markets for fresh seafood - Chilled product, including cooked, fresh chilled, filleted, head on gilled and gutted, frozen, vacuum packed or smoked. There is a risk that this higher volume market will return lower prices and in some cases can be insufficient to cover production costs;
• Restaurants and seafood retailers - Direct sale in live and/or slaughtered form. There is a risk that if you are unable to supply regularly they will stop taking your product; and
• Recreational markets - eg. tourism (Fishouts), aquarium trade and fishing bait.

Promotion

Product promotion is essential and one of the best forms of promotion is the product’s reputation supported by a quality assurance protocol. Individual business promotion may dovetail with the promotion of the State, region or the industry as a whole. Promotion through regular appearances at regional or promotional events, markets and direct contact with customers is effective, particularly as it provides opportunity for customer feedback.

Quality assurance

A quality assurance program is necessary to ensure consistent quality of product. All products should meet the National Food Standards and will be required to meet NSW Food Authority requirements.

Packaging and presentation

Packaging and presentation must be considered, especially in the retail market. The use of well designed innovative packaging can add value and increase returns.

Market acceptance

Market acceptance is critical. You must do your own research as market acceptance can change for a wide range of reasons.

Distribution

Market location including the distance to market and the logistics costs of supplying the products is another major practical business planning issue. You will need to determine available delivery options (eg. using agents, distribution companies or own staff) and costs in reaching your markets.

Tourism

Tourism may have potential for additional returns, but must warrant the added expense. It is important that the full cost of a tourism component to the business (eg. customer amenities, insurance, sales display area, equipment and additional staff costs) and costs associated with disruption to the daily operations of the farm. Tourism projects may include fishouts or guided tours.

Production feasibility

Once the business planning has determined that there is a potential market for the product, a full production feasibility assessment is undertaken. The production feasibility assessment should consider all fixed and variable costs, including:

• the site’s suitability;
• the species to be produced (caution should be exercised in trialling new species, species with difficult production phases or no species specific commercially available feed);
• production methods;
• feed costs and food conversion ratio (FCR);
• infrastructure requirements (caution should be exercised in respect of expensive technical rearing and husbandry equipment);
• staff – the availability of suitably experienced and skilled staff or advisers and/or access to appropriate training and instruction so that the enterprise can run smoothly;
• management – including the ability of management to make decisions and take actions for the reliable production of product;
• quality controls.
• in the production feasibility analysis, slight changes in cost of feed, juveniles, power, labour and health management should be considered to test the sensitivity of the production viability.

Financial feasibility

A cash flow projection (statement) is required within the business plan to help predict possible cash deficits as well as profitability. It is critical for those enterprises where there will be a single harvest per year while the production and marketing expenses will be spread over the year.

A cash flow projection plan should include monthly budgets for preferably three years or until the operation is likely to be ‘in the black’. In many operations, expenditure occurs in spurts, with higher costs experienced during stocking and harvesting when additional labour may be required. You need to distinguish between:

• Fixed costs – those that do not change as production volume changes (eg. full time employee salaries, overheads, insurance and depreciation on ponds/tanks, plant and equipment);
• Variable costs – those that change with production levels (eg. cost of juveniles, feed, chemicals, water, electricity and casual labour).

On the revenue side, there can be difficulties in making predictions because of price variability and harvest quantities. Therefore, it is essential that you consider variations in:

• sale price for various products in various markets;
• costs, including feed, water, juveniles, power and transport.

Example of cash flow items is attached.

A risk analysis should also consider the short and longer term viability of the business if various scenarios occur. These may include:

• disease outbreaks and subsequent mortalities;
• constraints on water supply because of droughts or regulations;
• major or extreme flood events;
• variable interest rates;
• shortages in the availability of juveniles;
• domestic or overseas market constraints.

Insurance

A comprehensive business plan greatly assists in acquiring insurances. Some policies are compulsory and others are essential to mitigate potential risks to the business. Examples of insurances that should be considered include:

• workers compensation;
• sickness and accident;
• key person;
• product liability;
• public liability;
• loss of profits;
• fire;
• burglary;
• machinery breakdown.

Under insurance as well as lack of insurance, particularly those required by law, could endanger your business and it should be reviewed on a regular basis. You should seek advice regarding your insurance requirements prior to commencing business.

Planning for continued success

Business planning doesn’t stop once a business has been established – a business plan should be a living document. It needs to be checked from time to time and whenever there are major events or changes.

It is good practice to have a regular cycle of review, covering issues including:

• Past performance – assessing the production yields and cost, quality and any other defined performance variables; and marketing and financial performance measures. It is then possible to compare actual with planned performance and make any necessary adjustments;
• Opportunities and threats analysis – you need to be aware of changes in markets and the potential for competition from within the region as well as interstate and overseas. Other changes in value adding, harvest size, transport, technology, cultivation species, species management, interest rates, etc. may offer opportunities as well as threats;
• Adjusting the plan as necessary – you may need to make changes to your business plan as threats and/or opportunities arise.

Avoiding business failure

Aquaculture like any business has potential pitfalls that may hamper the development of a strong business. Some pitfalls include:

• for family operations, the death of the key person (who understood how to operate the farm) or marital/divorce problems or attempting to support too many family members, especially during start up times;
• natural disasters (flood, drought, extreme heat or cold, etc.);
• speculation without proper research of as yet undeveloped technologies;
• poor business plan with unrealistic returns;
• under capitalisation;
• poor production management;
• failure to realise that aquaculture is a farming business and that animals have specific physiological requirements which often requires attention 24/7;
• poor marketing;
• poor monitoring or record keeping of the production, financial and/or marketing aspects;
• appropriate/adequate information not used for decision making;
• lack of ‘business’ experience or skills;
• not planning for expenses such as professional fees and taxes.
• lack of reliable/experienced workers and managers.

Further information

There are many resources available to assist with preparing a business plan. The Internet is a useful source of information and Business Planning section of the NSW Land Based Sustainable Aquaculture Strategy also provides further details.