Starting a Food Processing Business in Virginia
Introduction
Have you ever thought that maybe Grandma’s secret family recipe could make it big?
What about that chili recipe from Uncle Jim? This article can help build on that recipe and provides current information about starting up your own food processing business in Virginia.
You may be surprised to find that it is not the easiest task to set up a food business. Like all businesses, they require careful planning and dedication to be successful. The food business is very unique, in that the food you produce will have a direct effect on your customers’ health and safety. In fact, if a food is improperly processed or stored, it could
cause serious illness or even death. There are many other repercussions as well, including loss of your customers and sales, loss of prestige and reputation, lawsuits resulting in court fees, increased insurance premiums, lowered employee morale, and embarrassment.
Competition in the food business is fierce. It is very difficult to have a product accepted by a major grocery chain or even a nationwide food establishment. Even if your product is loved by family and friends, it may not be a national success. Overall, owning your own food business requires a great deal of commitment, hard work, time, and technical knowledge about food. Luckily, there is a lot of help for those who are just beginning and are looking for some guidance.
Questions to Ask Before Starting
Are you ready to start your own food business? Here are some general questions to ask yourself before getting started:
1. What are my personal characteristics?
2. What type of business plan would I have?
3. Do I have enough time to really commit?
4. What kind of contacts and assistance do I have?
5. What is my financial status and what resources do I have?
6. From where would I pool my labor and how much would it cost?
7. What do the market conditions look like for my product?
Should you quit your existing job? Here are some questions to ask yourself before you quit your job and focus solely on starting a food business:
1. Do you have enough money to get started?
2. Can you live without a steady paycheck?
3. Can you start by running your business only part-time?
4. Do you have a business plan?
5. Can you wait up to 5 years for success?
6. Are you a specialist in your field and known throughout the community?
7. Are you handle your own billing, taxes, and record keeping?
8. Do you have a support system both personally and professionally?
9. Are you self-motivated and confident enough?
Getting Help
There are many resources available to help you plan and start your own food business.
Here is a list of available services:
Virginia Department of Agriculture and Consumer Services (VDACS)
The Virginia Department of Agriculture and Consumer Services (VDACS) is has many
different branches of resources within their department to help get you started. The
Office of Food Safety and Inspection can assist in facility planning and layout, can
authorize a facility for food processing, and will enforce food regulations. The Office of
Marketing Services offers the Virginia’s Finest Trademark Program, Virginia Grown
Program (which assists with direct marketing programs for growers). They also supply
marketing boards, trade event notification, and organic certified programs. The
Agribusiness Developmental Services will help you find a location for your business,
provide assistance with permitting and/or environmental issues, help link you to a source
of financial assistance, and help promote regional cooperation to promote growth. More
information can be found online at http://www.vdacs.virginia.gov/.
Virginia Department of Health
The Virginia Department of Health helps clients in the food industry with defining
needed regulations for your food product. They also help with inspections of your
facility and host regular training workshops for food businesses as well as house
information on food and general environmental services available to businesses. Virginia
Department of Health can be found online at http://www.vdh.state.va.us/.
Food and Drug Administration (FDA)
The Food and Drug Administration is a federal organization created to ensure a safe food
supply and consistent regulations. For more information on regulations at government,
state, and local levels as well as information regarding nutrition, recalls, product approval,
and more. FDA can be found online at http://www.fda.gov/.
United States Department of Agriculture (USDA)
The United States Department of Agriculture (USDA) is another federal agency designed
to help with many facets of agriculture, especially with meat, eggs, and poultry products.
As for programs specific to a food business, USDA has countless services and
information on business development, marketing and trade, laws and regulations, dietary
health, food assistance and safety. More information can be found online at
http://www.usda.gov/.
Virginia Cooperative Extension
Virginia Cooperative Extension holds resources at both the state and local levels and
have personnel to answer questions free of charge for those looking to start their own
food business. There are specialists available in many different areas including, but not
limited to, how to prepare a business plan, technical advice, and product safety testing.
This information and more can be found online at http://www.ext.vt.edu/.
Virginia Department of Business Assistance
Virginia Department of Business Assistance holds information on getting started,
incentives for opening your own business, financing help, and workforce training
workshops. This information can be found at http://www.dba.state.va.us/.
Commonwealth of Virginia
The Commonwealth of Virginia has information on starting and running a business. This
includes the basics to start-up, permit and licensing information, and tax information.
This also includes business resources that come in handy when questions arise. Found
online at http://www.business.virginia.gov/.
Virginia Small Business Development Centers Network
The Virginia Small Business Development Centers Network helps new food businesses
with business counseling, training, and resources. In 2005, over 4600 business owners
and managers received one-on-one counseling. While there are many offices throughout
Virginia willing to help, they can also be found online at http://www.virginiasbdc.org/.
Virginia Tech Department of Food Safety and Technology
The Virginia Tech Department of Food Safety and Technology will help provide testing
of food products and provide technical guidance on safety and regulatory issues
governing food products. They also conduct Better Process Control School workshops
which are necessary for acidified food producers, provide guidance on reformulation of
your product, and will assist with compliance with regulatory agencies.
Marketing, Promotion, and Advertising
Marketing, promotion, and advertising all have different meanings. Marketing involves
these steps:
1. Determining the customers who will buy your product and what they want or need.
2. Supplying your customers with goods or services to satisfy these wants and needs.
3. Doing all of this at a price that shows a profit but that your customers will still pay for.
Promotion is the communications aspect of marketing that informs the public or your potential customers about the product. Examples of this can include written publicity, news releases, demonstrations or talks to local groups, posters, free samples, displays, brochures, and more. Take advantage of these promotion opportunities. If you are asked to donate some of your food products for community charity events, ask for recognition of the event programs. As your business grows you may be asked to donate more frequently. Remember, don’t feel like you have to donate, you can politely decline those you do not wish to support or do not feel will help to advance your business.
Advertising is a paid promotion. A newspaper or radio station may be interested in featuring a story about your product. You may have to pay a fee for the publicity in the news media. When you pay for newspaper or radio time you can say exactly what you want to about your product, provided what you say is allowed by law. Advertising is not the first thing you should think about when marketing your product. The overall marketing plan should come first.
The Marketing Plan
Marketing includes all of the decisions involved in creating a new business. Before starting you should define and ensure that you understand the basic marketing aspects of your product. This includes the product features, a target audience, competition, demand, pricing, cost of manufacturing (facility, utilities, ingredients, packaging, licensing and government fees), and other indirect costs (advertising, phones, postage, transportation, insurance). You always want to consider the product in relation to your customers. What do they need? Who are they? Think about what they like, what they dislike, their income, and their education.
What needs do your customers have that will make your product appeal them? They may want to save time, money, work, or energy. They may purchase only high quality items or receive special services. Your business should try and meet these needs.
You also need a way, through promotion and advertising, to get the word about your product to your customers. What do your customers do for fun? Can you advertise there? How are you best able to reach them and tell them about your product? For example, if you advertise your expensive catered dinners in a shopping guide that features garage sale ads, you may be targeting the wrong type of customer.
A great resource in helping define a marketing plan comes from the Virginia Tech Business Technology Center. It is part of Virginia Tech's statewide economic development support activities and it provides confidential strategic planning and business development assistance to individual entrepreneurs and businesses seeking to enhance their competitive position. Services provided include market research, market opportunity assessment, competitive analysis, market strategy development, and business plan development. More information can be found at http://www.pamplin.vt.edu/btc.
Setting a good foundation by working diligently and covering all the bases when setting up your marketing and business plans pays off in the long-run. It has been shown the more up-front homework done for new businesses the more success that business will have in the market. Make a marketing plan with realistic goals and leave enough time for those goals to be accomplished. You should not expect to be an instant hit. Developing a solid marketing plan will help you to understand where your product fits into the target market.
Figuring Expenses and Developing a Budget
There are many expenses in starting a food business that may not initially come to mind. A business has two types of expenses which include fixed expenses and variable expenses. Fixed expenses mean that the expense will not vary over time, for example, rent for your processing facility. Fixed expenses also include annual expenses such as equipment, license fees, etc. The other expense is known as variable expense, which will vary with each payment including utility bills, ingredient costs, transportation costs, supplies, promotion, etc. It is very important that when setting up an expense report that your business expenses are kept separate from personal and family expenses. This way, record keeping and tax preparation can be kept separate as well. Below is a list of typical expenses associate with starting your own food business:
Food Costs
When estimating the cost of food ingredients you will need to base the estimate on batch size. List all of the ingredients needed and compare prices for all of those ingredients from both grocery stores and wholesale outlets. Make sure to keep your product at top quality with the least expensive ingredients. Never sacrifice the quality of your product, but keep in mind that ingredients bought in bulk have a lower cost per unit. There can be snags with new businesses, as some ingredients are perishable and it may be hard to keep large quantities in proper storage. Also, buying prepared foods, such as chopped nuts or dehydrated ingredients, can reduce your cost by saving time during preparation.
Labor
Labor is a large part of expense that many people overlook. You may not expect, at first, to include yourself in salary distribution. Though this is a fine solution, remember that other employees, assistants, delivery people, and others expect to receive a salary. Start by figuring how much time is worth to you. This could be minimum wage or more. A good deal of time will be needed for developing the business, transportation, purchasing, record keeping, etc. Ensure that you set a fair wage for those who are working for you, even if you are not paying yourself.
Transportation
When considering transportation costs you need to take into account how much you will
be doing. For example, are you going to deliver your product? If so, gasoline and
automobile repairs need to be added into transportation costs. Another question to ask
yourself is will you need special temperature controls for your product? Is it a product
that has to remain refrigerated? If so, a special vehicle may be needed. All of these
factors must be taken into account when deciding costs necessary for transportation needs.
Insurance
Insurance usually brings up a great many questions. It will help to safeguard your
business in case of losses from fire, illness, and injury. It is very much worth the cost, as
one accident can ruin a business. Speak directly with your insurance agent about the
options you have with business. A commercial policy is needed for business ventures but
there are other options to discuss. The following list includes typical policies needed for
small businesses:
Liability Insurance—protects against financial losses suffered by others for whom
you are responsible. This may be the result of negligence or when a
contract, law, or court judgment requires you to pay for the losses of
another.
General Liability—protects the business from financial loss due to
bodily injury or property damage to employees or
customers caused by negligence.
Product Liability—protects the business if your product causes
injury to the user.
Auto Liability—protects the business if a car used for the business
is stolen, or if you are involved in an accident while on a
business call only.
Health Insurance—protects against financial losses resulting the illness, injury,
and disability.
Medical Payments Insurance—provides protection if someone is injured in your
business, whether or not it was your fault.
Income Insurance—including:
Unemployment Insurance—paid to employees who qualify, but no
longer work for you.
Worker’s Compensation—paid to employees who are injured on the job.
All Virginia businesses require worker’s compensation for
3 or more full-time or part-time employees.
Business Interruption Insurance—compensates for income loss and
provides protection against not being able to honor contracts
in the event of disability, or if the business is damaged by fire
or some other cause and you must totally or partially suspend
operations.
Disability Income Protection—form of health insurance in case of
disability.
Property Insurance—covers losses from fire, lightening, wind, tornadoes, etc
Personal Property Insurance—covers equipment, fixtures, inventory, accounts
receivable, and valuable papers
Business Life Insurance—provides funds for transition upon your death
Other Expenses
There are a multitude of small expenses that easily go overlooked. Here is a list of some
expenses that may not all be applicable to your business, but may help spark your
memory:
Accounting or legal fees, Advertising and promotion, Postage and telephone, Customers
who do not pay, Excess production such as leftovers, “mistakes”, trash, etc., Food wrap
such as napkins and condiments, Interest, Kitchen modifications, Licenses required by
local, state, and federal governments, Overhead for kitchen, equipment, and delivery
vehicle, Record keeping and required sales reports, Rent, and Utilities used in food
preparation.
Setting Prices for Products and Services
Setting prices for you product can be tricky. You want to be able to find that happy
medium between making a profit and having people buy it. Never underestimate the
price of your product, but overcharging just to make a profit can hinder your business just
as much. Typically, there are ten rules to follow when setting prices:
1) Do not under price just to get started with the intent of increasing your price later.
2) Specify payment amounts in writing and send statements on time.
3) Give yourself time to prepare a written fee proposal.
4) Keep track of the time you spend on a product or service.
5) Find out which jobs are profitable and eliminate those which create losses.
6) When negotiating a price—be confident, comfortable, and calm when there is silence
on the part of the customer.
7) If talking about a sizeable contract, state that you will need time to accurately prepare
your bid.
8) Learn everything you can about your client’s wants and needs.
9) Emphasize the benefits of your product or service and the results you will deliver, but
never criticize your competition.
10) Decide on a price, present it, and stick to it.
These are all great pieces of advice to help you get started in finding an appropriate price.
When figuring a price you will need to keep in mind direct costs, labor costs, and
overhead expenses. Total costs can be found using these equations:
Direct Costs + Labor Costs + Overhead Expenses = Total Costs
Direct costs include all the materials, parts, and supplies that go into the actual production
of your product. They should all be exact amounts, meaning they should be figured to
the penny. Labor costs include all wages paid to employees. You can calculate these by
multiplying the number of hours worked by the hourly wage. Include fringe benefits in
either the hourly wages or overhead expenses. Fringe benefits are benefits which
employees receive from their employment but which are not included in their salary.
They include such things as company cars, private medical insurance paid for by the
employer and cheap or free loans. Many are tax-free. They can range from 15% and up
depending on what benefits are included. Overhead expenses include all the business
costs not directly related to the actual production of the product. These include taxes,
advertising, rent, office supplies and equipment, utilities, professional assistance (for
example from a lawyer, accountant, etc.), and others pertaining to the overall operation of
the business. Remember, you need to set prices high enough that you cover your total
costs in order to stay in business.
Profit
Profit is the income you have left after subtracting the direct costs, labor, and overhead
expenses. For you to have any money left over, you need to calculate a profit factor or
margin in the initial pricing. Therefore,
Total Costs + Profit = Price
Or
(Direct costs + Labor + Overhead expenses) + Profit = Price
A standard profit margin for home-based businesses is around 10% - 20%. Make sure to
add in a profit margin from the beginning of your pricing strategy planning, otherwise
you will not have enough money to keep the business growing and expanding.
Retail Pricing
Retail pricing has many of the same basic principles as pricing a product initially for
profit. Some differences to consider when pricing for retail include adding a retail
margin to the overall price. These are usually two to three times the wholesale price,
which is the price you initially determined. Therefore,
Wholesale Price x Retail Margin = Retail Price
Or
(Direct Costs + Labor + Overhead Expenses + Profit) x Retail Margin = Retail Price
You want to compare this price to other similar products on the market. You can then make adjustments to try and fit in competitively, if you wish, with the rest of the products. You could reduce ingredient cost, reduce labor cost, increase per hour production, or decrease overall expenses.
Preparing Your Product and Standardizing Recipes
Before you begin to actually prepare your product, a lot of research needs to go into making your product on a larger scale. You want to make sure that you keep your recipes standardized throughout the entire procedure, that you are keeping your production and materials costs steady, and ensure a uniform product in the end. If you plan on adapting your favorite recipe that makes only a small amount of product into a recipe that makes a huge amount of product, there are very specific steps to ensuring a uniform product at the end. For the purposes of scaling up your product to make a full batch size, multiplying the ingredients to make a larger batch may not work. You may cause some reactions in the product that you would not originally see. It is safe to say that the best way to scale-up your product is to:
1) Convert all ingredients to weight measurements ensuring you weigh on your own
(www.gourmetsleuth.com is a great help for this)
2) Multiply to get desired batch size
3) Experimental additions or subtractions may be necessary
4) Jams and jellies notoriously do not "scale-up"
Experiment with cost cutting measures before standardization if possible. Please
understand that brand substitution of ingredients may greatly affect the product including the flavor, shelf-life stability and safety parameters of your product. After standardizing a recipe, make the product multiple times to determine repeatability. You want to make sure that your product tastes the same every time. Streamline your work station to develop the most effective way of producing your product using the most effective equipment. You should take very meticulous notes at every step along the way. Record things like flavor changes, color changes, mistakes make along the way, etc. This way you can look back on your notes and make small changes all throughout the process to try and make it more repeatable and get perfect product every time. Make sure that when you are re-writing the recipe that you include every step in great detail and both the weights and volumes of your ingredients. Make notes on substitutions if you want. Just remember to really go into detail about your process.
Planning and Approval of Food Processing Facilities
When you are first beginning to plan your business check with your local zoning ordinances to ensure you are able to have a food business in your own home. There are many regulations about zoning areas and your business may need to be relocated if you are unable to have the business in home. There is a possibility that you will need to rent a facility or build your own to house your processing equipment and offices.
Whether or not you relocate you will need to contact the Virginia Department of Agriculture for the facilities approval and inspection. They will ask you to supply them with a complete diagram of your processing area, a process flow diagram, product formulation (the recipe), and a water sample if you are on a private water supply (such as a well). Once approved construction can begin and will need to be inspected upon completion before you start processing your product.
All retail food products that are sold and produced in Virginia are enforced by the Virginia Department of Agriculture (VDACS). They work directly with the FDA to ensure good quality and safe products. If you are selling products within the state lines of Virginia you will work with VDACS and the Virginia Department of Health. Each of these organizations will help you with different aspects of the business. For example, VDACS deals with retail products while the Virginia Department of Health deals with the preparation and serving facilities such as caterers, delis, restaurants, and cafeterias. If your product is sold outside of Virginia state lines and contains less than 2% cooked meat then you will work directly with FDA’s regulations and enforcement. If you product is
sold outside of Virginia state lines and contains more than 2% cooked meat you will be working with UDSA for regulations and enforcement.
Make sure that when planning for processing you consider the amount of waste you will be generating. This includes scraps from the product as well as waste water, chemicals, etc. There are many state and federal laws prohibiting the discharge of biological waste into public sewers. Contact your local health department for more detailed information. Food Safety The United States has one of the safest food systems in the world, but each year the CDC (Center for Disease Control and Prevention) estimates 76 million cases of foodborne illness, 300,000 hospitalizations, and 5000 deaths. Many of these cases happen in retail food establishments and at home, but there are still cases of processing facilities creating these problems. Most recently in February 2007 Peter Pan peanut butter had to recall their product due to a Salmonella outbreak which caused the illness of 290 people.
A recall of your product can potentially ruin your business. You are not only making people sick. It can cost you customers and sales loss, a tarnished reputation, lawsuits resulting in high costs for lawyers and court fees, increased insurance premiums, loss of employee morale, re-training of employees, and even embarrassment.
There are many different sources of food contaminants. Raw ingredients, food handlers, food surfaces such as countertops, cutting boards, etc., water, animals, insects, soil, air, and packaging can contain harmful bacteria, parasites, viruses, and molds.
In order to remember the major factors bacteria need to survive just remember the acronym FAT TOM. These stand for Food, Acidity, Temperature, Time, Oxygen,
Moisture. Food means the type of nutrients that the bacteria need to survive, such as sugars or starches. Acidity is to remind you that at certain pH’s, bacteria are more likely