Authors: Tim Roberts, Extension Specialist, Food Safety, Virginia Tech; Ann Lastovica, Extension Specialist, Family Management, Virginia State University; and Susan Sumner, Department Head, Associate Professor, Food Science and Technology, Virginia Tech
Publication Number 348-963, Posted June 2001
You may be surprised to find that starting a food business is not as simple as it may sound. Like any small business, food enterprises require careful planning, dedication, and skilled management to be successful. But the food business is unique when compared to most other types of businesses. The food you produce can have a direct effect on your customers' health and safety. In fact, a food product that has been improperly processed could cause serious illness or even death. Consequently, a business that makes or sells food products must comply with a number of complex and often confusing federal, state, and local regulations.
In addition, competition is intense in the food business. Having a product accepted by a major grocery chain or nationwide food establishment is extremely difficult. Owning your own business also requires a lot of commitment, hard work, time, and technical knowledge about food.
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Getting Help
Many resources are available to help you plan and start your food business. Virginia Cooperative Extension personnel at the state and local levels are eager to help you and are available at no charge. Specialists can be used as resources in a wide array of areas, from information on preparing a business plan to technical advice on how to formulate a specific food product and having your product tested for safety. Extension agents and specialists in Family and Consumer Sciences (Nutrition and Wellness, and Management, Housing and Consumer Education specialties) and Agriculture and Natural Resources (Food Science and Technology, Horticulture, and Agricultural and Applied Economics) can be valuable assets to a beginning food business. Check your local Extension office for more details.
The Virginia Department of Agriculture and Consumer Services (VDACS) is another excellent resource. The VDACS Office of Dairy and Foods assists in facility planning and layout, authorizes the facility for food processing, and enforces food safety laws and regulations for production, distribution, and sale of food in Virginia.
The VDACS Agribusiness Development Services can help you find a location for your business, provide assistance with permitting and/or environmental issues, and can help link you to sources of financial assistance. The VDACS Division of Marketing can assist you with product marketing and help you become certified under the Virginia's Finest Program.
The Virginia Small Business Development Centers serve as focal points for the coordination of federal, state, local, university, and private resources to aid small businesses. These services are delivered through regional and affiliate centers located at state universities, community colleges, and technical institutes. Contact the nearest office for assistance in various business areas such as drafting business plans or seeking answers for financial assistance.
The Virginia Department of Health (VDH) issues permits and provides expertise and guidance concerning proper disposal of food processing waste. Also, VDH inspects and approves foodservice establishments, including catering operations, for sanitation and safety.
The U.S. Food and Drug Administration (FDA) provides information on established and required food safety regulations pertaining to safe preparation, manufacture, and distribution of food products.
Most small businesses start with personal investments, loans from family or friends, and business loans from banks and other commercial sources. Contact banks or lending institutions in your area for further information.
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Marketing involves these steps:
Promotion is the communications aspect of marketing that includes whatever is done to tell the public or potential customers about the product. This might include written publicity, news releases, demonstrations or talks to local groups, posters, free samples, displays, brochures or catalogs, and advertising. Take advantage of promotion opportunities. For example, if you are asked to donate products for community charity events, ask for recognition on the program or identification of your products in some way. As the business grows, however, you may be asked to donate products frequently. Don't feel you must always donate; politely decline those you do not wish to support or do not feel will advance your business interests.
Advertising is paid promotion. A newspaper or radio station may be interested in a feature story on your new business or your unusual product, but after that, you will most likely have to pay for publicity in the news media. When you pay for newspaper space or radio time, you can say exactly what you want about your product, provided what you say is allowed by law. However, advertising is not the first thing you should think about. The overall marketing plan should come first.
The Marketing Plan
Marketing includes all the decisions involved in the business effort, i.e. the product itself, production, pricing, promotion, selling, service, and customer satisfaction. Consider the product in relation to the potential customers. Think about who the customers are, where they go, what they do, what they like and dislike, their income, and education.
What needs do your customers have (real or perceived) that will make your product appeal to them? These may include:
How will you reach people to tell them about your product? That is where promotion and advertising come in. What are your customers' social, leisure, and reading habits? Where do they go? What kinds of promotion and advertising are most likely to reach them? For example, it probably is a waste of money to advertise expensive catered dinners in a shopper guide that features garage sale ads.
Develop a portfolio or album with photographs of your products to use when talking to potential customers, especially retail outlets. If possible, have a professional photographer take the picture in order to present the food in the most appealing way. There are techniques to food photography that only a professional will know.
A marketing plan begins with some realistic goals, with enough time for the goals to be reached. Think about what you expect to accomplish in six months, in a year, and in five years. Next, think about how to reach the goals. A good marketing plan won't necessarily make a product successful, but it will help you understand buying habits and behaviors of potential customers. It will help you understand where the product fits into the target market.
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It is important to keep business expenses separate from personal and family expenses. To accomplish this, keep a separate checking account for record keeping and tax preparation.
Food Costs
Estimate the cost of ingredients on a per unit basis (or per dozen, if small items such as cookies are involved). List the ingredients needed; then compare prices in both retail groceries and wholesale outlets. Try to find the most inexpensive ingredients, but do not sacrifice quality in order to cut cost. In general, larger quantities of ingredients have lower unit cost. But wholesale buying of large quantities may not save money for a beginning business, particularly if food is perishable. The major advantage of wholesale buying is to maintain consistent product quality. It also may enable you to purchase ingredients that are difficult to obtain in small quantities.
Prepared foods, such as dehydrated soup bases or chopped nuts, may reduce food costs by cutting preparation time.
Labor
Although you may be willing to work initially without a salary, assistants, delivery people, and others expect to be paid. Always include a labor cost, even if you do not intend to pay yourself a salary. This is a good business practice that will help establish a fair price. A method to establish labor cost is to decide what your time is worth. You may think your time is worth $6 per hour or maybe $20. It's up to you. Labor cost is more than preparation time. A certain amount of time will be required for developing the business, transportation, purchasing, and record keeping. If others will be working as well (family members for delivery, for example), include their labor costs also. Will they work as quickly or efficiently as you do?
Transportation
Consider the following questions. Will you deliver your products? If so, include gasoline and other automobile costs as an expense. Is a special vehicle necessary? Will you need equipment to keep foods at recommended temperatures while in transit? Some foods need to be kept cold during delivery. Let's use the example of ice cream. Ice cream must be kept frozen at all times or the quality of the product is lost. Therefore, if you plan to sell ice cream, you must purchase, rent, or lease a refrigerated truck to transport it. To determine which is appropriate for your business you must ask another question: Can you recover a prorated cost of the delivery vehicle, including fuel and maintenance?
Insurance
Insurance helps safeguard your business against losses from fire, illness, and injury. You cannot afford to operate without it. Talk with your insurance agent about your business needs. You will need a commercial policy for full protection when you have a business. Discuss these other possible needs with your agent:
General Liability Insurance protects the business from financial loss because of bodily injury or property damage to employees or customers caused by negligence.
Product Liability Coverage provides protection if your product causes injury to the user.
Auto Liability Insurance and "non-owned" auto liability insurance if a car is used to support the business. If you use your personal vehicle to make deliveries and products are stolen, or if you get into an accident while on a business call, your insurance may not cover the claim if the vehicle is not covered for business use.
A rider to your current policies may be all that is necessary or you may have to purchase a separate business policy.
Worker's Compensation is paid to employees who are injured on the job.
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 is a form of health insurance in case you become disabled.
Other Expenses
Although not all the following expenses are applicable to your business in the beginning, they may become significant as the business grows:
If you have major initial expenses, such as building a kitchen or buying appliances, ask an accountant to establish a monthly figure to include in expenses. You might consider using a commercial kitchen at a local restaurant, church, or club.
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Cost-Based Pricing
This method uses unit costs of ingredients, expenses, and labor to determine the price (Direct Costs + Labor + Overhead Expenses = Total Costs). Here's an example. As a maker of homemade bread, you have fixed expenses of $50 per month; you plan to work one day each week, or 32 hours per month; your ingredient cost is $0.50 per loaf; and you can make five loaves in an hour. How much should you charge for each loaf?
| Step 1: | Figure the productive working hours (total hours spent in actually making the product). Seven hours of the 32 are spent in marketing, bookkeeping, shopping, and delivery, so they are not productive hours. Therefore, your total productive hours per month are 25 (32 - 7 = 25). |
| Step 2: | Figure expenses per hour. Divide the monthly fixed expenses by the productive working hours in one month ($50 ÷ 25 hours = $2 fixed expenses per hour). |
| Step 3: | Figure ingredient cost per hour. Multiply the ingredient cost of one loaf ($0.50) by the number of loaves you can make in an hour ($0.50 x 5 = $2.50). |
| Step 4: | Set labor cost. In this example, you decide you are willing to work for $6 per hour. |
| Step 5: | Add your totals: Fixed Expenses $2.00 Ingredients $2.50 Labor $6.00 Total per hour cost $10.50 |
| Step 6: | Divide the total per hour cost by the number of loaves you can make per hour ($10.50 ÷ 5 = $2.10). |
Estimating Profits
Profit is the income left after all direct costs, labor, and overhead expenses have been paid. To have money left over, a profit factor or profit margin must be calculated in initial pricing. After the total costs are calculated, the profit factor is added to get the final price.
The amount to add for profit is based on the standard for the type of business. Generally, this amount ranges from 10 to 25 percent. An initial mistake that many businesses make is not adding in a profit margin to their pricing strategy. If this is not done, there will be no money for growth or expansion of the business.
Retail Pricing
While the principles for pricing a product or service are essentially the same, there are some differences that need to be considered when wholesaling a product to a retailer. The price figured above is the wholesale price. To arrive at the retail price for a product or service, a retail margin is added. This is usually two to three times the wholesale price and is called the markup.
After determining the price, compare this price with similar products. Will customers pay $4.20 to $6.30 retail for a loaf of your bread? If the price is considerably higher than a similar item made by the competition, consider these options:
A wholesaler may crossover and be a retailer at times. When this happens, the wholesaler must be careful not to compete with or undercut wholesale customers. For example, bread may be sold to a retailer for $2.10 knowing that the retailer is going to markup the price to cover costs. In this case, the wholesaler who also sells directly to the retail customer needs to sell at retail prices. If the foods business wholesaler sells directly to the retail customer at a lower price than the retailer, the business will lose wholesale accounts.
If wholesaling to retailers or selling to retailers through a distributor or "sales rep," the retailer may ask for discounts when buying in bulk and distributors may ask for a percentage of what they sell. Both of these are overhead "costs" that must be incorporated into the original pricing formula.
Price Sheet and Policies
Have a price sheet that is available to customers. On this sheet, list your basic policies. Post both prices and policies in your office as well. Some basic policies could include:
Remember, pricing is as much an art as it is a science. Your customer has to be willing to pay your price or your business will not be a success.
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Stress to helpers the importance of following the recipe exactly. Make sure they know what is meant by terms such as mix, beat, and fold. Be specific about how many strokes to beat or how long to mix. These things can make a difference.
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You may need to rent or build a suitable facility. If you build or remodel a facility, submit a prepared set of plans and specifications (blueprints) of the construction, remodeling, or conversion to the local Virginia Department of Agriculture and Consumer Services (VDACS) Office of Dairy and Foods, Division of Consumer Protection, for review and approval. These plans should include:
When VDACS approves these plans, you may begin construction. If you change the originally approved plans, they must be approved by VDACS. After the construction, remodeling, or conversion is completed, a VDACS representative must inspect your facility and determine compliance with the approved plans and specifications.
All foods prepared at any location and offered for sale to consumers for distribution to retailers fall under the responsibility of the Virginia Department of Agriculture and Consumer Services, Office of Dairy and Foods. VDACS is responsible for regulating and enforcing food safety as it pertains to food processing, handling, storage, and sale in Virginia. VDACS must inspect your premises and issue an inspection report before you are authorized to manufacture or process food.
The Virginia Department of Agriculture and Consumer Services, Meat and Poultry Services Division of Consumer Protection must approve meat and poultry processing facilities that manufacture products that contain more than 3% raw meat or poultry, or more than 2% cooked meat. VDACS and the U.S. Department of Agriculture (USDA) will inspect your facility if meat and poultry products are to be sold outside of Virginia (interstate commerce).
If your product is sold across state lines, it will be subject to regulations of the Federal Food, Drug and Cosmetic Act and Fair Packaging and Labeling Act. These include labeling, ingredients, preparation, and handling requirements.
Commercial facilities that process heat-processed, low-acid canned foods and acidified foods are required to be registered with the Food and Drug Administration, which regulates low-acid (pH 4.6 and above) and acidified canned foods. In addition, low-acid canned food and acidified food processors must have their processes approved by a recognized processing authority. Full text of the low-acid canned food and acidified food regulations is in the Code of Federal Regulations (CFR), Title 21 Parts 108, 113, and 114. To obtain these regulations, contact the Superintendent of Documents, Government Printing Office (GPO) Attn: New Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. Also, the regulations may be obtained from VDACS, Office of Dairy and Foods or from FDA.
Federal regulations require supervisors of low-acid food thermal processing systems to attend a Better Process Control School. Virginia Tech's Department of Food Science and Technology provide courses throughout the year.
Because most food processing facilities generate waste, you need to consider its disposal when planning and constructing your facility. State and local laws prohibit the discharge of any biological waste into public waterways or local sanitary sewers without proper permits. If the waste is liquid and is being discharged into a local sanitary sewer system, these permits are usually based on the biological oxygen demand (BOD) and suspended solids content of the liquid waste. If the food processing waste is solid waste, you may need to pay a solid waster disposal company for its removal. The waste from some processes is valuable, and it may be sold to another processor or producer. For guidelines on the proper handling of specific process wastes, contact your local health department.
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A foodborne outbreak and product recall can destroy the reputation of your business. Potentially hazardous foods (PHFs) such as fresh meat, poultry, fish, eggs, and dairy products may be contaminated with foodborne pathogens. Also, food ingredients, such as dry milk powder, are considered to be potentially hazardous because reconstituted (water added) milk powder will support microbial growth. Fresh fruits and vegetables may be surface contaminated with bacteria, viruses, parasites, and/or molds. Good manufacturing practices (GMPs) and Hazard Analysis Critical Control Point (HACCP) systems will ensure a safe, high quality food product.
Time and temperature control is essential for processing food. Food and food ingredients received should meet quality standards (appropriate temperature and exhibit no signs of spoilage); be stored at the proper temperature (minimize growth of microorganisms); be processed to the recommended time and temperature if heat treated (reduce spoilage bacteria, destroy foodborne pathogens, and inactive enzymes); be packaged (packed in clean containers and under conditions that minimize product contamination) and adequately stored to preserve product quality (extend shelf-life). During food processing, personnel must incorporate good hygienic practices. Processing equipment must be cleaned and sanitized after use.
Most bacteria that cause illness thrive in the temperature Danger Zone between 41°F (5°C) and 140°F (60°C). "Keep hot foods hot and cold foods cold" is a good rule of thumb for food safety.
Good Manufacturing Practices
To produce and sell food for human consumption, your food business must conform to Good Manufacturing Practices (GMPs). GMPs were designed and instituted by the federal government, and adopted by VDACS Office of Dairy and Foods to ensure that foods are manufactured, processed, and handled in a safe and sanitary manner. To operate and maintain your business, you must meet the conditions as set forth in the GMPs. If a complaint is filed against you or your product, a GMP inspection by the FDA or state is likely to occur. The GMPs include the following areas:
Good Manufacturing Practices Regulations for food processing plants can be obtained from The Code of Federal Regulations, 21CFR, and Parts 100-169 (specifically Part 110).
Hazard Analysis Critical Control Points
Hazard Analysis Critical Control Points (HACCP) is a systematic approach to food safety. HACCP involves identifying and assessing hazards associated with food production. Once the food safety hazards are identified, controls are implemented to reduce or eliminate the identified hazards. Processors of potentially hazardous foods (PHFs), or foods that contain potentially hazardous ingredients, such as meat, poultry, fish, eggs, and dairy products, would benefit greatly from HACCP systems.
Hazards may be biological, chemical, or physical. A biological hazard exists when potentially hazardous foods (PHFs) are inadequately processed or prepared. For example, chicken cooked to an internal temperature below 165°F (74°C) may allow for survival and growth of harmful Salmonella. A chemical hazard would include storage of cleaning agents or pesticides in a food processing area, increasing the risk of accidental contamination of food. Physical hazards may include extraneous material, such as grease from pumps, contaminating food in a processing plant to metal shavings contaminating menu items in a foodservice establishment.
In order to identify hazards associated with food production, a flow diagram of food preparation from receiving food and food ingredients to the finished product must be constructed. Each hazard identified must be assessed to determine the potential for causing illness. Points in the process that control, eliminate, or reduce hazards to an acceptable level are called critical control points (CCPs), whereas a control point (CP) is a standard or procedure such as regularly cleaning the storeroom or warehouse.
Establishing CCPs during food processing will eliminate foodborne disease causing bacteria and/or prevent growth of surviving bacteria. Examples would include adequate cooking and cooling. Normally, CCPs include the cooking/heating step followed by adequate cooling and storage of food to prevent growth of micro-organisms. In addition, steps to prevent cross-contamination of cooked or heat-processed foods would be considered critical control points. Once the hazards and critical control points have been identified, critical control limits are established. An example would be the correct temperature range for the heat processing of food.
Operating temperatures for processing foods vary depending on the food product. For instance, current FDA temperature recommendations for cooking ground beef and poultry are at a minimum internal temperature of 155°F (68°C) and 165°F (74°C) for 15 seconds, respectively. It is your responsibility to know the temperature requirements for storing, preparing, and processing food products! Each critical control point must be monitored and corrective action established when a deviation is identified. An undercooked food product would need to be reprocessed to meet minimum temperature requirements.
As with any system, verification is needed to ensure that the HACCP system is working. If the system is not working, a review of HACCP plans must be conducted to identify and solve problems. Record keeping is essential in food production. Records must be kept for each critical control point. Periodic temperature checks and continuous monitoring, such as recording charts on cooking equipment, are highly recommended.
Currently, HACCP is mandated in the seafood, poultry, and meat processing industries. However, all food processors and foodservice establishments will likely be required by federal and state regulatory agencies to implement HACCP programs.
Information about HACCP is available. Check your local library and the internet for information. In addition, Virginia Cooperative Extension, the Virginia Department of Agriculture and Consumers Services, Virginia Department of Health, and HACCP consultants can provide additional information.
Product Testing and Safety
It is important to have your finished food product tested for safety. The product should be representative of each batch manufactured or continuously produced.
Product testing should never be considered a substitute for good food safety control procedures. Virginia Tech's Department of Food Science and Technology can analyze your product for safety and provide technical expertise (http://www.fst.vt.edu/smbuss). Also, several state and national food testing laboratories are available to analyze your product. Food analyses may include pH (acidity or alkalinity), water activity (moisture), shelf-life (product life under conditions of storage), microbial testing, and chemical composition. Also, several laboratories provide nutrient labeling information. This is important if you are required to provide a "Nutrition Facts" label on the product. Compare services and costs of food testing laboratories. Your local Extension office and the VDACS Office of Dairy and Foods maintain a listing of food testing laboratories.
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Product Labeling
All food and nonfood items packaged by your business must be properly labeled before they are sold. The law requires the following to be on all food items:
For further details, a copy of FDA Regulations 21CFR101 may be obtained from the VDACS Office of Dairy and Foods. After you have designed and written your label, submit it for review and comments to VDACS. Although not required by law, it can save you time and money.
Your food product may require compliance with Nutritional Labeling ("Nutrition Facts"). See Code of Federal Regulations (21CFR101.9). Consult VDACS, your local health department, or your local extension office for details.
Product Codes
Each package or container of food produced in your establishment should have a legible product code. The product code allows record keeping and tracking of products in case of a recall (Refer to FDA Regulations 21CFR, Part 7 for recall guidelines and procedures). A product code should identify the product, production facility, date and year packed, and batch number. Any method of coding that is recognizable by the processor is acceptable.
An example of a product code incorporating the Julian Date Coding system:
198G0115
198 -- represents the day of the year
G -- represents the month (July)
01 -- represents the year packed (2001)
1 -- production facility (If more than one facility)
5 -- represents hour period or batch number
If you wish to sell your product in retail grocery chain stores, you should obtain a Universal Product Code (UPC) for your product. This code is a series of bar codes that allows your product to be checked out at the grocery stores' automated cash registers. There is a minimum of $750 to obtain the code. To obtain a UPC code for your product, contact the following office for the appropriate application: Uniform Code Council, Inc., 7887 Washington Village Drive, Suite 300, Dayton, OH 45459. Phone: 937-435-3870.
First five digits (12345) assigned by Uniform Code Council. Second five digits (67890) assigned by manufacturer.
Trademarks (TM)
Trademarks are distinctive names or symbols used by a company to distinguish its products from those produced by any other company. The creation and use of a trademark is the first step to making it exclusively yours. If the trademark is used in interstate commerce, you can register it with the U.S. Patent and Trademark Office. This registration costs $325 and gives you the legal rights to the trademark for 10 years. However, after five years you must file an affidavit confirming use to keep the trademark active. Trademarks may be renewed every 10 years.
The booklet, Basic Facts About Trademarks, may be useful if you are considering registering your trademark. Contact the Patent and Trademark Office, U.S. Department of Commerce, Crystal Plaza No.3, Suite 2CO2, 2021 South Clark Place, Arlington, VA 22202. Phone: 800-786-9199.
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Information on weight and measure laws can be obtained by contacting the Virginia Department of Agriculture and Consumer Services, Division of Consumer Protection, Office of Product and Industry Standards, P.O. Box 1163, Room 402, Richmond, VA 23218. Phone 804-786-2476. Additional information concerning federal and state laws for weights and measures including packaging and labeling regulations can be obtained by accessing NISI Handbook 130 - 2001 Edition (http://ts.nist.gov/ts/htdocs/230/235/h130-01.htm) from the National Institute of Standards and Technology (NIST).
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If you use the family telephone for your business, insist that family members answer correctly and know how to take orders and messages.
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Uniform Code Council, Inc.
http://www.uc-council.org
United States Department of Commerce Patent And Trademark Office
http://www.uspto.gov
United States Food and Drug Administration (FDA)
http://vm.cfsan.fda.gov/~comm/foodbiz.html
Virginia Cooperative Extension
http://ext.vt.edu
Virginia Department of Agriculture and Consumer Services (VDACS)
Agribusiness Development Services
http://www.vdacs.state.va.us/agribusiness/index.html
Marketing Services
http://www.vdacs.state.va.us/marketing/index.html
Regulatory Services
http://www.vdacs.state.va.us/regulatory/index.html
Virginia Department of Health (VDH)
http://www.vdh.state.va.us/
Virginia Small Business Development Centers
http://www.bplans.com/sbdc/virginia.htm
Virginia Tech Department of Food Science and Technology
http://www.fst.vt.edu
http://www.fst.vt.edu/smbuss
Virginia Tech Department of Human Nutrition, Foods and Exercise
http//www.chre.vt.edu/HNFE
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Doug Saunders, Ryan Davis, and Pamela Miles, Virginia Department of Agriculture and Consumer Services, Office of Dairy and Foods; Tory M. McGowan, Virginia Department of Agriculture and Consumer Services, Agribusiness Development Services; Gary Hagy, Virginia Department of Health, Division of Food and Environmental Services; Phyllis Deel and Johanna Hahn, Virginia Cooperative Extension, Family and Consumer Sciences; Brian R. Yaun, Virginia Tech Department of Food Science and Technology.
Adapted from: Starting A Food Processing Business? What You Should Know Before You Get Started, Alabama Cooperative Extension System, Alabama A&M and Auburn Universities. Starting a Food Manufacturing Business In Tennessee, Tennessee Cooperative Extension Service, University of Tennessee Cooperative Extension Service. Getting Started In The Specialty Food Business, Cooperative Extension Service, University of Georgia College of Agriculture. Selling Food Products: A Business From Your Home, North Central Regional Extension Consortium (Cooperative Extension Services for University of Illinois, Purdue University, Iowa State University, Kansas State University, Michigan State University, University of Missouri, Ohio State University, and South Dakota State University.
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