Greenhouse Business Management Ben Beale Extension Educator-MCE St. Mary’s County Some slides adapted from Wei-Fe Uva; Cornell Extension

Objectives Trends in Maryland Greenhouse Businesses Marketing Strategies for Greenhouse Businesses Financials-Enterprise Budgeting

Why do we care? Rising population base of affluent suburbanites in reach of Maryland growers Source: Census 2000 analyzed by the Social Science Data Analysis Network (SSDAN).

1953-Agricultural land

1982

1992

Why do we care? Rising population base of affluent suburbanites in reach of Maryland growers Growing interest in gardening, landscaping, and plants.

Why do we care? Rising population base of affluent suburbanites in reach of Maryland growers Growing interest in gardening, landscaping, and plants. Horticulture industry is the fastest growing sector in American Agriculture.

Production trends of floriculture crops 1,000 2,000 3,000 4,000 5,000 6,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Million $ bedding and garden plants potted flowering plants foliage plants cut flowers propagative material and cut greens

Floriculture crops: Average sales per grower 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Dollars West South Midwest Northeast

ERS Data. $ in 1000. Greenhouse and Nursery Crops

Now for the Bad News! The majority of small businesses fail within the first 2 years. Most folks starting a greenhouse do so because they enjoy growing, not the business side.

The Importance of Management

SWOT analysis: The SWOT analysis is simply a tool for organizing your thoughts and determining areas of competitive advantage. Looks internally at: Strength Weaknesses Looks externally at: Threats Opportunities

Cornell Greenhouse Business Summary, 2000 - Growing Greenbacks in Your Greenhouse http://hortmgt.aem.cornell.edu/resources/presentations.htm Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

2000 Greenhouse Businesses Profile 29 New York Greenhouses 12 Eastern NY 11 Central NY 6 Western NY Marketing Channel: 14 mainly wholesale, 15 mainly retail Major Crops: 21 produced mainly bedding/garden plants 5 produced mainly potted flowers 1 greenhouse vegetables & herbs 1 propagative material, 1 cut flowers

Size of Greenhouses Surveyed Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Scope of Greenhouse Study: Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Wholesale Greenhouse 2000 Income Statement Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Cost of Goods Sold: Wholesale Labor 44% Plant Material 23% Packaging Materials 11% Heating 6% All Other COGS 16% Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Overhead Expenses: Wholesale Land Rent 18% Repairs 18% Depreciation 17% Insurance 12% Interest 12% Other Overhead 23% Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Retail Greenhouse 2000 Income Statement Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Cost of Goods Sold: Retail Labor 37% Plant Material 27% Hard Goods 7% Heating 6% All Other COGS 23% Wen-fei Uva Department of Applied Economics and Management Cornell University

Overhead Expenses: Retail Depreciation 20% Insurance 18% Miscellaneous 15% Interest 13% Repairs 11% Other Overhead 23% Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Average Balance Sheet

Average Cash Flow Statement

First Question- What is marketing? Marketing is: Organizing the resources of the firm toward understanding customers needs and wants and offering products and/or services that meet those needs. (Russell Winer-Marketing Management) The purpose of a business is to create and keep a customer. To do that you have to produce and deliver goods and services that people value and want at prices and under conditions that are reasonably attractive relative to those offered by others to a proportion of customers large enough to make those prices and conditions possible. (Theodore Levitt-Marketing Theorist) Doing something for someone(s) better than another can in order to make a profit. (Ben’s farm guess)

Marketing Functions: Price Product Promotion Distribution

Marketing is finding, developing, and profiting from opportunities Products Price Place Promotion Target Market Your target markets will determine your production and marketing practices, Not vise versa. Slide From: Wen-fei Uva Department of Applied Economics and Management Cornell University

Differentiation Broad Narrow / Focused Low Cost/Low Price Low- Cost leadership Focus-Niche Strategy based on low cost Best-Cost provider Differentiation Broad differentiation Focus strategy based on differentiation

What Opportunities Exist? Low-Cost Provider Strategy Target Market: Chain Super Market and Box Stores Large Operations with market partnering agreements Mass market with commodity type pricing Efficiency based

Wholesale Production-Contract Production Agreement with landscape and retail operations for production of particular or specialized cultivars Contractors/builders Smaller individual retail centers On-site location advantages

Service Oriented Opportunities Production of material plus installation or service agreement Landscaping-Production of “landscape pillows” for high end market Pick your own/ Plant a tree service Rentals items -Parties, special occasions, seasonal items, interior-scaping. Mostly container production. Interior-scapes

Wholesale Production-Specialty Items (differentiated strategy) Competitive advantage in being able to produce a product of substantial attributes that outside, larger producers can not. Such attributes include: Quality Delivery flexibility Specialized cultivars branded for specific area Value added features Ability to predict future trends and customer desires

Finding your niche-Getting things in the right place.

Name of the Game: Niche Marketing Identify markets Determine special needs Position yourself to serve those markets Find out what the larger producers can’t supply: What is too small for them? Look for ways to differentiate your product, not only from what you grow, but how you grow it, what you do with it, or how you package it, or market it.

Some Examples of Current Niche Market Trends Fresh, in-season local produce Color, (white eggplants, blue potatoes) Nostalgia, (traditional American comfort foods, i.e. corn-on-cob, corn bread, vegetable varieties from several years ago) Organic foods, people believe it is safer Edible and cut flowers

Where are folks selling? Farmer Owned farmers market Community farmers markets Direct sales to local stores Sales to supermarket chains Sales to wholesalers and brokers On-farm sales Contract growers

Developing an Enterprise Budget

What is Your Profitability? - Using Financial Records to Improve Business Performance Dr. Wen-fei Uva Senior Extension Associate Department of Applied Economics and Management Cornell University Ithaca, NY 14853

What Is Financial Management? The ability to allocate financial resources in the areas which generate the greatest returns. Financial Management Decisions You Need to Make:

* Pricing Your Product One of the most critical components of marketing. A common concern! Critical in achieving sales and profitability Need to know your COSTS

* Making Business Decisions Are your sales covering your costs? Which product lines generate the most income? Should you operate year-round or shut down in the winter? Contributions to fixed costs Optimum mix of product lines Goal setting and increased efficiency

* Making Investment Decisions Input substitution Capital for labor: installing automated irrigation system or not? Buying vs. raising your own bedding plants Enterprise changes Whether or not to sell a particular product Adding another operation to your business What is the best investment for my money

Are Your Financially Healthy and Wise? Do you keep good financial records? Keep records for more than just taxes! Use a computer program! Financial information should be at your fingertips at all times

Are Your Financially Healthy and Wise? Do you construct financial statements? Income statement, balance sheet, cash flow statement Banks require these statements Can often be tedious to complete -- work with your accountant Do you look at your financial sheets from your accountant? Do you understand all the lines? - cost of good sold, retained earnings etc.

Are Your Financially Healthy and Wise? Do You Perform Financial Analysis? Cost analysis - costs to operate the business and profitability Ratio analysis - Gross Margin Return On Investment, Return on Asset, Inventory Turns Enterprise analysis - What is your most profitability product line?

Are Your Financially Healthy and Wise? Do you know how your business compare with industry benchmarks How do you compare to other firms in the industry? - Gross Margin, Inventory Turns, Profit Margin Set performance goals Track your performance over time (trend analysis) Repeat process annually

Calculating Production Costs A Record Keeping System for You Pricing for Profit

Expenses Records Variable costs: cost items that vary with production volume (Direct and Indirect). Costs of plant materials, pots, soil, hourly labor, advertising. Fixed costs: cost items that do not vary with production volume (Overhead costs). Costs of rent, property taxes, management salary and family living expenses. Allocate these costs to each product could be tricky (by floor space, time in store, etc.) 25 to 50% of total costs.

Expenses Records - cont. Marketing costs: Advertising, packaging, shipping, billing, and special promotion, display, etc. It could also be assigned to variable and fixed costs, but why look at it separately? Production efficiency vs. marketing efficiency 5 to 15% of total costs

Pricing for Profit Price (Revenue) Variable Costs Fixed Costs Profit Contribution Variable Costs Break-even Fixed Costs Profit

Cost Equation + = (Don’t forget to take into account shrinkage) Unit Costs ($) = Fixed Costs ($) Variable Costs ($) + Units Produced (lbs, dozens, bag) (Don’t forget to take into account shrinkage)

Analyze Enterprise Profitability Step 1: Determine How You Want to Allocate the Fixed Costs By Area & Length of Operation

Step 2: Calculate SFW Needed for a Enterprise (ex Step 2: Calculate SFW Needed for a Enterprise (ex. 5,000 pots of 4” Geraniums)

Step 3: Calculate Costs - Direct Variable Costs

Step 3: Calculate Costs - Indirect Variable Costs

Step 3: Calculate Costs - Fixed Costs

Step 4: Calculate Enterprise Profitability

Step 5: Breakeven Analysis

= PROFIT Profit Equation VOLUME (PRICE-COST) 4,800 pots* ($3.25/unit - $2.78/unit) = $2,256 4,800 pots* ($3.00/unit - $2.78/unit) = $1,056 10,254 pots* ($3.00/unit - $2.78/unit) = $2,256 For $250,000 in sales, a 4% price increase (4 cent increase for every dollar) give you $10,000 more profit.

Evaluating Business Profitability Financial Ratios Efficiency Measures

Financial Ratios Profitability Ratios Return on Assets Gross Margin: (Revenue - Variable Costs)  Revenue -- (around 50%) Profit Margin: (Revenue - Total Costs)  Revenue -- (around 10-15%) Return on Assets Net Business Income  Average Total Assets How efficient are you using your resources to produce income.

Financial Ratios Inventory Ratio (3.5) Liquidity Solvency Cost of Good Sold  Average Inventory How fast are you turnover your inventory Liquidity Current Ratio: Current Liability  Current Assets Your ability to cover current debt (liability) Solvency Debt-to Asset Ratio: Total Liability  Total Assets The percentage of the business’s assets to which creditors have claim.

Efficiency Measures Operating Efficiency Cost Efficiency Profitability Sales per Full Time Worker Equivalent Net Income pre FT Worker Equivalent Sales per Square Foot Cost Efficiency Labor as percent of sales Operating expenses as percent of sales Costs per square foot (or square foot week) Profitability Net Income per Owner Net Income per Owner Hour Net Income per Square Foot

http://aede.ag.ohio-state.edu/people/moore.301/index.htm

So get ready, hold on and enjoy the ride. The trying is half the fun.

And after all the hard work, you get to reap the benefit of your efforts!

The End