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).Census 2000Social 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 0 1,000 2,000 3,000 4,000 5,000 6, Million $ bedding and garden plantspotted flowering plants foliage plants cut flowers propagative material and cut greens

ERS Data. $ in 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, Growing Greenbacks in Your Greenhouse - Growing Greenbacks in Your Greenhouse 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 Labor44% Plant Material23% Packaging Materials11% Heating6% All Other COGS16% Wen-fei Uva and Steve Richards Department of Applied Economics and Management Cornell University

Overhead Expenses: Wholesale Land Rent18% Repairs18% Depreciation17% Insurance12% Interest12% Other Overhead23% 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 Labor37% Plant Material27% Hard Goods7% Heating6% All Other COGS23% Wen-fei Uva Department of Applied Economics and Management Cornell University

Overhead Expenses: Retail Depreciation20% Insurance18% Miscellaneous15% Interest13% Repairs11% Other Overhead23% 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

Products PricePlace Promotion Target Market Marketing is finding, developing, and profiting from opportunities 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

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

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 marketsIdentify markets Determine special needsDetermine special needs Position yourself to serve those marketsPosition yourself to serve those markets Find out what the larger producers can’t supply: What is too small for them?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.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 produceFresh, in-season local produce Color, (white eggplants, blue potatoes)Color, (white eggplants, blue potatoes) Nostalgia, (traditional American comfort foods, i.e. corn-on-cob, corn bread, vegetable varieties from several years ago)Nostalgia, (traditional American comfort foods, i.e. corn-on-cob, corn bread, vegetable varieties from several years ago) Organic foods, people believe it is saferOrganic foods, people believe it is safer Edible and cut flowersEdible 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

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

What Is Financial Management? greatest returnsThe 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.

¢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 Are Your Financially Healthy and Wise?

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

¢Expenses Records +Variable costs +Variable costs: cost items that vary with production volume (Direct and Indirect). êCosts of plant materials, pots, soil, hourly labor, advertising. +Fixed costs +Fixed costs: cost items that do not vary with production volume (Overhead costs). êCosts of rent, property taxes, management salary and family living expenses. êAllocate these costs to each product could be tricky (by floor space, time in store, etc.) ê25 to 50% of total costs.

¢Expenses Records - cont. +Marketing costs +Marketing costs: êAdvertising, packaging, shipping, billing, and special promotion, display, etc. êIt could also be assigned to variable and fixed costs, but why look at it separately? êProduction efficiency vs. marketing efficiency ê5 to 15% of total costs

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

Cost Equation 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. 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

= VOLUME (PRICE-COST) PROFIT Profit Equation 4,800 pots* ($3.25/unit - $2.78/unit) = $2,256 4,800 pots* ($3.00/unit - $2.78/unit) = $1,056 10,25410,254 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 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) 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 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

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