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					  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.
         Greenhouse and nursery crops: Wholesale cash
                           receipts


2002

2000

1998

1996

1994

1992

       0.0         5.0           10.0           15.0          20.0
                            Billion dollars

                Nursery and other greenhouse   Floriculture
                             Production trends of floriculture crops


            6,000

            5,000

            4,000
Million $




            3,000

            2,000

            1,000

                  0




                      1994     1995   1996   1997   1998   1999      2000    2001   2002   2003


            bedding and garden plants                  potted flowering plants

            foliage plants                             cut flowers
            propagative material and cut greens
               Floriculture crops: Average sales per grower


          1,600,000

          1,400,000

          1,200,000
Dollars



          1,000,000

           800,000

           600,000

           400,000

           200,000
                  0




                      1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

                               West        South       Midwest   Northeast
                                Maryland

350,000
300,000
250,000

200,000
                                                              Maryland
150,000

100,000
 50,000

      0
          1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


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
            Internal Strengths:                                     Internal Weaknesses:
 Strong local recognition of name                        Production inefficiencies compared to
 Excellent internal efficiency with                       larger farms
  management, communication and human                     Most expertise in area of tobacco
  recourses                                                production
 Good communication skills and public                    Marketing culture of farm based on
  relations                                                wholesale, commodity markets
 Very flexible horizontal structure                      Limited experience in marketing
 Ability to specialize and customize each                 management
  product to customer needs
 Close to consumers
 Very good financial standing, low
  debt/asset ratio
 Enjoys raising beef
 Internal production synergies through
  feeding grain products through beef
 Facilities used for tobacco easily converted to beef
  barns

          External Opportunities                                      External Threats
 Local Population base expanding offering                Local population base expanding-more
  more customers                                           expensive land, large farm operations not
 Regional population base (within 4 hour                  compatible with urban settings (noise,
  drive) represents 2/3 of total US population             odors)
 Disposable income very high in                          Traffic congestion prevents movement of
  surrounding area                                         large equipment
 Large # of specialty restaurants and shops              Unemployment low in area
  in area                                                 Farm industry very segmented and
 Government subsidies and grant programs                  specialized suited to large economy of
  for farmers direct marketing                             scale-leave little room in profits for small
 Tobacco conversion program provides                      producer
  financial support for switching to other                Tobacco production not expected to last in
  enterprises                                              long term future
 Limited competition in direct sales of
  differentiated beef products
 Consumer loyalty to local farm products
 Foreign disease scares increase value of
  domestic beef
Figure 1          Execution not good
                                                     Overall objective-profit



Strength of SMP




                                            SMP not good




                     Success of Execution
  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
                      7
                      6
                      5
          frequency




                      4
                      3
                      2
                      1
                      0
                          1,440       15,580       29,720       43,860   More
                                                 Size (sq ft)

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

                Ave Size (SqFt) Ave Sales % G.M.
All Greenhouses         38,500 $ 576,000       27%

Wholesalers                                      55,500 $   837,500   26%

Retailers                                        23,000 $   334,000   28%



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


WHOLESALE FIRMS >50%                             Amount    Per Sq Foot % of Sales
Sales                                            843,403   $     14.67         100%
Less: Cost of Goods Sold                         664,711   $     11.10          74%
Accrual Gross Margin                             178,693   $      3.58          26%

Less: Overhead Expenses                          162,473   $     2.98          20%
Accrual Net Income                                16,219   $     0.60           6%



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


RETAIL GREENHOUSES                               Amount    Per Sq Foot % of Sales
Income                                           304,510   $     13.90         100%
Less: Cost of Goods Sold                         219,612   $     10.56          73%
Accrual Gross Margin                              84,898   $      3.35          27%

Overhead Expenses                                 49,564   $     2.64          23%
Accrual Net Income                                35,334   $     0.71           3%



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
ALL GREENHOUSES                  Year Start   Year End
              ASSETS
Current Assets                     176,429     187,411
Intermediate Assets                 72,846      65,269
Long Term Assets                   191,999     187,694
   Total Assets                    441,274     440,374
            LIABILITIES
Current Liabilities                 54,895      53,404
Intermediate Liabilities            23,660      13,872
Long Term Liabilities              110,718     131,115
   Total Liabilities               189,274     198,391
Net Worth (Assets-Liabilities)     252,000     241,983
Average Cash Flow Statement
 Cash Flow From Operating Activities
 Cash Farm Income                          56,127
 Less: Cash Withdrawals                    44,747
            Net Provided From Operations            11,380
 Cash Flow From Investing Activities
 Sale of Assets                             5,167
 Less: Capital Purchases                   18,657
            Net Provided From Investing             (13,491)
 Cash Flow From Financing Activities
 Cash Inflow From Financing                35,890
 Less: Cash Outflow From Financing         27,587
            Net Provided From Financing              8,304
 Cash Flow From Reserves
 Beginning Cash/Checking/Savings           46,733
 Less: Ending Cash/Check/Savings           47,515
            Net Provided From Reserves                (782)

 IMBALANCE                                           5,411
             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

                       Promotion      Products


                                Target
                                Market

                        Place             Price




 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
                                Broad                          Narrow / Focused


     Low          Low- Cost leadership                            Focus-Niche Strategy
     Cost/Low                                                     based on low cost
     Price
                                          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          • On-farm sales
• Community farmers       • Contract growers
  markets
• Direct sales to local
  stores
• Sales to supermarket
  chains
• Sales to wholesalers
  and brokers
         Developing an Enterprise Budget
GREENHOUSE BEDDING PLANTS (24'X100' DOUBLE LAYER PLASTIC)       PER ACRE FOR YEAR 2006
ITEM                                                UNIT         QUANTITY      PRICE       TOTAL
GROSS INCOME
BEDDING PLANTS                                   FLATS                  2100      $7.00    #########
                                                                                          $      -
TOTAL GROSS INCOME                                                                         #########
VARIABLE COSTS
SOIL MIX                                           CUBIC FEET            500      $3.60   $ 1,800.00
CUTTINGS                                           FLATS                2100      $1.00   $ 2,100.00
FLATS                                              FLATS                2100      $0.33   $ 693.00
INSERTS                                            FLATS                2100      $0.30   $ 630.00
PLASTIC COLOR TAGS                                 PACK                20000      $0.02   $ 400.00
NITROGEN                                           POUND                  50      $0.34   $    17.00
LIQUID FEED NUTRIENTS                              POUND                  50      $1.00   $    50.00
PLASTIC COVER (40'X100'-2LAYERS-$600/3YRS/0.5YR)   ROLL                    2    $300.00   $ 100.00

BANROT                                             POUND                   4      $31.00 $ 124.00
INSECTICIDES, MITICIDES                                                    1     $60.00     $60.00
UTILITIES (ELEC. FUEL-OIL)                                               100     $19.00 $1,900.00
HAULING                                            FLATS                2100      $0.20    $420.00
LABOR                                              HOURS                 600      $7.00 $ 4,200.00
                                                                                         $     -
     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)
             Contribution
                            Variable Costs

Break-even
             Fixed Costs


Profit
                 Cost Equation


                     Fixed Costs ($)   +   Variable Costs ($)
Unit 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
#                 total sq.ft.   Weeks in    Total square ft. weeks
                                 operation        in operation
Greenhouse             18,000       25                 450,000
Outdoor display        50,000       28               1,400,000
Gift shop               5,000       45                 225,000
4                                                            0
5                                                            0


Totals                 68,500                        2,075,000
 Step 2: Calculate SFW Needed
         for a Enterprise
(ex. 5,000 pots of 4” Geraniums)
Product     Location    Square   Weeks    SFW
                         Feet
Geranium   Greenhouse   5,000      4     20,000
            spacing A
Geranium   Greenhouse   10,000     4     40,000
            spacing B
Geranium    Outdoor     10,000     4     40,000
            Display
                                 TOTAL   100,000
        Step 3: Calculate Costs
        - Direct Variable Costs
Direct Variable Costs         $ Amount
Seeds or plants                    $ 750
Potted soil                          100
Fertilizer and Chemicals                 50
Packaging material                   150
Direct labor                        2,000
TOTAL FOR THIS PRODUCT LINE      $ 3,050
            Step 3: Calculate Costs
           - Indirect Variable Costs
Indirect Variable Costs   $ Amount    Total Sq. Ft. Week   $/Sq. Ft. Week
Electricity                 $ 8,000       2,075,000            $ 0.00386
Trucking                      2,400       2,075,000               0.00116
Telephone                     1,000       2,075,000               0.00048
Water                          500        2,075,000               0.00024
Fuel                          1,000       2,075,000               0.00048


Heating for Greenhouse        2,000        450,000                0.00444
Hourly Labor                 65,000       2,075,000               0.03133
Advertising                   2,000      Annually or
                                        special event?             0.0096
                                          2,075,000
                                           TOTAL                  0.05159
               Step 3: Calculate Costs
                    - Fixed Costs
Fixed Costs                  $ Amount    Total Sq. Ft. Week   $/Sq. Ft. Week
Management Salary               50,000            2,075,000          0.02410
Interest                        15,616            2,075,000          0.00753
Depreciation                     5,497            2,075,000          0.00265
Insurance                        5,102            2,075,000          0.00246
Building and Equipment M/R       2,779            2,075,000          0.00134
Property Taxes                   8,025            2,075,000          0.00387
Leases and Rental               10,879            2,075,000          0.00524
Office Supplies                  2,991            2,075,000          0.00144
Professional Fee                 2,123            2,075,000          0.00102
Misc.                            4,000            2,075,000          0.00193
Family Expenses & Bank          20,000
Principal Payments
                                              TOTAL                  0.05157
        Step 4: Calculate Enterprise
                Profitability
Revenue
Price per Unit                                            $ 3.25
Units Sold (Take into consideration shrinkage)             4,800
TOTAL REVENUE                                                      $ 15.600
Expenses
Direct Variable Costs (COGS)                             $ 3,050
Indirect Variable Costs (100,000 SFW * $0.05159/SFW) =   $ 5,159
Fixed (Overhead) Costs (100,000 SFW * $0.05157/SFW) =    $ 5,157
TOTAL EXPENSES                                                     $ 13,366
ENTERPRISE PROFIT                                                     2,134
        Step 5: Breakeven Analysis

Variable Costs per Unit       ($3,050 + $5,159) / 4,800 Consider discontinue
   Sold                               = $1.71             if below this
                                                          number
Overhead Costs per Unit        $5,157 / 4,800 = $1.07   Need to cover this
   Sold                                                   number
Total Cost per Unit            $1.71 + $1.07 = $2.78    Breakeven price
Profit per Unit Sold (4,800            $1.01
   pots)
Profit per Unit Grown                  $0.97
   (5,000 pots)
              Profit Equation

VOLUME (PRICE-COST)
                             =       PROFIT

•   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
   •   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
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

				
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