Ornamental plant nurseries need to understand costs to remain profitable (Part 3)
This final article of a three-part series will conclude how nursery growers can better manage their business through the use of MSU Extension’s new, low-cost financial management software.
The nursery industry in Michigan and across the nation has experienced some financial challenges in recent years due to the economy’s downturn and subsequently a slower demand for herbaceous perennials, shrubs and trees.
Growers need to evaluate their production costs and plant inventory to determine if adjustments need to be made to stay competitive. To accomplish this, growers need to have a good handle on their costs. MSU Extension has developed inexpensive software to help you evaluate your nursery business from a financial perspective. “Estimating the Wholesale Cost of Nursery Production” is an Excel spreadsheet tool that allows you to use your records to estimate your production costs and to explore opportunities for cost savings.
This is the third of three articles that will help you understand how this software works and how to use it to help your nursery remain profitable and even grow your business’ bottom line. Read the first article of this series, “Ornamental plant nurseries need to understand costs to remain profitable (Part 1),” and the second, “Ornamental plant nurseries need to understand costs to remain profitable (Part 2).”
The Cost of Production worksheet combines all previously entered costs and requires inputs of other direct costs that are typically provided or easily calculated as a per unit cost (containers, growing media, liners, tags, etc.). A weighting factor is included in this worksheet to allocate overhead to operations that require more infrastructure or other indirect costs. For example, more indirect costs may be expected in container production than field production due to the development of production beds, irrigation systems and drainage, and other infrastructure that is typically not necessary for field production. A value must be entered, but at the users discretion. If there is no difference in overhead allocation to operations, enter a “1.”
After these costs are entered, a section of this worksheet provides a comparison of projected costs for the current year with recorded costs from the previous year from the information entered in the Income worksheet. A difference between previous year costs and current estimated costs should be expected due to actual changes in costs between years, but this section of the worksheet provides a “reality check” of estimated costs to recorded costs. Other factors that could result in differences include changes in number of units produced, changes affecting pest pressure, thus pest management costs, changes in labor efficiency, and other such changes.
Three types of cost estimates are calculated further down the Cost of Production worksheet:
- Total economic cost
- Maintain net worth cost
- Meet cash flow demand cost
The value of unpaid labor and unpaid equity capital are entered and the spreadsheet calculates the “total economic cost” per unit sold based on the estimated percentage of the nursery crop sold. Recovery of this cost covers all direct and indirect costs plus opportunity costs based on unpaid labor and equity capital costs.
The “maintain net worth costs” is determined by entering income taxes paid and other family expenses and subtracting unpaid labor and equity costs. If a business does not have family expenses or unpaid labor expenses, these cells should be left empty. Recovery of this cost will allow a business to maintain its net worth from one year to the next.
The “meet cash flow demands cost” is the final cost calculated. The cost of principal paid to reduce debt, interest, and capital (infrastructure) replacement is included. Recovery of this cost will allow service of business debt and planned replacement and growth of the nursery without additional borrowed money.
The Cost of Production Summary worksheet shows how projected sales and estimated costs affect cost recovery per plant by enterprise, per enterprise and the combined nursery on a total economic cost, maintain net worth cost, and meet cash flow demand cost basis. Once actual sales quantities and sale prices per enterprise are known for the year, there is a section further down the worksheet to enter these values. The worksheet uses these values to analyze how actual sales and estimated costs resulted in cost recovery for the three types of cost estimates per plant by enterprise, per enterprise and combined nursery.
The final worksheet, Sale Price Projection worksheet, estimates a break-even sale price based on meeting 100 percent, 90 percent, and 70 percent of the projected sales entered in the Enterprises worksheet for the three types of cost estimates. This demonstrates the effect of missing sales goals on the price increase needed per plant to recover estimated costs. Basing sales price solely on estimated costs does not provide a buffer incase sales goals are not achieved, nor does it provide for a profit. The next section of this worksheet allows the user to enter a profit goal and calculates an estimated sale price to meet this goal based on meeting 100 percent, 90 percent, and 70 percent of the projected sales entered in the Enterprises worksheet.
To order a copy of this software, go to the MSU Extension Bookstore website and type in DVD-029 in the “Search” box to begin your ordering process.