Uncensored participants shared lessons learned from the recession and discussed ideas on how to build a stronger business. During the event, economist Charlie Hall presented ways to meet the future challenges of the green industry. And Jeff Burch of Bank of the West explained how to better use financial metrics and monitor leading economic indicators to improve sales and profitability. Here Burch continues the discussion with tips on understanding profitability and controlling expenses.
If certain pundits’ predictions are accurate, the U.S. is facing another recession around 2018. What lessons did you learn from the last one and are you ready for the next one, asks Charlie Hall, economist and Ellison Chair in International Floriculture at Texas A&M.
The next recession doesn’t have to mean disaster if you properly position your business between now and 2018, he says.
“Make sure working capital is where it needs to be to sustain you during this period, and manage working capital in such a way that you can withstand the next recession when it occurs,” he explains. “You have two options – hoard it in a rabbit hole or invest it strategically. And now is the best time to make a strategic investment in your operation because of low interest rates.”
Although you may think of the latest recession as the time of green industry consolidation, it’s actually been consolidating for nearly two decades, he says.
“The industry is still very fragmented and bipolar despite this consolidation,” he says. “The largest grower may represent 2-3 percent of the market share. In addition, there are still firms that are overleveraged, not meeting line of credit obligations and not managing cash – working capital – properly.”
Historic oversupply problems have been mitigated, he adds, but history indicates this may be short-lived. (See more about current market shortages on page 14.)
Besides being well prepared for the future, Hall wants growers to be aware of current positive events.
With housing starts trending up, the green industry is poised to capture that housing market growth.
“Houses under construction are being built by half the number of home builders than prior to the recession, so there’s a greater efficiency in that industry now,” he explains.
Gas prices are slightly decreasing, giving families an average of $700 more a year. “Ask yourself, where are they spending the extra money? How can we get them to buy our product with part of that money?” he asks.
One of the problems is there is a lack of consumer interest.
“Reports indicate that 42 percent of consumers have bought flowers, shrubs or trees, which equals another 58 percent we could be selling to. And only 25 percent of households report they’ve purchased a landscape service,” he says.
But there’s some good news.
“Personal Consumption Expenditures data forecasts sales increases for plants and garden tools. By 2019 we should be getting back to pre-recession levels,” he adds.
While the expenditures data is a positive outlook, Hall advises growers to make changes immediately to “succeed in the new green industry paradigm.”
Hall suggests growers employ new key success factors:
- LEAN must be implemented at all stages of the value chain
- Measurement and control of shrink
- Greater efficiency in distribution & logistics
- More detailed SKU movement analysis
- Closer integration of genetic innovations and supply levels with consumer demand
- Must be better at brand management
- Assimilation of innovative marketing technologies
- Skills in building alliances and contracting
A strong housing market and plant sales increases are indeed something to celebrate, but they won’t do much for your business without the proper money management. Jeff Burch, managing director at Bank of the West, is seeing mixed financial results from customers’ 2015 statements. To better understand profitability and controlling expenses, Burch created a series of questions to ask (and answer) to improve the health of your business.
Do you simply expense all of your labor costs or are you capitalizing any of it? (For example, building it into inventory, then moving into your cost of goods when the product sells.)
Have you ever considered an outside consultant to analyze your handling of inventory in an effort to reduce the need for labor?
Have you considered automating parts of your process to reduce labor needs?
Do you have an inventory costing methodology?
Do you know which of the varietals you are growing will make the best profit margin and which are the lowest or will potentially be a loss?
What is your cost to grow 1- 5- or 15-gallon plants? And what is your profit margin at each sales point?
How often do you count your inventory?
Do you monitor your dumps? Do you recycle with your local municipality and can you get credit if you do?
How many suppliers do you have and do you have alternatives for key inputs? Are you paying suppliers on time to take advantage of offered discounts?
Do you have a sales strategy?
How nimble is your company in adapting to a changing market? (For example, drought impact, recession impacting larger size sales, etc.)
Who do you sell to and do you have a concentration with that segment that makes you vulnerable if changed?
Have you considered adjusting pot sizes? Instead of growing a 5-gallon container, what about a 2- or 3-gallon plant)? Would a smaller pot size still work for your customer?
Are you paying for equipment or other longer term assets with your operating line of credit?
Have you considered using term debt to take advantage of low fixed interest rates for automation equipment or other longer term assets?
How long is your cash tied up to where you can’t use it? You can calculate this by taking your accounts receivable turnover days, adding your inventory turnover days on hand and subtracting your accounts payable. A banker or accountant can help, if desired. Working to reduce the number will free up cash that can be used to pay suppliers quicker or use in other areas of the business.