Interview by Brooke N. Bates
There’s a big difference between just accounting and accurate cost accounting, and Lloyd Traven says most growers aren’t capitalizing on this critical calculation. It’s the difference between focusing only on inputs (like the cost of a 4-cent seedling plug compared to a seed that only costs a couple tenths of a cent), versus understanding the total overhead cost of a crop in terms of time and space. Cost accounting considers, for example, “how much less time a seedling spends on the benches than a seed sown in an open flat,” to help growers optimize their profit margins.
Traven, owner of Peace Tree Farm in Bucks County, Pa., will share his cost accounting method in a session at Cultivate’17 to help other growers go beyond guesswork to calculate costs accurately.
Traven gave us a preview of what he’ll cover at Cultivate.
Q: What can attendees expect from your session at Cultivate’17?
A: People need to be able to do accurate cost accounting, and most operations do not. They do not have a reproducible, consistent method that they use and review regularly that allows them to accurately, not only cost out a product, but account for loss and profits. They’re guessing.
There have been studies done on the topic of cost accounting methods where they’ve surveyed growers, ranging from some of the biggest to some of the smallest – and the disparity of methodologies they use is nothing short of stunning. Many of them have no basis in anything data-based. They’re basically guessing or making up some factor and using that as their method. And it doesn’t seem to make much difference whether they’re big or small, which amazes me, so you have some of the largest operations using some of the most elementary methodologies.
I forget how many methods the survey revealed, but a lot of them are as ridiculous as, ‘I take the cost of the plug and triple it.’ How does that account for anything? How does that equate into a cost? Where have you accounted for profit, and where have you accounted for your historic losses on a particular product?
So I want to talk about some of those methods and drive home the point that unless you’re doing a calculation, you’re just making stuff up. It doesn’t matter what size you are, it doesn’t matter what your business model is – there’s a way to calculate what you’re making and what you’re losing.
I have a very straightforward calculation that anybody can do. It doesn’t require computer analysis; it’s just a simple mathematic equation, and it works. So I’ll send them home with the method and the calculation.
Q: What’s the biggest mistake growers commonly make when it comes to cost accounting?
A: They’re doing accounting; they’re not doing cost accounting. They do it one time and they think they’re done. It’s not accurate, and it’s not reproducible. I’m saying you have to revisit it and look at your numbers a couple times a year. What happens if somebody launches a missile in the Middle East, and suddenly fuel prices spike horribly? Or if you lose two key people to injury, and you suddenly have to hire four or five part-timers and your labor cost spikes? You have to be able to adjust according to current conditions.
It’s one thing to do a straight-up calculation, but that’s a cost calculation. I’m more interested in the return side of it – and that accounts for profitability at your selling price and what losses you take on that crop. An azalea that costs $20 wholesale sounds great, but a plug that costs seven cents might be a far better return.
The whole concept boils down to what’s called the square foot week, and that is how you account for the time and space that any crop takes up. That allows you to compare any crop to any other crop. A plug that takes four weeks can be compared to a hydrangea that takes two years, to help you determine which one makes a better return per square foot week.
If you’re not doing cost accounting, you’re not doing the part of the calculation that actually tells you what the overhead cost is, and overhead is the key. It is not the cost of the inputs. We as an industry focus obsessively on the cost of the plug and the cost of labor, instead of the overhead cost of that crop. I’m trying to show that this is all about controlling the overhead, not controlling the input cost.
Q: What tools, talent or capabilities do growers need to perform cost accounting?
A: You already have almost all the data already; you just have to organize it and add some things up and divide them. You know what your crop schedule is. You know what pot size you’re going into, how many square feet that occupies, and what your final spacing is – so you’ve got the square foot data already. Then you have to apply that to the accounting end of it, which is: How many square feet of bench do I have available for how many weeks a year, and what is my overhead cost?
It’s just simple division of your total overhead divided by the total square foot weeks you have available to cover that overhead, and that’s your square foot week cost. It’s pretty straightforward. It’s just algebra.
Q: How does cost accounting benefit a grower’s operation?
A: They will know accurately what it actually costs them to grow a crop, and they will then be able to apply their expected return or what they would like to be making on it percentage-wise, to come up with a true selling price that’s based on data instead of guessing or basing it on what the guy down the road is charging.
This is an easy reproducible method you can use so you no longer have to guess what you should charge on any crop that you’re selling. So when somebody calls up and says, ‘Hey, can you do this for me?’ you can answer that question easily and quickly.
I no longer ever give somebody a price quote without knowing the data, and that’s huge. I cannot emphasize that enough. It gives me the ability to tell people no. You always have the ability to say yes, but that doesn’t mean it’s always going to work out for you. This gives you the opportunity to say, ‘No, I’m not doing that, because we understand what our costs are, and we’ve got to be realistic.’