The Great Recession, as Charlie Hall refers to our economy the last two years, led to great structural changes in our industry. Fewer growers are operating businesses today than they were two years ago, and the ones still standing–particularly the ones thriving financially–have one thing in common: They benchmark their performance.
“There are a number of folks who were in business a couple years ago who aren’t here with us today,” says Hall, holder of the Ellison Chair in International Floriculture at Texas A&M University. “There are many reasons for that, but by and large, many of those growers did not go through benchmarking efforts.”
Benchmarking is one way the highest performers in our industry have survived the Great Recession. But in addition to benchmarking, successful growers are analyzing their resources and capabilities to determine competitive advantages while also tearing apart the value chain and reengineering it to reduce costs and enhance value to customers.
But benchmarking, Hall says, leads to faster company growth and greater productivity.
“There’s a PricewaterhouseCoopers barometer survey that indicates companies who benchmark achieve 69 percent faster growth and 45 percent greater productivity than those who don’t,” Hall says.
There are, however, plenty of factors inhibiting growth and productivity for growers. Hall and colleague Paul Thomas, a professor and Extension specialist at the University of Georgia, posed financial questions to growers at 2009 industry events and came up with some disheartening data:
- Twenty-nine percent of growers are having trouble paying their bills in a timely manner;
–Forty percent are experiencing a shrinking market for product;
–Twenty-five percent are frequently losing customers;
–And 33 percent are experiencing sales growth but no growth in net income.
One of the ways growers could improve upon those numbers, Hall says, is if they reviewed their company’s financial situation more frequently than they currently are.
“About half our audiences said they review their financial situation monthly, but 25 percent are analyzing their financial statements on a less-than-monthly basis,” Hall says. “We challenge folks to do that in a more timely manner, particularly in times of economic distress. It’s imperative to do at least a monthly analysis of your statements–if not more frequent than that. There were a few folks doing it on a daily basis.”
Unless growers have well-thought-out benchmarking systems in place, it’s difficult for them to know where their company needs specific improvement. But benchmarking, Hall says, helps growers identify trouble spots.
“In any financial analysis within a firm, you’re focusing on three major issues: profitability, liquidity and safety,” Hall says. “Basically, every single financial ratio is related to one of those fundamental issues.
“It can be mind-boggling at times when you’re getting all this information. So I’m encouraging folks to take a look at one or two ratios each year, implement those into their benchmarking system, analyze them and then, each year, add another metric or two to their system. That way, it doesn’t become as daunting a task.”
Among the most important tools of a financial analysis is the Strategic Profit Model. The model equation is profit margin times asset turnover, which equals return on investment (ROI) times leverage factor, which equals return on equity (ROE).
For privately held firms, Hall says the Strategic Profit Model is the most appropriate measure of profitability one should look at. And it’s a more complete model for those simply relying on ROI figures.
“Most folks, on their return on assets, should target 8 to 10 percent and 15 to 20 percent on return on net worth. If you want to be among the best in the industry–the top performers–you’re looking at 15 to 20 percent on return on assets and 30 to 40 percent on return on net worth.”
If growers aren’t seeing returns like these, they need to ask themselves what they can do differently. Simple tweaks, Hall says, can make a tremendous difference in the profitability in the business.
“It’s not doing a complete overhaul, it’s tweaking the system,” he says.
To get started on benchmarking, Hall recommends growers check out the Horticulture Business Analysis System at https://hortbusiness.ifas.ufl.edu/analysis. The system has been around for years, but growers can now plug in income statement and balance sheet data and compare their businesses against others.