Manage Costs To Increase Profitability
Business scares people. I think this is especially true of people in the greenhouse industry, because business principles can seem daunting. In actuality, managing your business in principle and on paper is pretty easy. It requires just a few simple numbers that will really give you the temperature of your company and how it is performing.
Know And Manage Your Costs
To truly know how profitable you are (or aren’t), you need to know your costs. That being said, ‘cost’ can be a very tricky and complicated thing. It is not a matter of straight dollars and cents. I’ve found that growers often kid themselves and don’t look at the complete picture.
Costs are not just the price you paid for something. How much is the royalty? How much was shipping? How many plants are you losing? What is your shrink? How long does an item sit in your inventory? Those are just some of the factors that affect cost. There are many more, which makes cost accounting a complicated subject.
This is an everyday thing at Raker. We have weekly business management meetings, where we are looking at several things — top line sales, costs and ultimately, bottom line profitability. The key cost areas we look at include freight, labor, inputs, inventory, natural gas and electricity. We have better control of some of these than others.
Winter 2015 was another trying season, weather wise. The cold temperatures we experienced in Michigan once again played with our profitability. We did our best to drop greenhouse temperatures to consume less fuel, but you can only do so much of that without hindering plant quality. Also, having exceptionally cold temperatures gave us small windows for shipping. Having limited time to ship didn’t let us use the more cost-effective methods of shipping, and instead we had to use a lot of overnight service.
Labor and inputs are easier cost categories to manage, to some degree. At Raker, a team looks at labor numbers weekly. We review the past week’s numbers and look at the projection for the upcoming week’s numbers. This process helps us to discover where we have inefficiencies in production, or if a new product is or isn’t matching up labor-wise with the numbers we originally forecasted. Over the years, we’ve developed ratios of labor to sales numbers that indicate whether we are operating within the norm for labor or if something is out of whack.
To manage input costs, Raker works very closely with our suppliers. We keep close track of increases in price on all of the products we use, and raise prices to help cover the cost of the increase, work with our vendors to keep costs competitive or drop an item because the increase in price is more than the market can bear.
Focus On Your Bottom-Line Profits, Not Just Top-Line Sales
It is critical for growers to understand that the results they produce with their top-line sales and managing to produce specific results is what business ownership is really about.
If a greenhouse is not managed with a system of checks and balances that is properly structured to produce profits, increasing the top-line revenue simply means you will work much harder for the same results.
Our teams and managers at Raker are constantly tweaking our product mix toward profitability, working on new business opportunities that represent better profitability, figuring ways to squeeze pennies out of processes, reducing shrink and managing labor and team’s costs, as well as budgets.
One of the most irritating questions I get asked is, ‘How are sales?’ The correct question to ask is, ‘How is profitability?’ or, ‘How are your EBITDA ratios looking?’
EBITDA is earnings before interest, taxes, depreciation and amortization. It is an important standard measure of a company’s financial health and a standard measure of profitability.
Sales are definitely an indication of how business is going, but they are one small piece of the puzzle. A company that is profitable is much more successful than a company that has good sales at bad margins.
Top-line revenue growth is extremely important, and I’m not discounting the importance of growing sales. However, business owners should put as much focus and effort on bottom-line profit results as they place on top-line sales. Assuming that the bottom-line profit will be there just because the top-line revenue looks good, or is better than the year before, is a mistake!
Find New Outlets For Sales To Grow Your Profitability
It’s imperative for the industry to “grow the pie,” so we can all have a piece, instead of constantly trying to grab larger shares of the existing pie from one another. A few areas that I think we can focus on may not be groundbreaking ideas, but they are important.
First, we need to encourage gardening to younger generations. Gardening is a wonderful outdoor activity, and kids are hungry for interaction with plants. We have to figure out a way to make gardening a viable extracurricular activity for them. This can be as simple as getting involved in your community through beautification projects or with the local school.
We also need to break out of the current supply chain. Selling plants through traditional channels is valid and will continue to be, but we have to expand our views and figure out how to sell plants in non-conventional venues. The internet presence for selling plants is growing; however, I don’t think anybody has nailed it quite yet. This is one area that the industry needs to explore. I don’t know how many times I’ve heard that gardeners of today aren’t gardeners — they’re decorators. So, why aren’t we doing a better job of partnering with companies that sell decorations?
Seek Out Talent That’s Strong Where You’re Weak
One of the biggest things that I’ve learned regarding business in general is to be very aware of who you are and what your strengths are as a person. Not every business owner is going to be strong in every aspect of business management. That’s what employees are for: Find people who are strong where you aren’t. If managing the numbers isn’t your strength, find and hire somebody who has those strengths. It’s okay to not be great at everything.