Why It’s Critical to Understand Your Real Costs of Plant Production

Why It’s Critical to Understand Your Real Costs of Plant Production

Money-featureI have had many opportunities to speak to growers, academics, students, and particularly to business owners about a wide range of topics. One of the driest, least-fun topics is cost-accounting and pricing for profitability; yet none is more crucial. When presenting on the topic, I open by asking the audience to raise their hands if they have a consistent, repeatable method of accurately calculating the real cost of production and a method to price product or services to ensure adequate profit to sustain a company into the future. It is rare for a hand to go up, and that boggles the mind. How can this be?

This past summer, I spoke at Cultivate’17 on this topic to a packed room. I provided a handout of the method to calculate as a take-home because the topic I wanted to speak about was even more important. I had decided that rather than highlight the method, I wanted to illustrate the why and use real-world responses from an industry survey to show the lack of attention, and, frankly, blatant guessing at actual costs. The survey included anonymous responses from hundreds of operations of every type and size.

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The reality is that almost all are using some rule of thumb, a guess, or a comparison to someone else’s prices, and this is true across the board, no matter the size of the company or whether it is retail, wholesale, or a combination.

Help Is On the Way

I participate in the GROW Summit, 10% Project, and other places where we examine critical industry issues and seek for solutions available to all, no matter the type or size of the operation. Meister Media Worldwide, parent company to Greenhouse Grower, and others are spearheading this effort, and there has been some great work by Dr. Charlie Hall, Carol Miller, Laura Drotleff, Dr. Bridget Behe, and Dr. Jennifer Dennis, among others working hard to show a way we can all benefit and become steadily profitable. The GROW Summit has now formed a committee with the goal of creating an online cost accounting resource anyone can access to get the methods and tools to succeed. During my presentation, I took the opportunity to relate some of the findings of these people and groups and show how far we still have to go. It was wonderful to see and feel the powerful reactions of those listening.

There are other groups and researchers also working on these problems, and it was gratifying to see them at the Cultivate presentation, as well. Dr. Paul Fisher from the University of Florida heads up a project to make cost accounting easy and available to almost anyone. However, like any method of calculating costs, the knowledge means nothing unless growers carry the process through to completion and build in provision for profits in their selling prices. Fisher’s method is certainly not new. My first exposure was through work done by Dr. Jim Stefanis. In 1980, Stefanis and Gerald White at Cornell University published in “Florists’ Review,” illustrating the concept of the square-foot-week, a true common denominator for pricing crops.

Survey Responses Show There’s Work to Do

It was powerful for the Cultivate’17 audience to hear answers to the question “How do you calculate your costs and prices?” I shared responses such as, “I take the plug cost and triple it;” “I see what my competition charges and try to cut it by 10%;” and “Whatever the guy down the road is charging.” Another blunt, honest answer was “I guess.”

Some of these responses came from mega-growers supplying box chain stores (Now, let’s not feel we are at any disadvantage because of the size of the company). There were some refreshing answers, as well — “I figure the actual cost and then see what the perceived value of the crop could be and start there.” Do we not hear all the time about a box chain actually charging more than many independents?

There were some excellent responses also, including “We add all direct costs, figure out the overhead contribution according to time and space for the crop, and factor in losses.” Now we’re getting somewhere — but there were still glaring omissions.

Nobody included marketing costs, few accounted for delivery, and almost all concentrated solely on the cost side of the equation. There was virtually no provision for profit anywhere, and only rare mentions of tracking historic losses or unsold numbers. While we assume big growers work on smaller margins than small operations, it seemed that nobody looked at what the return on investment actually needed to be. Why is this so? I believe we don’t do it because it looks hard to calculate (even though Stefanis and White laid it out clearly).

The Numbers Are There

Can we change this? Resoundingly, yes! This is the day when you start to use algebra again. You already have the numbers you need. You know how many square feet you have. You know your overhead items, direct items, labor, insurance, etc. You have to calculate the overhead per square-foot-week, but you get to use that number for several months or until something changes drastically (e.g., a fuel crisis). However, the calculation applies to all crops and accounts for fast ones versus slow ones, big versus small, and gets you to a known profitability per square-foot-week for any item.

Once you do it regularly, you will know which crop contributes to your bottom line and which one will suck the life out of your company. Armed with this information, you can make informed choices of dropping the crop or changing some method or input to make it profitable. Yes, sometimes (hopefully, rarely) you continue to grow or sell a loser because you will simply lose a critical customer unless you have that as part of the mix. This summer at Cultivate’18, I will show some of the next steps: What do we do with this data?

It’s Time for You to Lay the Groundwork

As long as we, as an industry, work in a vacuum and fail to apply the data we already collect (e.g., crop records, schedules, vendor files, accounting reports) to accurately cost and price our products and services, we are dooming ourselves to giving an impression of low value, and that creates a climate of demanding low prices. Worse, we convince ourselves of the low value of what we sell and simply cannot get people excited about us — and that includes employees, customers, and the owners. Low prices lead to low wages and losing good people, and so on, and eventually to businesses going away. The tools and the method are there, and there are major efforts underway to make these available to us all, but we have to do the initial work and use the data consistently, without fail. Never guess, and don’t be afraid to charge what your company needs to charge to remain viable. The power is in your hands.