10 Steps to Easily Analyze Crop Profitability (perform an enterprise budget analysis)
Farm Enterprise Budget Analysis can be fun, informational, and eye-opening!
The goddess of all profitability tools: The Enterprise Budget Analysis.
If you’ve ever wondered about what’s actually making money in your farm business, or what flowers might be losing you money, this tool is your best friend.
Before I performed this process I was just shooting in the dark with my profit margins. After performing this process for the first time I felt like I finally had an idea of what was happening in my business. I started feeling like a real pro, and every year I’ve managed to grow my revenue and my profits by making decisions using the information learned during this process.
The enterprise budget analysis is quite frankly, THE only way to know if the flowers you are growing are truly profitable or not.
But firstly, what exactly is a Farm Enterprise Budget Analysis? An Enterprise Budget is a listing of all expenses and income associated with a specific enterprise (aka a specific flower crop). Farm enterprise budgets are used to evaluate the profitability & efficiency of specific crops and provide farmers with a tool to use in crop selection, planning, and financing.
Before I lose you here, since this subject could potentially be dryer than sand in a dust-bowl desert: I want to make it clear that this process can be eye-opening, business-altering, and actually FUN (once you learn how to do it properly). It sounds boring but it is essential if you are going to run your farm business like a… well, business.
Personally, I never enjoyed math (nor was good at it) and words like “business planning,” “cash-flow projections” and “budgeting” would cause me to instantly yawn and my mind to drift off to thoughts like “what am I going to have for lunch today?"
I would much rather spend time out in my fields planting, harvesting, and working in the sunshine than at a computer “number-crunching” in spreadsheets (wouldn’t we all?). But after a few years of not making as much money as I wanted, I begrudgingly sat down to learn the process of enterprise budget analysis. And boy, it was one of the best things I have ever done for my business.
Although I still would rather be outside in the sunshine, I actually LOVE performing my enterprise budget analysis every winter. The process has brought me so much clarity and has armed with concrete, specific ways to increase my profits and make more money on my farm. Once I finally got a hang of the process and knew what I was doing, I started to look forward to doing it!
(Confession: sometimes I open up my spreadsheet when I am supposed to be answering emails and just play with the numbers to see if I can raise my profits up a percentage or two!)
Knowing your numbers is beyond important in your farm business: it is ESSENTIAL. This process has been a complete game-changer for me, and I hope the process I share here is a game-changer for you as well!
Now that I sound like a total nerd, let’s jump into the actual process:
On my farm, I complete enterprise budgets for most of our individual flower crops and also for our sales outlets. Using this data, I am able to determine if I am actually making money on specific flower crops and just exactly how much. It is important to acknowledge that this process is not exact or mega-precise and should be treated as an estimate. Because no matter how accurate your predictions are, realities often throw projections off course (the weather, disease, pests, market volatility, etc.).
The key to allocating costs within the budget process is to develop a process that is consistent over time, rather than being ridiculously exact. Regardless, this data is invaluable and influences all business decisions.
The first time I did this exercise to review my crops, I was quite surprised to find out that I was growing flowers that were actually losing me money. What? How can that be?? Surely I made a mistake…? I thought as I leaned closer and adjusted my reading glasses to take a closer look. Everyone said zinnias were so profitable - it can’t be that I actually lost money on them this year - I harvested so many! Wait…Didn’t I??
Alas, to my disappointment, there were no mistakes in my calculations.
The good thing is that if you find you are not making money from a specific crop, you can adjust your expenses or income to create a more desirable result. For example, if you find that you are spending way too much time weeding a bed of zinnias, therefore spending too many labor dollars on it (making it unprofitable)- you can find ways of more efficiently keeping your beds weed-free, thus reducing labor hours and increasing your profits.
Alternatively, you may be able to raise your prices slightly (as long as they are within fair market prices) to get ahead of your break-even price.
In some cases, you may decide that you’re better off minimizing the amount you grow certain crops, or changing the time of year you grow them, or eliminating them from your lineup altogether in order to make room for other, more profitable flowers.
The only way to determine these specific profit-boosting techniques, however, is to actually sit down and work through this process.
Each season I predict the profitability of each crop using this enterprise budget analysis process, and then record the actual data throughout the season. At the end of the season, I compare my projected profitability with my actual profitability. Sometimes I am pretty spot-on, but other times a crop failure due to disease or a pest issue may render a specific crop unprofitable. Either way, the information is an invaluable tool in making decisions moving forward.
This is a very basic introduction to enterprise budget analysis- you can dive much deeper into the process but starting out with the basics is the best way to get going with this important tool.
Components of Farm Enterprise Budgets
Basic Farm Enterprise Budgets consist of:
Income from a specific enterprise (crop)
Variable Costs (operating costs) such as labor, machinery/equipment, materials, fertilizer, etc. associated with growing a specific enterprise (crop)
Fixed Costs (also known as ownership or sunk costs) such as land, buildings, taxes, insurances, and general farm equipment. These are the costs that are necessary to run your business, but may not be associated with a particular flower or growing method.
Other components may be included such as establishment costs (for perennial plantings) and break-even analysis, but like I said, it’s best to master the basic outline of a farm enterprise budget analysis and improve from there. '
(Are your eyes drying up from boredom yet? Stick with me, I promise it will be worth it!)
Notes About Calculating Your Enterprise Budgets
There are many different ways to calculate your enterprise budgets, but I am going to guide you through basic, simple steps in this version of a budgeting process. You can calculate profitability per bunch, growing bed, square foot, acre, etc.
In the following guide, we will calculate each crop per bunch and per bed (of equal length and size). This is how I calculate on my farm. This way, I can compare “apples to apples” how much a bunch of zinnias vs a bunch of dahlias makes, as well as how much a bed of zinnias makes vs a bed of dahlias makes. I then allow more space on the farm to our most profitable (and easily sellable crops), and grow the less profitable crops in smaller amounts or not at all.
All of that being said, it’s also equally (if not more) important to take into account what your market and your customers value, and be sure you are producing what they want AND what makes you money (and what’s best for the overall health of your farm).
There is information that you need to keep track of in order to have accurate enterprise budgets. However, if you don’t have exact data, that is totally fine! The first time you do this, just start with estimates, but then be sure to keep tabs on your data so you can complete a more accurate analysis later (you can read about record keeping and get free templates here).
How To Calculate Farm Enterprise Budgets, Step-By-Step:
I will be using one bed of zinnias as an example of how to perform a simple enterprise budget analysis.
I use an excel spreadsheet for this process, and I highly recommend that you do the same (Remember when I said I sucked at math? I love excel because it does all the math for me, so I don’t have to worry about making mistakes!). If you don’t have access to excel, you can still complete this process with an old-fashioned pen, paper, and calculator.
Step 1: Track (or estimate if it’s your first time doing this) your labor rates and materials costs for each task associated with growing 1 bed of zinnias (I wrote a blog post about this here, you can also grab free copies of the templates I use at the bottom of the blog). Keep track of the time it takes to:
Fill the seed trays that will fill one bed
Seed the trays that will fill one bed
Transplant one bed at the specific spacing you use
Weed one bed
Fertilize the bed
Spray the bed (if needed)
Harvest
etc.
During the season, record yourself (& employees) for each task. I have a spreadsheet printed on piece of paper in my crop record book with columns for: Task /start time / stop time / total duration / # people / notes. When I start a task (such as filling 50 seed trays), I write down the start time on the sheet. When I finish the task, I write down the stop time. I then can figure out how long it took me to fill 50 trays, and how much on average it takes to fill 1 tray. (If it takes me 1 hour exactly to fill 50 trays: divide 60 minutes by 50 trays = on average it takes 1.2 minutes to fill a tray). I pay my employees around $14/hour, but I calculate the labor rate at $22 to account for: payroll expenses & taxes, miscellaneous time spent waiting or transporting items from the greenhouse to field, etc., and because I am also accounting for my own time spent on tasks, which demands a higher pay rate than my employees.
Step 2: Track your sales for your 1 bed of zinnias (grab free copies of my sales record templates).
Step 3. Open an excel spreadsheet. Based on the information you gathered step #1, list all your pre-harvest variable costs to grow 1 bed of zinnias, including costs for:
Labor for potting up
Labor for seeding
Labor for transplanting
Labor for pinching (if applicable)
Labor for weeding
Labor for spraying (if applicable)
In addition to materials costs for:
Seed/Corms/Tubers/Bulbs
Potting Soil
Seed Trays
Weed Barrier or mulches
Netting
Fertilizers
Soil Amendments
Fungicides/Insecticides
Drip tape /irrigation
Stakes
Step 4: Below your pre-harvest variable costs, list your pre-harvest overhead costs such as:
Greenhouse/propagation house heating costs (while growing your transplants)
Irrigation costs
Cooler/electricity utility costs
(Remember to list costs only associated with that 1 bed of zinnias)
Step 5: Calculate your total pre-harvests costs per bed by totaling all of the above to get your “pre-harvest cost total” per 1 bed of zinnias. Now, below this, divide the total by the # of bunches you expect to harvest from the one bed of zinnias (your projected yield) to figure your total preharvest cost per 1 bunch of zinnias.
Step 6: List all your post-harvest costs (associated with the one bed of zinnias) below your pre-harvest costs including your:
Harvest rate (to calculate your harvest rate, divide the # bunches you harvest per hour by your hourly labor pay rate. For example, if you harvest 15 bunches of zinnias/hour, divide 15 by your hourly labor rate of $22 = $1.47/bunch).
Rubber Bands
Holding or Hydration Solutions
Sleeves/stickers/packaging
Step 7: Calculate your total post-harvest costs per bed by totaling the above expenses. Then, divide the total of the above costs by the number of bunches you expect to harvest from the one bed of zinnias to calculate your total post-harvest costs per 1 bunch of zinnias.
Step 8: Calculate your fixed (also called ownership or sunk) overhead costs for the farm. This includes all of your overhead costs such as your mortgage, phone bill, insurance bills, repairs & maintenance, marketing fees, etc. and should also include your time spent working on the business outside of crop production. Add the costs of these together, then divide it by the # of beds you have on the farm (assuming all of your growing beds are of equal width and length). Apply this number below your post-harvest costs. You can determine your fixed overhead cost per bunch by dividing by the total # of bunches you expect to harvest from 1 bed (Your fixed costs are a major factor that may determine some of your crops unprofitable…)
Step 9: At the bottom of your spreadsheet, add together your preharvest cost per bunch, your post-harvest cost per bunch, and your overhead cost per bunch to determine your total cost to produce a bunch of flowers. Then minus this from your average price received per bunch to determine your average profit margin and profit margin %. From these numbers you can calculate your total revenue per bed, profit per bed, and overall projected profit margin for that crop.
Step 10: Compare your actual costs and sales (from steps #1 and #2) with your enterprise budget projections from your spreadsheet. Are they similar or different? Did you make money or lose money? Analyze your results and find ways to root out waste, cut costs, and make crops more profitable.
TA-DA!!!! You’ve just completed a basic enterprise budget analysis!
Now, if all of this sounds VERY confusing and overwhelming: take a big deep breath!
All of the “business" jargon” can make things sounds very baffling. Remember: You can do hard things!!
It took me a while to fully grasp all the components of the process and how to calculate each section accurately. If I can do it, so can you!
But if you’re feeling a little unsure about how to calculate things like your labor rates, or how to allocate overhead costs, don’t worry. The process is actually much easier to understand if you have someone break down the process for you step-by-step, while you are able to look at the actual spreadsheet and concrete numbers right in front of you. I would love to personally de-mystify the process and walk you through this process step-by-step so you can simply follow along.
You can check out upcoming opportunities to learn this process and get the actual, fillable spreadsheets by joining a business workshop. You can find more information by clicking here.