Risk Management for the Green Industry Dr. Robin G. Brumfield Rutgers Cooperative Extension Risk Management Workshop June 7, 2000

Risk Management for the Green Industry

Dr. Robin G. BrumfieldDr. Robin G. Brumfield

Rutgers Cooperative ExtensionRutgers Cooperative Extension

Risk Management WorkshopRisk Management WorkshopJune 7, 2000June 7, 2000

Distribution of Farms and Land in Farms By Region, 1998Distribution of Farms and Land in Farms By Region, 1998

Top 6 Commodity Groups in the US

BeefBeef DairyDairy CornCorn SoybeansSoybeans BroilersBroilers Green Industry 11% of crop cash receipts Green Industry 11% of crop cash receipts

for farm crops in 1998.for farm crops in 1998.

U.S. Floriculture

23.5 million sq. ft. of construction in 199723.5 million sq. ft. of construction in 1997 $37.2 billion in green industry expenditures$37.2 billion in green industry expenditures 9.8% growth 1986 - 909.8% growth 1986 - 90 3.4% growth 1991 - 953.4% growth 1991 - 95

Top 10 States in Cash Receipts 19961996 %% 19871987 %% CaliforniaCalifornia 2020 California California 2222 FloridaFlorida 1111 Florida Florida 1414 North CarolinaNorth Carolina 8 8 Texas Texas 7 7 TexasTexas 8 8 Pennsylvania Pennsylvania 4 4 OhioOhio 5 5 New York New York 3 3 OregonOregon 5 5 Michigan Michigan 3 3 MichiganMichigan 4 4 Oregon Oregon 3 3 PennsylvaniaPennsylvania 3 3 New Jersey New Jersey 3 3 OklahomaOklahoma 3 3 North Carolina North Carolina 3 3 New YorkNew York 2 2 Ohio Ohio 3 3

Source: Floriculture & Environmental Horticulture, Oct. 1997Source: Floriculture & Environmental Horticulture, Oct. 1997

Impressive green-industry growth

Total US growth has been extraordinaryTotal US growth has been extraordinary

Most states have expanded cash receiptsMost states have expanded cash receipts

Market shares - some states have increased Market shares - some states have increased cash receipts, but failed to keep up with the cash receipts, but failed to keep up with the growth in other statesgrowth in other states

U.S. Retail Expenditures

ItemItem Billion $Billion $ Per CapitaPer Capita Cut Flowers & GreensCut Flowers & Greens 6.56.5 $26.80$26.80 Flowering Potted PlantsFlowering Potted Plants 3.43.4 $12.80$12.80 Foliage PlantsFoliage Plants 2.92.9 $10.90$10.90 Bedding PlantsBedding Plants 2.62.6 $ 9.90$ 9.90 Env. Hort.Env. Hort. 21.2 21.2 $79.90$79.90 TotalTotal 37.2 37.2 $140 $140

Source: Floriculture & Environmental Horticulture, Oct. 1997.Source: Floriculture & Environmental Horticulture, Oct. 1997.

Percent of Households Buying Plants

PlantPlant %%

AnnualsAnnuals 25%25%

PerennialsPerennials 20%20%

Rose PlantsRose Plants 13%13%

Flowering TreesFlowering Trees 9%9%

Source: National Gardening Survey, 1994-95Source: National Gardening Survey, 1994-95

4343 out of everyout of every

100 100 householdshouseholds

do notdo not buy floricultural buy floricultural products!products!

Top 10 CropsCropCrop Share of ValueShare of ValueRosesRoses 9%9%Mums (cuts & pots)Mums (cuts & pots) 8%8%PoinsettiasPoinsettias 7%7%GeraniumsGeraniums 6%6%FernsFerns 5%5%CarnationsCarnations 3%3%ImpatiensImpatiens 3%3%PalmsPalms 3%3%Lilies (cuts & pots)Lilies (cuts & pots) 2%2%PetuniasPetunias 2%2%Source: 1987 Census of Ag.Source: 1987 Census of Ag.

Only 6Only 6 of every 100of every 100 householdshouseholds

buy poinsettias, the number one buy poinsettias, the number one potted crop!potted crop!

Percent of Households Buying Lawn & Garden Products

VendorVendor %% Garden CenterGarden Center 51%51% Mass MerchandiserMass Merchandiser 36%36% Home CenterHome Center 22%22% SupermarketSupermarket 17%17%

Source: National Gardening Survey, 1994-95Source: National Gardening Survey, 1994-95..

Factors Impacting Demand

IncomeIncome $35,000 vs. $30,000$35,000 vs. $30,000 Education - 54% have one year of collegeEducation - 54% have one year of college Age - 44% are over 18Age - 44% are over 18 Housing StartsHousing Starts

Source: Gineo and Omano, 1990, Waldrop, 1993.Source: Gineo and Omano, 1990, Waldrop, 1993.

Factors Influencing Outlet Selection

Plant qualityPlant quality SelectionSelection LocationLocation PricePrice Professional AssistanceProfessional Assistance

Source: Padgett et al., 1995.Source: Padgett et al., 1995.

Factors That Impact Determination of Price

Reduced Mkt. Share Increased Mkt. Share

1988 1993 1988 1993

Cost of production 1 1 1 1

Comparison to other growers 2 2 2 3

Market demand 3 3 3 2

Grade of plant 4 4 4 4

Last year's price 5 5 5 5

Inventory 6 6 6 6

Inflation 7 7 7 7

Time of year 8 8 8 8

Factors Limiting Overall Expansion of Nursery Business

Reduced Mkt. Share Increased Mkt. Share

1988 1993 1988 1993

Capital 2 3 1 2

Labor 1 2 2 3

Market demand 4 1 3 1

Land 3 4 5 7

Ability to hiremanagers 5 7 4 8

Own management 6 6 6 4

Water 7 10 8 10

Weather 9 9 9 9

Environmentalregulations 10 8 10 6

Factors Limiting Geographic Expansion of Nursery Business

Reduced Mkt. Share Increased Mkt. Share1988 1993 1988 1993

Production 1 5 1 5Transportation 2 4 2 4Personnel 3 1 4 2Marketing 4 2 3 1Capital 5 3 5 3

Limits to Expansion: Retail Firms

Market DemandMarket Demand Available CapitalAvailable Capital LaborLabor CompetitionCompetition

Source: Dole and Schnelle, 1993.Source: Dole and Schnelle, 1993.

Value of an Acre of Production

CropCrop $$ CornCorn $350-$400$350-$400 VegetablesVegetables $4,000-$8,000$4,000-$8,000 FruitFruit $8,000-12,000$8,000-12,000 Greenhouse flowers Greenhouse flowers $350,000$350,000

How Does the US Stack Up? RankRank

ShareShare

Size of Consumer MarketSize of Consumer Market 11 31%31% Value of ProductionValue of Production 33 14%14% Area in ProductionArea in Production 33 9% 9% ImporterImporter 11 29%29% ExporterExporter 1 1 29%29% Economic OutputEconomic Output 11 22%22%

Source: Floriculture & Environmental Horticulture, Oct. 1997Source: Floriculture & Environmental Horticulture, Oct. 1997

US Weaknesses

Not having a good handle on the financial Not having a good handle on the financial side of the businessside of the business

Not thinking internationallyNot thinking internationally

US Strengths

Next to the largest consumer marketNext to the largest consumer market Financially conservativeFinancially conservative Operate under a wide range of conditionsOperate under a wide range of conditions OptimisticOptimistic

Marketing/Advertising/MediaTrends

Market segmentationMarket segmentation Superstores and warehouse storesSuperstores and warehouse stores ConsolidationConsolidation

Marketing/Advertising/MediaImpact on the Industry

Low prices from large producersLow prices from large producers Decline of large, homogeneous, middle Decline of large, homogeneous, middle

classclass Not sure who the target market isNot sure who the target market is Many specialized production nichesMany specialized production niches

Marketing/Advertising/MediaSolutions

Promote quality, not pricePromote quality, not price Promote servicePromote service Try new ideas as well as proven winnersTry new ideas as well as proven winners Use cable TV to target local customersUse cable TV to target local customers Use 1-900 numbersUse 1-900 numbers Develop good signsDevelop good signs Get involved in the communityGet involved in the community

Social/Lifestyle/ConsumerTrends

Consumers are more sophisticatedConsumers are more sophisticated Growth of 2-income familiesGrowth of 2-income families Consumers want “shopping experience” or Consumers want “shopping experience” or

“event marketing”“event marketing”

Social/Lifestyle/ConsumerImpact on the Industry

Can’t shop 9-5Can’t shop 9-5 Limited time to work on landscapes Limited time to work on landscapes Limited time to shopLimited time to shop

Social/Lifestyle/ConsumerSolutions

Create “shopping experiences” and “event Create “shopping experiences” and “event marketing”marketing”

Market After HoursMarket After Hours Stand behind the productStand behind the product Give your 800 number to customersGive your 800 number to customers Sell processed and lightly processed items Sell processed and lightly processed items

to save consumers timeto save consumers time

Business/ManagementTrends

Global marketplaceGlobal marketplace Switch from producer-driven to consumer-Switch from producer-driven to consumer-

driven economydriven economy Information ageInformation age

Business/ManagementImpact on the Industry

Competition from low cost countriesCompetition from low cost countries Age of surplus rather than shortageAge of surplus rather than shortage Must offer quality prices to attract Must offer quality prices to attract

customerscustomers Producers are farmers who have difficulty Producers are farmers who have difficulty

thinking of marketing from the consumer’s thinking of marketing from the consumer’s perspectiveperspective

Business/Management Solutions Become computer literate and train employees Become computer literate and train employees

on the computeron the computer Learn to surf the internetLearn to surf the internet Consider a webpageConsider a webpage Make electronic sales tax paymentMake electronic sales tax payment Create value added products, don’t compete on Create value added products, don’t compete on

priceprice Do things in slow monthsDo things in slow months Make your farm a shopping destinationMake your farm a shopping destination

Political/Legislative/RegulatoryTrends

Government regulationGovernment regulation Deer overpopulationDeer overpopulation Increasing environmental/health concernsIncreasing environmental/health concerns

Political/Legislative/RegulatoryImpact on the Industry

Deer damageDeer damage Consumers reluctant to purchase plants that Consumers reluctant to purchase plants that

deer may eatdeer may eat Increasing demand for native, organic, and Increasing demand for native, organic, and

environmentally friendly plantsenvironmentally friendly plants Loss of minor use pesticidesLoss of minor use pesticides RecyclingRecycling Composting landscape wastesComposting landscape wastes

Political/Legislative/Regulatory Solutions

Deer fencing, human hair, relocate deer, etc.Deer fencing, human hair, relocate deer, etc. Sell and educate about biological pesticidesSell and educate about biological pesticides Start recycle programsStart recycle programs Chip trees and give away compostChip trees and give away compost Recycle waterRecycle water Proactively present producer concerns to regulatorsProactively present producer concerns to regulators Educate on recycling, environmentally friendly Educate on recycling, environmentally friendly

landscapes, etc.landscapes, etc. Be environmentally aware and responsibleBe environmentally aware and responsible

Workforce/WorkplaceTrends

Low unemploymentLow unemployment Declining work ethic. How do farmers Declining work ethic. How do farmers

find, train and retrain motivated employees find, train and retrain motivated employees with skills they need at affordable wages?with skills they need at affordable wages?

Improved communications technologyImproved communications technology

Workforce/WorkplaceImpact on the Greenhouse

Industry

Difficult to find part-time workDifficult to find part-time work Wages are increasingWages are increasing Difficult to find good helpDifficult to find good help

Workforce/WorkplaceSolutions

Set up a training program for employeesSet up a training program for employees AutomateAutomate Make daily lists of tasksMake daily lists of tasks Make shopping more self-serviceMake shopping more self-service

Financial Management is Critical to Success

BudgetingBudgeting Managing Cash FlowManaging Cash Flow Controlling CreditControlling Credit PricingPricing Obtaining CapitalObtaining Capital ProfitabilityProfitability PlanningPlanning

InvestmentInvestment Interest InterestLabors & ManagementLabors & Management Salary SalaryRiskRisk Profit Profit

Producers have returns to:

Income Statement Is Critical For Measuring

ProfitabilityProfitability

– Return on assetsReturn on assets

– Return on equityReturn on equity Financial efficiencyFinancial efficiency

– Ratio of operating expenses to value of Ratio of operating expenses to value of productionproduction

– Ratio of debt service to value of productionRatio of debt service to value of production

Income Statement

Total RevenueTotal Revenue Value of plants soldValue of plants sold $1,290,181 $1,290,181 Change in inventoryChange in inventory 40,125 40,125 Increase in suppliesIncrease in supplies 897 897 Misc. cash incomeMisc. cash income 14,601 14,601

Total RevenueTotal Revenue $1,345,803 $1,345,803

Less Cost of Goods SoldLess Cost of Goods Sold $$878,633878,633(Prefinished, cost of production)(Prefinished, cost of production)

____________Gross MarginGross Margin $$467,170467,170

Less Operating ExpensesLess Operating Expenses $392,924 $392,924____________

NET REVENUE (before taxes)NET REVENUE (before taxes) $74,246$74,246

Net Profit Margin Focus on Net Profit Margin Focus on Factors Affecting the Income Factors Affecting the Income

StatementStatement

Margin Management from Income Statement

less

Operatingless Profit

Operating $74,246 After-taxExpenses less Profit$392,924 Federal $74,246 Net ProfitExpense Taxes divided by Marginpercent $0 5.52%

29%Sales

$1,345,803

Sales $1,345,803

COGS $878,633

Gross Margin 35%

Gross Profit $467,170

Interpretation

Net profit margin = profit per dollar Net profit margin = profit per dollar

of sales after paying the owner’s salary of sales after paying the owner’s salary and accounting for opportunity cost and accounting for opportunity cost

of capital invested.of capital invested.

Common Problems With Profit Margin

Wrong pricing systemWrong pricing system Prices have not been increased as costs have Prices have not been increased as costs have

increasedincreased Costs are too high relative to size of businessCosts are too high relative to size of business Not enough sales for the resources allocatedNot enough sales for the resources allocated High overhead costsHigh overhead costs Wasteful spending on inputsWasteful spending on inputs Poor productionPoor production

If Costs Are Too High:

Are we over-mechanized?Are we over-mechanized? Is labor being used efficiently?Is labor being used efficiently? Do we have too much labor?Do we have too much labor? Do we have the right type of labor?Do we have the right type of labor? Is there too much labor in slack periods?Is there too much labor in slack periods? Is there a labor shortage in peak periods?Is there a labor shortage in peak periods?

If Costs Are Too High:

What Costs Are The Highest?What Costs Are The Highest? Are These Controllable?Are These Controllable? Are The Costs Necessary?Are The Costs Necessary? Can The Same Function Be Done A Better Can The Same Function Be Done A Better

Way?Way? Would mechanization reduce costs?Would mechanization reduce costs?

Every Dollar Saved By Cost Every Dollar Saved By Cost Control Equals A Dollar Of Control Equals A Dollar Of

ProfitProfit!!

Balance Sheet Or Net Worth Statement Is A Financial Snapshot

Of Business On A Specific Date

Shows:Shows: AssetsAssets - Valuables The Business - Valuables The Business

Owns Owns LiabilitiesLiabilities - Claims Of Outsiders- Claims Of Outsiders Net WorthNet Worth - Claims Of Owners- Claims Of Owners

Balance Sheet Segregates, Assets and Debts Into:

CurrentCurrent Non-CurrentNon-Current

Current Assets Will Become Cash Within One Year

CashCash InventoryInventory Accounts ReceivableAccounts Receivable Marketable SecuritiesMarketable Securities Prepaid ExpensesPrepaid Expenses

Non-Current Assets

VehiclesVehicles EquipmentEquipment SecuritiesSecurities BuildingsBuildings LandLand

Assets

Current AssetsCurrent Assets Cash on handCash on hand $35,502$35,502 Accts. ReceivableAccts. Receivable202,085202,085 Plant InventoryPlant Inventory818,389818,389 Supply InventorySupply Inventory 15,00415,004

Total CurrentTotal Current $1,070,980 $1,070,980

Long-term AssetsLong-term Assets Machinery/EquipmentMachinery/Equipment $214,885$214,885 Bldgs./FixturesBldgs./Fixtures430,107430,107 LandLand176,754176,754 Less depreciationLess depreciation ((357,423357,423))

Total Long-termTotal Long-term $464,323$464,323 _________ _________ Total AssetsTotal Assets $1,535,302$1,535,302

Current Liabilities Are Payable Within One Year

Notes PayableNotes Payable Accounts PayableAccounts Payable RentRent TaxesTaxes InterestInterest Portion Of Intermediate & Long Term Debt Due Portion Of Intermediate & Long Term Debt Due

Within 12 MonthsWithin 12 Months Loans Against Cash Value Of Life InsuranceLoans Against Cash Value Of Life Insurance

Non-Current Liabilities

Term LoansTerm Loans Mortgages On BuildingMortgages On Building Mortgages On LandMortgages On Land Less Principal Due In 12 MonthsLess Principal Due In 12 Months

Balance Sheet Is Critical For Measuring:

LiquidityLiquidity SolvencySolvency

LiabilitiesCurrent LiabilitiesCurrent Liabilities

Accts. PayableAccts. Payable$30,000$30,000 Short-term notesShort-term notes 28,32628,326 TaxesTaxes 11,08011,080

Total CurrentTotal Current $69,406 $69,406

Long-term LiabilitiesLong-term Liabilities MortgagesMortgages $120,000$120,000 Long-term notesLong-term notes146,000146,000

Total Long-termTotal Long-term $266,920$266,920 ____________Total LiabilitiesTotal Liabilities 336,376336,376Net WorthNet Worth $$1,198,9261,198,926 ________________Total Liabilities and Net Worth $Total Liabilities and Net Worth $1,535,3021,535,302

Asset Management Asset Management

Focuses on the asset side of the Focuses on the asset side of the Balance SheetBalance Sheet..

Asset Turnover RatioHow Well Do I Manage My Assets?

InventoryTurnover

1.61+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover55 $202,085 $1,070,980 Total 0.88

+ + AssetsFixes $1,535,303

Assets$464,323

Inventory $833,393

Cash $35,502

Sales $1,345,803

Interpretation

Asset turnover = income generated per Asset turnover = income generated per

dollar of assetsdollar of assets

Common Problems With Asset Turnover Ratio:

Too much equipment for the sales volumeToo much equipment for the sales volume Wrong type of equipmentWrong type of equipment Low pricesLow prices Poor productionPoor production

Return on AssetsHow Well Do I Manage the Farm?How Well Do I Invest My Money?

less


Operating $74,246 After-taxExpenses less Profit$392,924 Federal $74,246 Net ProfitExpense Taxes divided by Marginpercent $0 5.52%

29%

Return ofAssets

Inventory 4.84%Turnover

1.61+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover55 $202,085 $1,070,980 Total 0.88

+ + AssetsFixes $1,535,303

Assets$464,323

Sales $1,345,803

COGS $878,633

Gross Margin 35%


Sales $1,345,803

Inventory $833,393

Cash $35,502

Sales $1,345,803

Interpretation

Rate of return of firm assets measures Rate of return of firm assets measures profit generated by firm assets.profit generated by firm assets.

Measures managerial ability without Measures managerial ability without regard to how the firm is financed.regard to how the firm is financed.

Common Problems With Return On Assets

Low salesLow sales Low pricesLow prices Poor productionPoor production Too much equipment relative to size of firmToo much equipment relative to size of firm Too few enterprises relative to size of firmToo few enterprises relative to size of firm Wasteful spending for inputsWasteful spending for inputs High overhead costsHigh overhead costs

Leverage SituationHow Much of the Business Do I Own?

TotalAssets

Total $1,535,303 FinancialAssets divided by Leverage

Current $1,535,303 Net 1.28Liability less Worth

$69,406 Total $1,198,927+ Liability

Long-term $336,376Liability

$266,970

less


Operating $74,246 After-taxExpenses less Profit$392,924 $74,246 Net ProfitExpense divided by Marginpercent 5.52%

29%

Return ofX Assets


1.61+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover Return on55 $202,085 $1,070,980 Total 0.88 X Equity

+ + Assets 6.19%Fixes $1,535,303

Assets$464,323

Total FinancialAssets divided by Leverage

Current $1,535,303 1.28Liability less$69,406 Total

+ LiabilityLong-term $336,376Liability

$266,970

Total Assets $1,535,303

Net Worth $1,198,927

Sales $1,345,803

Sales $1,345.803

COGS $878,633

Gross Margin 35%


Inventory $833,393

Cash $35,502

Federal Taxes $0

Sales $1,345,803

BASE MODEL

Interpretation

Return on equity = how much return the Return on equity = how much return the owner’s money is generating in the owner’s money is generating in the business.business.

Highly leveraged firms are vulnerable to Highly leveraged firms are vulnerable to rapid losses in net worth or rapid gains if rapid losses in net worth or rapid gains if successful.successful.

Common Problems With Return On Equity

Return on assets is less than the cost cost of Return on assets is less than the cost cost of capitalcapital

Too much equipment for the size of the firmToo much equipment for the size of the firm Too few enterprises for the size of the firmToo few enterprises for the size of the firm Wasteful spending for inputsWasteful spending for inputs High overhead costsHigh overhead costs Low pricesLow prices Poor productionPoor production

Cut Overhead Expense as a Percent of Sales by 3 Percent

less



26%

Return ofx Assets


1.61+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover Return on55 $202,085 $1,070,980 0.88 x Equity

+ + 9.78%Fixes

Assets

$464,323




$266,970



Federal Taxes $0

Sales $1,345,803

Inventory $833,393

Cash $35,502

Sales $1,345,803


Sales $1,345,803

COGS $878,633

Gross Margin 34.71%


Increase Gross Margin by 2 Percent

less



29%

Return ofx Assets


1.61+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover Return on55 $202,085 $1,070,980 0.88 x Equity

+ + 8.76%Fixes

Assets

$464,323




$266,970

Sales $1,345,803

COGS $878,633

Gross Margin 37%


Inventory $833,393

Cash $35,502

Sales $1,345,803




Federal Taxes $0

Sales $1,345,803

Increase Inventory Turns By 1

less



29%

Return ofx Assets


2.60+

Age of Accts. Accts. Current Assetrec. Receivable Assets divided by Turnover Return on55 $202,085 $755,203 1.1 x Equity

+ + 8.41%Fixes

Assets

$464,323




$266,970


Net Worth $883,150

Federal Taxes $0

Sales $1,345,803

Inventory $517,616

Cash $35,502

Sales $1,345,803


Sales $1,345,803

COGS $878,633

Gross Margin 34.71%


Reduce Receivables to 30 Days

less


Operating $74,246 After-taxExpenses less Profit$392,924 $74,246 Net ProfitExpense divided by Marginpercent 5.52%29.20%

Return ofx Assets


1.61+


+ + 6.70%Fixes

Assets

$464,323




$266,970



Federal Taxes $0

Sales $1,345,803

Inventory $833,393

Cash $35,502

Sales $1,345,803


Sales $1,345,803

COGS $878,633

Gross Margin 34.71%


Combined Effects1. INCREASE GROSS MARGIN 2%2. CUT OVERHEAD BY 3%3. INCREASE INVENTORY TURNS BY 1

less 4. REDUCE AGE OF ACCTS RECEIVABLES TO 30 DAYS


Operating $148,038 After-taxExpenses less Profit$349,909 $148,038 Net ProfitExpense divided by Marginpercent 11%

26%

Return ofx Assets


2.60+


+ + 18.70%Fixes

Assets

$464,323




$266,970


Net Worth $791,679

Federal Taxes $0

Sales $1,345,803

Inventory $517,616

Cash $35,502

Sales $1,345,803


Sales $1,345,803

COGS $878,633

Gross Margin 37%


Conclusions

Market is now consumer driven rather than Market is now consumer driven rather than production drivenproduction driven

Producers can generally handle production, Producers can generally handle production, but are less confident about selling at a but are less confident about selling at a reasonable pricereasonable price

Producers are looking for help in marketing, Producers are looking for help in marketing, labor management and business labor management and business managementmanagement

Documents

Risk Management for the Green Industry Dr. Robin G. Brumfield Rutgers Cooperative Extension Risk Management Workshop June 7, 2000