State of the Industry: Expense Control

The biggest concern growers have going into next year is increased expenses. Rightly so, seeing as how they’ve gone up each year, and when they go up without price increasing, it’s cutting into your profits. It’s hard to get a handle on your expenses, so we talked to Charlie Hall, Ellison chair in international floriculture at Texas A&M University, and Forrest Stegelin, extension agribusiness economist at the University of Georgia. The two provided their top tips for how to cut and control expenses as you head into 2013.
 

Tip 1. Know the arithmetic of price and cost analysis.
Answers “what-if … ?” problems. Fill in the known quantities and solve for the unknowns.

If using margin management (contribution margin percentage equals contribution per unit divided by selling price per unit), use known variable cost to determine the selling price. For example, if you’re seeking a 20 percent margin with variable cost per plant of 76 cents, then selling price (100 percent) – variable cost (76 cents or 80 percent) = contribution (20 percent), therefore selling price should be 95 cents a plant.”
– Forrest Stegelin

Tip 2. Think both supply and demand.
“Belt-tightening in depressed economic conditions involves re-examining both the demand and supply side of profitability. On the demand side, what products and how many of each should I be growing and how can I reduce the risk of speculated production. On the supply side, can I reduce costs by cutting back on certain inputs, which ones can I get at a cheaper price, and which ones do I really need to produce the minimally acceptable level of quality required by the marketplace?”
– Charlie Hall

Tip 3. Solve customer problems and satisfy needs.
“Provide solutions to customers’ concerns. Customers buy benefits rather than things, so emphasize features, advantages and benefits -— there is perceived customer value from providing intangibles and benefits. Also, sell the customers what they want to buy, and make it easier for them to buy. Establish relevancy with the customer by providing “real” as well as “perceived” comparative value in floriculture and greenhouse crops.”
– Forrest Stegelin

Tip 4.  Don’t major in the minors.
“It also helps to bear in mind that the most expensive input a grower ever uses is labor. Adopting some lean flow principles may be the single greatest investment a grower can make in terms of saving on input costs. Yet it is ironic that so much time is spent getting the absolute lowest price on production inputs.”
– Charlie Hall

Tip 5. Focus on marketing strategies instead of production.
“Do not cut expenses in areas that will harm or impact future sales negatively (i.e., selling, advertising, promotion, customer service). Market more wisely by targeting customers and markets to reduce risks and receive greater payoffs — not necessarily to spend more on advertising and a sales force.”
– Forrest Stegelin

Tip 6. Shrink the shrink.
“It all comes down to diligence in record keeping. Growers should track shrink in three areas and stick with it -— production loss, unsold product, and credits on product that is sold. The best way to do this is to develop a spreadsheet to track shrink rates on a per crop basis. This information can then be used to assess the impact on profitability (loss associated with the value of the inputs used, unrealized profits, etc.).”
– Charlie Hall

Tip 7. Go beyond cutting costs.
“Whittling at costs, especially overhead costs, which the producer has some control, can greatly improve the firm’s profitability, but does little for profit per unit. Actions less likely to negatively affect or impact future sales while reducing costs include: change terms of insurance policy (negotiate for a better quote, but do not eliminate coverage that may be needed); reduce travel (consolidate deliveries by combining routes); install energy- efficient lighting and equipment; recycle waste; renegotiate lease or mortgage for lower monthly payments; close out production of slow moving or unprofitable inventory; pursue accounts receivables more aggressively.
– Forrest Stegelin

Tip 8. Think system, not silver bullets.
“Growing quality plants has become more science than art and, as such, requires more technical consideration of the right combinations of inputs that fit into the production system rather than simply selecting the popular input of the month or, heaven forbid, the portfolio of cheapest products available. There’s an old adage that says you get what you pay for and I have seen growers save money in the short-run to only lose a lot of money in the long-run.”
– Charlie Hall