Budgeting from the bottom up

Spring means “Opening Day” is here, not just for greenhouse growers and retailers, but for baseball fans, who have waited all winter for the start of a new season. Like the ballplayers who have worked hard during spring training preparing for the season, so too have growers and their employees. No matter which team you root for, you know there are no guarantees on the season’s success until it’s over.

Scouting reports look good. The economy is rebounding and people are willing to spend more of their discretionary dollars. So how are you going to turn that potential into a profitable season?

One word: focus
In baseball, the focus is on winning the game. Ballplayers do it with passion, hard work and discipline. They train so that they are able to do the fundamentals. But even these professional athletes need a manager and coaches to convey the intricacies of the game plan.

I never met a grower who isn’t passionate about what they do. Hard work is a given in most agricultural pursuits. In fact, it’s the one element growers do almost too well. The discipline part is the hardest, but it is the one common element among successful businesses.

What provides financial focus and discipline to a business? It’s a budget.

Budget blues
Why don’t growers budget? Most because they often resent being told what to do, even if it’s their own instructions. Maintaining discipline is tough.

Growers also expect a budget to deliver bad news. During a recent business planning project, I recommended to a grower that we create a budget to give his business focus. The owner considered my suggestion for a moment and then replied, “I don’t think I want to do that because it will just show me how much money I won’t have in a few months.”

This grower just threw in the towel and admitted defeat with that statement. He might as well have forfeited the entire season.

The traditional way to budget is to start with last year’s sales figures and adjust, going with your gut on some assumptions about the general economic trends. Usually, you give it a conservative slant, because you don’t want to project something you can’t deliver.

Then come the expenses, one by one, taking dollars away from your sales numbers. Whatever is left over is, in essence, your cut. That can be a depressing thought because it means that no matter how hard you worked you end up with the leftovers.

The bottom line
I’d like to challenge you to look at a budget in a different way. Start with what’s most important, the bottom line. That’s a very different perspective from the one the horticulture industry is used to.

When I’m in a room full of growers, every one of them can tell me almost to the dollar, how their sales are doing. Everyone knows how much they “made”. In contrast, very few can say, with certainty, how much of that money they “kept”. The reason knowing how much they kept is so important is because we all like to eat, have a place to sleep and be able to do things with our children.

A grower may have loan payments to make and the principal can only be repaid from profits. Equipment will eventually need to be replaced. One thing I constantly hear growers say is they need money for expansion. This isn’t just for physical land and greenhouses, but working capital to grow more product.

Making a profit means you’re winning the game. So start with the most important line -- the bottom line. Figure out the amount you need for the coming year and add the appropriate percentage for taxes. Everyone hates that part of the budget, but it’s like tagging up on a sacrifice fly. You’ve got to do it or you’ll be thrown out and won’t have the chance to score.

Figuring expenses
After projecting your bottom line, move onto expenses, which includes overhead (fixed expenses) and your cost of goods sold (variable expenses). But don’t get too bogged down in the specifics. For example, don’t agonize over whether the insurance is $15,462 or $16,542 this year based on the agent’s estimates. Use last year as a guide or the previous two if last year was an anomaly.

One way to work through the budget is to hold a discussion session with your company’s key people. If they feel they have contributed to the budget plan, they’re much more likely to be on board to accomplish it.

Add the expenses to the required profit and you’ve got your sales goal for the year. Make sure that cost of goods you’ve projected is realistic based on the sales goal (both in dollars and volume). Is the goal much different than the one you would have set had you started with sales? Chances are, it is, because now you know what you need to do to reward yourself for taking the risk of being an entrepreneur and making the business successful.
 

Action plan
Once the sales goal is in place, put a plan in action to make it happen. Implementing new marketing strategies and looking for cross-selling opportunities and additional services is where company employees can really be creative. Does the action plan require doubling sales? If so, how is this going to be accomplished? Can it be done in a year? If not, the plan may need to be changed and some underlying assumptions will have to be adjusted.

Boston Red Sox executive vice president and general manager Theo Epstein is known for being a numbers guy. His goal, his reward, his profit is winning games. He does it with good defense just like a grower’s cost control measures. He doesn’t give away anything. He also uses good offense just like a grower’s sales team. He puts together a plan for a combination of players to make the base hits that deliver wins.

You also need to take advantage of opportunities that present themselves during the mid-season. And remember to have a backup plan just in case the unexpected should happen such as bad weather or a customer goes out of business or suddenly changes suppliers.
 

Budget goals
A budget works for every company large or small, whether if you’re a grower, retailer or landscaper. A budget works for the departments within these organizations. Every person on the team needs to be aware of the budget goals so they know what they are trying to achieve, how they’re going to get there and how they can measure their progress. Transparency can do wonders for an organization, so don’t be afraid to share budget goals with the appropriate members of the team.

A budget is also an important tool when a grower is looking to replace equipment or facilities or to expand. It helps to calculate how long it will take to reach a savings goal. For seasonal businesses like most growers, cash flow budgeting helps determine the amount, source and timing of working capital, as well as payback period.

Monitoring a budget is easy. A general ledger computer program, such as QuickBooks, should have a budget function. Enter your monthly budget at the beginning of each year and you’ll have a regularly updated report each time you look at your financials. Reviewing actual performance compared to budget at least monthly allows you to make course corrections if needed in plenty of time to see the results.
No baseball team wins all of its games, but by maintaining your focus and monitoring your budget plan, your company will be headed to a successful post-season.

Key points

1. Look at a budget in a different way starting with what’s most important—the bottom line.
2. If a company’s key people feel they have contributed to the budget plan, they’re much more likely to be on board to accomplish it.
3. Every person on a company team needs to be aware of the budget goals so they know what they are trying to achieve, how they’re going to get there and how they can measure their progress.

Erin S. Pirro is a business consultant, Farm Credit East, (800) 562-2235; erin.pirro@farmcrediteast.com; www.farmcrediteast.com.