Planning for financial success

As a banker dedicated to working with greenhouses, nurseries, retail garden centers and suppliers on a nationwide basis, the Uncensored Event was unlike any I’ve attended. Presentations and content tailored to this industry, including discussions among growers, retailers and suppliers, created an environment for rich strategic discussions.

Two areas of interest that fostered much discussion among greenhouse owners were the importance of working capital and how leading indicators could help support short-cycle greenhouse operations, large or small.

The importance of working capital

In the banking industry, we define working capital as the difference between a business’ current assets and current liabilities. Current assets, which include inventory and accounts receivable, are the most liquid of assets and can be quickly converted to cash. Current liabilities are any obligations due within one year. This distinction is critical to any greenhouse operation because of the investment required in growing inventory, combined with a short sales window, which can leave a business significantly exposed to short-term weather changes. Greenhouse operations are more dependent on maintaining working capital resources beyond inventory as a safety net because of the perishability of inventory and lack of alternative markets.

There are four key potential sources for improving working capital to help meet short-term obligations. A business could sell fixed assets, take on long-term debt, sell part of the company, or decrease its working capital needs by increasing inventory turns or accounts receivable collections. Any of these changes would inject working capital and help sustain a company during weather shocks or other cash flow interruptions.

According to data collected by Bank of the West Commercial Banking Group in September 2015, greenhouse operations have been able to grow their average working capital over the past five years by managing expenses while increasing prices. Extreme weather has impacted smaller operations more than large, as large operations are more geographically diversified. Well-capitalized operations have seen increased sales after extreme weather conditions as homeowners purchase replacement products and seasonal color. For a greenhouse operation, the key is to have sufficient working capital to sustain operations through multiple short sales cycles.

According to data collected by Bank of the West, greenhouse operations have been able to grow their average working capital over the past five years by managing expenses while increasing prices.

Leading indicators support short-cycle greenhouse operations

Another key topic of discussion at the event was the use of leading indicators to help support budgeting and planning of greenhouse operations. It’s worth noting that for those indicators with the strongest ties to greenhouse owners, businesses should:

• Recognize that one indicator is not enough, as it might not correctly reflect the overall market.
• Look at chosen indicators on a regular basis as well as longer term trends.
• Understand that depending on the geography, national trends may not be reflective of local or regional trends.

The Federal Reserve Economic Data (FRED) research site is a terrific source of trend information that can be analyzed at the state or metro level.

Greenhouse operations, even with shorter inventory cycles, can gain market insight by watching certain leading indicators that are more closely affiliated with their consumers. Examples of these indicators include:

• Employment — As unemployment rates drop, both consumer spending capacities and residents’ ability to improve their salaries through job changes increase.
• Average wage — As average wages in a market increase, consumer spending on non-essential impulse buys also increases.
• Consumer spending and discretionary income — Greenhouse sales in many cases are impulse-buy related (e.g., buying a mum for the doorstep, picking up a plant in front of the grocery store, etc.)
• Average home values — As home values increase, a homeowner is more likely to invest in the landscape or make outdoor improvements.
• Pending home sales (new or existing) — Studies show that a new homeowner will make investments into the landscaping within the first two years of taking ownership.
• Housing starts – Most construction will be complete nine months from the construction start, at which time the landscape is installed.
• Outdoor living space sales — Looking at sales for companies in this space will confirm homeowners investing in landscape.
• Apartment vacancy rates — As vacancy rates drop, rental rates increase, making home ownership a less-expensive option and driving the likelihood that home sales will increase.

Each of these indicators can be useful as greenhouse owners look to forecast, budget and plan. While smaller operations may not be able to find specific charts, tables or data from national sources, local Economic Development Corporations (EDCs) or Chambers of Commerce may be good sources for this type of information.

Understanding the importance of working capital and how to strengthen it, along with looking at leading indicators to gain better intelligence on business operations, can certainly help foster further stability and planning for greenhouse operations as they traverse the seasonality of their business.

Jeff is managing director of the nursery and greenhouse management group with Bank of the West Commercial Banking Group. Burch has been in banking for over 25 years and has supported Bank of the West’s agribusiness division for 10.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Bank of the West.