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Use benchmarking to determine if your company is financially healthy

Features - Financing

A comprehensive review of your company's operations and financial performance can help you determine whether your business is heading in the right direction or if corrective action is needed

Alan W. Hodges | December 17, 2009

Comparing benchmark values helps companies decide on operations planning, purchasing, financing and expansion.The ongoing economic recession has impacted the horticulture industry by reducing profitability, increased rates of business failure (bankruptcy), increased defaults on loans and widespread layoffs. In this challenging economic environment it is imperative that greenhouse and nursery operators strive to make their businesses as efficient and financially sound as possible.
 
A comprehensive review of a company’s operations and financial performance should be done at least quarterly, in order to determine whether a business is heading in the right direction or if corrective action is needed. The analysis should also review performance trends during the past five years. Think of this as a checkup with your “financial” doctor to determine the health of your business.

Evaluating your business
Financial benchmark analysis is a common and longstanding method involving the use of key indicators or metrics to evaluate a company’s operational and financial performance over time and in comparison to industry averages or benchmark values. Benchmark analysis is practiced by about two-thirds of leading global businesses. Ideally, comparisons should be made with the leading or most profitable firms in an industry that are presumably following best business practices.
 
Labor may be measured in terms of payroll hours.Comparison of a company to industry benchmark values can assist in identifying a company’s strengths and weaknesses to capitalize on its competitive advantages. This comparison can also serve as a guide for important decisions such as business expansion, financing, marketing strategies, operations planning and product selection.
 
Benchmark analysis can assist in identifying common problems in wholesale growing operations, such as slow crop growth, low pricing, excessive costs, waste or overuse, poor cash flow, undercapitalization and imbalanced debt structure. When used effectively, this information can help achieve business goals to increase profitability, control costs, reduce the risk of business failure, enhance efficiency, boost productivity and improve management professionalism.

An Internet-based system
Traditionally, financial benchmark information is compiled through industry surveys. With the power of the Internet, this process can be made more efficient and significantly accelerated to provide more timely information to users.
 
An Internet-based financial benchmark system for the greenhouse and nursery industry was developed through a partnership between the University of Florida and the Florida Nursery Growers and Landscape Association. The system was originally developed in 2004, but has recently been modified to incorporate new features. The system is available at http://hortbusiness.ifas.ufl.edu/analysis and is free. As the system is being continually updated, we would appreciate any feedback.
 
The Internet-based system consists of data entry forms, a historical database of business records, a report generator and a security encrypted Web site user interface. The benchmark measures and calculations used closely follow the longstanding “Nursery Business Analysis Program” at the University of Florida. The database was developed from financial statements and production records collected from wholesale growers in Florida between 1990 and 1998, and augmented with new data submitted to the internet-based system since 2004.
 
The free Internet-based benchmarking system is also open to plug and liner growers.Users can choose from a series of menus to create reports that summarize benchmark information in the database for selected nursery commodities or production systems, operation sizes, profitability levels, locations (state, county) and years. Currently, nursery commodities or production systems represented in the database include greenhouse tropical foliage, shadehouse tropical foliage (South Florida), container-grown woody ornamentals, field-grown woody ornamentals, potted flowering plants and cut foliage (ferneries). Commodity groups have also been set up for plugs/liners and herbaceous perennials, and other nursery commodities or production systems may be added as requested by users.
 
Within each commodity, information is also available for subgroups of large, small and highly profitable companies. Large firms are defined as those having annual sales of $2 million dollars or more, while small firms had sales of less than $250,000. Highly profitable firms had a rate of return on assets of 15 percent or greater. Users can also view time series information for any industry group in three separate periods (years).
 
The system requires a minimum of five valid records in the database to view averages for a selected combination of attributes (commodity/production system, firm size, profitability, location and year), to protect the confidentiality of user records. If the user does not specify any of these selection conditions, the system automatically defaults to all records available.

Company comparisons
The real power of this system is users can enter their own financial data for customized analysis of their companies in comparison to industry benchmarks. Users of this feature must first create an account with their general company information (name, address, telephone, email, etc.) and select a username and password to enable access to the system. Security encryption prevents unauthorized access to confidential information. Clients can view reports for up to three years of their own company or any combination of industry average benchmarks.
 
Reports generated by the system consist of a series of tables and charts that present information for comparison of up to three industry groups or individual firm records (years). Graphical bar charts are also available for selected key indicators to help visualize critical differences. Information that is provided includes:
 
Scope of business operations: annual plant sales, value of production; gross nursery area and net usable production area; number of fulltime equivalent employees; and value of owned and leased capital.
 
Income statement: nursery sales, miscellaneous income, total income; expenses for labor, supplies, equipment/facilities, overhead, capital, management and 32 detailed items; gross income and net income.
 
Monthly sales: as a percentage of total annual sales.
 
Statement of financial position: current and long-term assets; current and long-term liabilities; net worth.
 
Productivity and efficiency indicators: sales and value produced per square foot and per acre growing space; sales and value produced per fulltime equivalent employee; capital managed per acre and per employee.
 
Financial ratios: profitability, turnover, liquidity and solvency.
 
Cost analysis: costs per square foot, costs per unit sales and cost per unit value produced in major expense categories (labor, supplies, facility and equipment, overhead, capital and management).

Getting started
The starting point for benchmark analysis is to collect the most recent information from financial statements, income tax forms and other company records. 
 
The system checks to assure all data is complete and is within a reasonable range of values. Specific information required to use the Internet-based system includes: 
 
Income: Annual plant sales, monthly sales (optional), sales of finished product purchased and resold and other miscellaneous business income.
 
Capital owned and leased: Capital resources managed includes both owned and leased assets in land, buildings and equipment, and working capital in inventories, cash and accounts receivable. Owned capital in buildings, improvements and equipment are given as original cost and accumulated depreciation. Leased assets are taken at market value.
 
Inventory values must be given for both the beginning and end of the year to calculate the change occurring during the period, which is treated as an accrual. Plant inventories are to be estimated at market value, reflecting wholesale prices, less discounts for unfinished plant material in relation to degree of completion.
 
Nursery area: Total nursery area (acres) and usable growing space (square feet). Production area should be measured as the net available space within growing beds and fields, and excluding non-productive space in aisles, driveways and other service areas.
 
Labor work time: The physical quantity of labor used by nurseries may be measured in terms of payroll hours, including production, administrative, sales and management personnel, or expressed in terms of fulltime equivalent persons, representing the number of employees working 52 weeks at 40 hours per week or 2,080 hours per year.
 
Operating expenses: Management salaries, employee wages and salaries, commissions, health insurance, payroll taxes, other benefits, plants, containers, growing media, fertilizer, agrichemicals, packaging, heating fuel, other supplies, facility repairs and maintenance, equipment operations, insurance, electricity, communications, taxes, advertising, rent, interest, depreciation, bank charges, postage/freight, dues/subscriptions, professional services, offices supplies, waste removal and miscellaneous.  
 
Alan W. Hodges is economist and extension scientist, University of Florida, Food and Resource Economics Department, (352) 392-1881 Ext. 312; awhodges@ufl.edu.

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