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Calculating Income and Business Projections for Your Farming Operation

By Louise Placek

We all know about the two inevitabilities of life: death and taxes. You become acutely aware of the “T” word when setting up a business. The IRS wants to know all about you and how much income you are generating, and the state comptroller wants to know if you are collecting sales taxes. Whether or not you owe Federal taxes at the end of the year, you will need to get an Employer Identification Number (EIN) from IRS. You fill out a form (currently the W-9) and return it to IRS, they will then assign your business a permanent ID number. This number will be on all correspondence with the Department of the Treasury, Internal Revenue Service.

If you plan to sell anything retail, you also need to get a tax ID number from the state comptroller. You will be required to report retail income monthly, quarterly or annually (depending on your taxable sales) and pay the taxes you collect based on rates in the counties or cities in which you sold taxable, retail product. Please remember that the sales tax you collect is not yours. This money should be kept separate from other income so it can be paid promptly when it is due.

paperwork
If you aren’t fully confident in your own knowledge, remember that there are people whose job it is to help guide you through the process.

Financing Your Business

Of all the start-up considerations that a business owner faces, financing is likely to be the most important one in terms of your survival the first few years. Unless you have years of experience, an established market, and the resources (includ­ing the human type) to begin production immediately and start selling within a few months, you might want to think hard about how you finance your business.

When I started my business, we had the cash to buy the greenhouse and supplies. Fortunately my husband Chris had a job to pay the bills until I figured out what I was going to do with this business. As it turned out, it took me several years of many costly mistakes and a negative cash flow to learn how to make organic horticulture work. My point is that even if you have the cash to buy your start-up necessities, do you have the money to maintain the business until it can sustain itself? Horticulture is a costly business no matter what aspect of it you choose to be involved in and no matter the level of experi­ence with which you start. The old adage that it takes money to make money is never truer than in the plant growing indus­try. It may take you years to turn the cash flow from negative to positive.

This is not to discourage you. It is only to save you the grief of losing the business after several years because you did not foresee the financial burden created as the business is trying to get to a place where it supports itself. Thinking through the financing of the business means allowing yourself the freedom to learn how to make the business work without going bank­rupt. Even if you pay cash for your initial investment of materi­als and structures, you still need to figure out how to finance the business in the time it takes to make it self-sufficient. Granted, this time will vary depend­ing on your experience, how steep your learning curve is, and how well your market supports the prod­uct. No matter how much time it takes, you need the financial safety net.

If you finance your business through a personal, bank or govern­ment loan, you will need to figure in operating capital. This is difficult because it is often based on speculation. At best you are guessing at costs and potential income. If you are wrong, you might need much more finan­cial support than originally thought. Lending institutions do not look fondly on businesses that come back for more money because of inaccurate projections.

Experience helps a lot in this area. If you don’t have the necessary experience, then go to people who do. Talk to as many horticulture business owners as you can to get the infor­mation you need. Some won’t want to share, but many will. Allow yourself time to take notes on what is generally required to start and/or maintain a business of this kind. If you do this work thoroughly now, you won’t have to keep rewriting your plan and plugging in the items that slipped your notice the first time around.

Once you have gathered as much information as you can, it is time to calculate projections. This means figuring your costs versus income on a monthly, quarterly or annual basis. One of the biggest considerations is the seasonality of this business. Your greatest costs (and income) will occur in spring and, to a lesser degree, fall. If you plan well enough, you might be able to pro­duce something to sell in the summer and winter, but that depends on your market and where you reside. Here in Texas, nurseries do very little business in the middle of summer—it’s just too hot. All over the country nurseries close down in the winter unless they are involved with Christmas selling or their climate is so mild they can do business year-round. Your pro­jections must reflect seasonal variables in order to be accurate.

Don’t take it personally if, in the end, your income projections are a wee bit lofty.

List of Considerations for Business Projections

Income

In order to determine your income you must know what it costs you to produce your product. When you know this, you can figure what you will charge your retail and/or wholesale customers. Then you have to realistically calcu­late how much product you will be able to generate in a year, given your resources. When you know this, you can estimate your potential income with the assumption that you will sell what you produce. The only advice I can offer here is to try to be as pragmatic as possible. It is rare that a horticulture busi­ness sells everything it produces, but this may have more to do with the whims of the nursery business than with the quality of your product.

Production Costs/Cost of Goods Sold

Note: This is the calculation of how much it costs you to pro­duce each unit (6-pack, 4-inch, 6-inch, quart, gallon, hanging basket, etc.) so you truly know how much to charge your cus­tomers in order to make a profit. It is imperative to know this so your bottom line is not a surprise at the end of the year.

Soil. Whether you buy pre-mixed soil or make your own with individual components, you must calculate the cost of soil per unit. In other words, how much does the soil cost you per each container (6-pack, 4-inch, 6-inch, gallon, etc.).

Containers. You need to know the cost of each container (6-pack, 4-inch, 6-inch, gallon, etc.) in order to know (along with the cost of soil) what each unit costs you to produce.

Labels. Calculate the cost of each label and apply it to each unit to be produced for sale.

Seed. If you plan to grow any plants from seed you must assess a value and apply it to the overall cost. At best it is esti­mation because there is no way to calculate the cost of indi­vidual seeds unless they are big and pricey.

Plant Material. If you plan to buy starter plants (plugs, rooted cuttings, stock plants, etc.) this outlay needs to be added to the cost you calculate for plant production. These starter plants may be convenient, but they will drive up your costs.

Plant Losses. You will have plant losses. If you are just starting out you might want to plug in a generous allowance (say 20-30 percent). Plants can be lost to lack of experience, insects, disease and acts of God (try a hail storm). Your losses may be more or less than average, but it is better, when doing cost projections, to err on the side of higher projections. Then, if you do better than you projected, you will have a more accu­rate percentage to work with the next year.

Ancillary Costs. This can be anything from holiday nurs­ery pics and pot covers to container sleeves. Anything you plan to send out with your plants, even if it is seasonal, should be counted here.

Expenses

Note: These are ongoing expenses (monthly, quarterly or annual) not one-time expenses.

sheet with calculator
You can decide either on an annual bud­get amount that is pro-rated monthly, or a variable expense that fluctuates with the time of the year or season.

Utilities. You must estimate electricity, water, heating fuel (propane, natural gas, etc.) based on average expected cost dur­ing different times of the year. For instance, in Texas heating fuel will likely only be used three or four months out of the year unless you have a water heater in addition to a heating unit. Electricity will, on average, be higher during warmer months if you have exhaust fans or a water wall in your green­house. Water will be two to three times higher during the warmer months, not only because of increased evaporation, but you will likely have the most plants during the warmer months and therefore be watering more.

License/Permit Fees. Any fees you pay your state depart­ment of agriculture (or health department) for your nursery/ floral, market, food handling, or organic certification.

Office Expenses. Any ongoing expense related to operating your business from your office. Postage, paper, pens, paper­clips, business telephone, long distance business charges, Internet services, business equipment rental, etc. In this cate­gory you also want to budget notebooks and clipboards for record keeping in the production area, and marking pens for writing on pot tags.

Advertising. This covers expected costs of business cards, fliers, publication ads, help-wanted ads, etc.

Dues and Subscriptions. Annual membership dues and fees for industry-related organizations or publications.

Professional Development. Anticipated budget for indus­try-related conferences, trade shows or other educational opportunities to further your knowledge of the business.

Insurance. Anticipated cost of insurance related to busi­ness liability, health, automobile, trailer or workman’s comp.

Vehicle. Budget amount set aside to pay for repairs, main­tenance and fuel for your business vehicle(s). You might want to budget a monthly allowance that reflects higher usage at certain times of the year.

Sales Tax. If you plan to do any retail sales, you will have to estimate how much you will be selling in “non-food” plants. Texas, for example, has a very narrow definition of food plants, so you will have to check the laws in your region. In many places, herbs in pots are taxable.

Bank Fees. Any service charges or check printing costs applied to your business account by the bank.

Interest Expenses. This is your estimated budget on any business related interest (loans, vehicle payments, credit cards) you will owe during the projected time frame. Generally you can get this information from your loan amortization schedule.

Loan Principal. This is the estimated budget for principal costs associated with loans related to the business. Again, you can get this information from your amortization schedule.

Auxiliary Production Materials. This will include fertiliz­ers, pesticides, or other pest control costs such as beneficial insects, sticky traps, pheromone traps, etc.

Employee Expenses. You will need to estimate your pay­roll expenses, which includes Social Security and Medicare taxes. These expenses will fluctuate a great deal as you add and subtract employee hours from peak production times like spring and fall to slower times like mid-summer and winter.

Professional Fees. For a business this will usually be service by a CPA. It could also be for attorneys or business consultants if you foresee using either during the projected period.

Market/Stall/Booth Fees. If you plan to do retail sales at plant shows, flea markets, farmers markets, etc., you will need to estimate your expenses for booth/stall rental and associated fees (electricity, water, chairs, tables).

Building Rental. This is any expense for rental of a struc­ture necessary to the business such as a retail shop, storage building or office space.

Travel Expenses. Business-related overnight lodging and meal expenses for conferences, trade shows, plant shows, obtaining supplies, etc. If you know ahead of time what out-of-town excursions you will be taking, it should be relatively easy to budget these expenses.

Tools/Equipment. Budget an amount that covers any of the anticipated supplies in this area that would be necessary for production. These might include garden tools, pruners, trowels, pumps, sprayers, carts, hand trucks, hoses, cut-off valves, hose-end sprayers, etc.

Miscellaneous Supplies. This category might include things like dish soap, hand soap, bleach (for disinfection), mops, towels, scrub brushes, brooms, trash containers, plastic tubs or anything that you can think of that will be used regu­larly in the work area.

Owner Pay. If you plan to give yourself an income from the business, then put this in the budget. If there is not enough projected income to allow for your salary, then you had better have another way to pay your personal bills because they should not come out of the business income.

income equation

The spreadsheet provided is a mock projection sheet for a fictitious business to give you an idea of how to plan and implement one for your own business. This exercise is the most important one you can do to determine if you are indeed ready to take on the responsibility of a business. Simply plug in your own items and numbers, and do the math.

spread sheet
The numbers tell the truth about the viability of this busi­ness.

It might be helpful to use a computer program that assists you in putting these projections on a spreadsheet. Many business programs will help you see into the future by projecting cost/expense versus income over a three- to five-year period. You could, of course, do this by hand with a calculator and a grid sheet, but what a brain strain. Again, it depends on your resources. If you have lots of time and no computer, the choice is obvious. Either way, it must be done in order to have a realistic idea of what you are facing in the birth and growth of your business.

If you are financing your business with a loan, you should be armed with reasonable expectations of what your business is capable of doing in a three- to five-year period. This is impor­tant to the lending institution because they want to know how the heck you are going to repay their loan. Most won’t lend money on projections alone. This is where it gets sticky. You may have to prove that you have income outside the business that will support loan payments until the business is able to sustain that financial burden on its own. No doubt you also will have to have some pretty fancy collateral. Horticultural businesses are notorious for being bad risks to moneylenders. A failed nursery business isn’t worth much in the open market and broken down into pieces is worth even less.

Again, I am not trying to dissuade you. I am just trying to help you see the challenges you face if you choose one path over the other. Any way you go, breaking down your costs is a very healthy exercise and reality check. Unfortunately people who get into the plant business are generally not number-oriented folks, but it really is an important step in implementing your plan. I think it is a good idea to educate yourself on building and maintaining a small business by reading books on the subject or attending workshops or classes (many are held by IRS, the SBA, and local business associations). Some community colleges offer evening classes by local business people on small business management, but many offered by government or small businesses associations are free. The more you learn ahead of time about profit and loss statements (P&Ls), a chart of accounts (breaking down income and expenses into meaningful categories), and creating financial statements, the better vision you will have for the future of your business.

Source: Made From Scratch

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