how to increase your profits through benchmark analysis
DESCRIPTION
How to Increase Your Profits Through Benchmark Analysis. Dr. Charlie Hall Ellison Chair in International Floriculture Texas A&M University [email protected]. Dr. Paul A. Thomas Professor & Extension Specialist University of Georgia [email protected]. Today’s Topics. - PowerPoint PPT PresentationTRANSCRIPT
Dr. Charlie HallEllison Chair in International FloricultureTexas A&M [email protected]
How to Increase Your Profits Through Benchmark Analysis
Dr. Paul A. ThomasProfessor & Extension Specialist
University of [email protected]
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Is this your first time at Farwest?
1. Yes2. No
Yes No
73%
27%
Years in business?
1. Less than 12. 1 to 53. 6 to 104. 11 to 205. More than 20
1 2 3 4 5
0%
11%
67%
20%
2%
What is your age?
1. Under 302. 30 to 493. 50 to 654. Over 65
7%
55%
38%
0%
1 2 3 4
Marketing channels?1. Wholesale
grower only2. Wholesale and
retail grower3. Retail grower
only4. other
Wholesa
le grower only
Wholesa
le and retail g
r...
Retail gro
wer only
other
43%
6%
24%28%
Operating season?
0%
0%
1 2
1. Year-round2. Seasonal
Type of business?1. Sole
proprietorship2. Partnership3. S-corporation4. C-corporation
26%
23%29%
23%
Sole proprietorship Partnership S-corporation C-corporation
10%
14%
6%
39%
31%
Business composition?1. Greenhouse only2. Greenhouse and nursery3. Greenhouse & florist4. Greenhouse & vegetable5. Other
10%
10%
15%
19%
20%
26%
Square feet of bench space?
1. Less than 50,000 ft2
2. 51-100,000 ft2
3. 101-250,000 ft2
4. 251-500,000 ft2
5. 501-1,000,000 ft2
6. More than 1,000,000 ft2
Which of these problems is most threatening to your business?
1. Low output or slow crop growth
2. Undercapitalization3. Poor pricing4. High labor cost5. High materials cost6. Waste or overuse 7. Poor cash flow8. Other9. Don’t know
5%
11%
8%
19%
5%6%
17%18%
12%
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
How have the economic conditions (and the weather) played out for the green industry?
Hypercompetition!
My best anecdotal estimates:
About 15% of firms have already exited the industry.
About 35-40% of those left are holding steady (flat sales).
About 40-45% have had declining sales and are just hanging on.
The last 15-20% or so have increased sales (& profits) during this time period.
Hypercompetition strategies
innovate and reduce costs within the supply chain.
tweak existing or develop new value proposition(s).
have enough financial capital to outlast competitors.
When times are tight,cash is king!
The imperative: Keep score!
Major score keeping areas include:
Financial – e.g. return on assets, sales volume, and gross profit.
Operational – e.g. labor utilization rates, quality and safety measures.
Educate employees about the correlation between these metrics and profit.
Importance of benchmarking
Companies who benchmark achieve 69% faster growth and 45% greater productivity than those who don’t.
PWC Trendsetter Barometer Survey
You can’t manage what you can’t measure!
Types of benchmarking
Time series analysis – comparing your own firm’s performance against a previous time period (previous quarter, this quarter last year, etc.)
Cross sectional analysis – comparing your firm’s performance against similarly-sized firms in the industry.
OFA Bulletin May/June 2008
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Adopting Operational Benchmarks For Long Term Success
2009 OFA ShortCourse
Credits: Thank you Wen Fei and Steven!
New York Greenhouse Business Summary and Financial Analysis. Pub. EB-2003-12
Wen-Fei Uva and Steve Richards, 2003
What I will cover:
Labor EfficiencySales and Marketing
Crop Production
Why Look At Operational Benchmarks?
• Many financial parameters are based on operational expenses and outputs.
• Small improvements in outputs, sales and reduction of losses (shrink) can have significant impact on financial outcomes.
• Operational benchmarks are essential to management and staying on track!
How many weeks is your operation open for business?
1 2 3 4 5
5%11% 13%
7%
64%
Answer Number
1. 11 (Spring Only)2. 22 (Spring/Fall)3. 52 (Full Year)4. 26 (Half Year)5. 44 (Eleven Mo.)
How many full time employees do you have?
1 2 3 4 5
10%
25%
41%
11%14%
Answer Number
1. One2. 63. 124. 245. Over 24
How many supervisors manage those employees?
1 2 3 4 5
20% 20%
29%
17%
14%
Answer Number
1. One2. Two3. Three4. Four to Five5. Over 5
How do you pay your “worker bees” ?
1 2 3 4 5
94%
0%4%
0%1%
Answer Number
1. Hourly Wage2. Piece Work3. Task Unit4. Sub-Contract5. Familial Slavery
Small Changes Add Up!
Several simple changes may bring you back to profitability.
Change in Profit to a 1% Increase in:
ParameterYield Production IncreaseLabor HoursLabor Cost (Wage)Equipment InvestmentManagement CostPackaging CostsFuelInterest Rate
Change+ 26.90 %+ 24.63 %- 7.17 %- 5.25 %- 4.18 %- 3.93 % - 2.28 %- 2.18 %- 0.97 %
Source: Kirschling and Jensen, 1974
Crop Production Metrics• Units Produced / Person, Team, Line
• Units Per Hour / Person, Team, or Line
• Waste Units / Person, Team, or Line______________________________________
• Percent Loss by Crop or “% Shrink”
Number units Invoiced / Number units produced.
Example: 45,906 sold / 58,424 produced = 0.786 = (1 - 0.786) = 21.4% shrink!
Dollars and Sense
• Examples: (5% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,790.50 Cost of growing = $2,650 Net profit = $1,140.50
Profits reduced by$199.50 or 17%
Roberto Lopez, Purdue Univ. and Brian Krug, Univ. of New Hampshire
Dollars and Sense
• Examples: (10% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,591 Cost of growing = $2,650 Net profit = $941
Profits reduced by$399 or 42%
Roberto Lopez, Purdue Univ. and Brian Krug, Univ. of New Hampshire
Dollars and Sense
• Examples: (15% shrink) Grow 1,000 - 4 ½ annuals Selling price = $3.99 Gross revenue = $3,391.50 Cost of growing = $2,650 Net profit = $741.50
Profits reduced by$598.5 or 81%
Roberto Lopez, Purdue Univ. and Brian Krug, Univ. of New Hampshire
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
What are the red flag warning signs signaling those in trouble?
Are you having difficulty meeting your bills in a timely manner, indicating cash flow problems?
1. Yes2. No
Yes No
65%
35%
Are you experiencing a shrinking market for your product?
1. Yes2. No
Yes No
57%
43%
Are you frequently losing customers?
1. Yes2. No
Yes No
89%
11%
Is there an increase in customer complaints, revealing that your business is failing to meet their needs?
1. Yes2. No
Yes No
93%
7%
Do you find that inventory levels are climbing faster than sales, and you are building up more inventory than sales warrant?
1. Yes2. No
Yes No
60%
40%
Is your company highly leveraged and thinly capitalized? Does your bank have more at stake in your business than you do?
1. Yes2. No
Yes No
69%
31%
Do you have essentially a one-person management team? Is your company overly dependent upon any one person?
1. Yes2. No
Yes No
49%
51%
Is your business suffering from poor management communications? Are decisions not being disseminated down from the top?
1. Yes2. No
Yes No
50%50%
Are you making decisions based on poor or inadequate managerial information (e.g. on sales levels, growth and aging of accounts receivables, inventory turns, etc.
1. Yes2. No
Yes No
64%
36%
Is your company very late in producing financial statements?
1. Yes2. No
Yes No
56%
44%
Are you experiencing sales growth but no growth in net income?
1. Yes2. No
Yes No
70%
30%
Do you have a tight grip on expenditures, or is your company committing to expenditures before cash is in hand?
1. Yes2. No
Yes No
37%
63%
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks
Paul
Strategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Benchmarking Operational Metrics
Each operational metric is based on, and will tie into, the financial metrics to be used by your company.
Labor metrics are assessed by work unit / process
Benchmarking Operational Metrics
External benchmark metrics are useful for establishing company to company comparisons, if you can find benchmarks for a industry segment similar to yours.
Internal or “historic” metrics are the most useful guides for assessing improvements to efficiency, organization, production flow and marketing.
Example: Ask Yourself....
• Is my transplant line managed effectively?
• Is my shipping department efficient?
• Are my sales team leaders meeting goals?
• Am I meeting company conservation goals?
• How much room do I have for improvement?
Example: Transplant Line MetricsWhat Do I Need to Know?
• Line production per day or per hour.
• Productivity per person, per day or per hour.
• Overall labor cost / hourly cost
• Number of labor hours utilized by crop.
• Loss (shrinkage) at transplant line by crop.
Productivity Assessment
020406080
100
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 3
Line 1Line 2Line 3
In-Series Task Process
Do You Seed Or Transplant Using Human Labor?
Yes : Ju
st my...
Yes : 2-10 W
...
Yes : 10-15 W
o...
Yes : 15 + W
...
No – I’m auto
m...
5%
51%
5%
19%21%
Answer Number
1. Yes : Just my family2. Yes : 2-10 Workers3. Yes : 10-15 Workers4. Yes : 15 + Workers5. No – I’m automated!
Productivity Assessment
76 75 74 66
020406080
100
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 3
Line 1Line 2Line 3
In-Series Task Process
Poor Pace Setter
Poor Line Manager62%
52%
28%
Productivity Assessment
020406080
100
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 3
Line 1Line 2Line 3
Independent Task Process
Do You Regularly Track Employee Efficiency?
Never
2-4 times a ye...
Monthly
Weekly
Daily
42%
30%
8%7%
13%
Answer Number
1. Never2. 2-4 times a year3. Monthly4. Weekly5. Daily
Productivity Assessment
020406080
100
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 3
Line 1Line 2Line 3
Independent Task Process (Piece Work)
Profit Killers
Best Employee!Horrid Placement !
So What?
Let’s assume we have a production goal of 12,000 units / day. (4000 units per line…or 500 units / hour)* Hourly wages are paid @ $10.50 per hour.
Line 1 = 4,000 * 0.28 = 1,120Line 2 = 4,000 * 0.52 = 2,080 5,680 per day Line 3 = 4,000 * 0.62 = 2,480
12,000 / 5680 = 2.11 (days) * 8 hr = 16.9 hoursLine efficiency is only 47.3% !!!!!Cost = 12 employees * $10.50 * 16.9 = $2130.00
*Based upon previous performance standards!
So What? …………..5680? Can we do better? Probably! Let’s assume we can impart a 20% increase in
productivity (units) by rearranging personnel in the lines: Yield = 8040 Units
Let’s also assume we can increase productivity by 20% by re-training or replacing poorly performing employees: Yield = 10440 units
12,000 / 10440 = 1.15 * 8 = 9.20 hours to complete the job!
12 employees * $10.50 * 9.20 hours = $1159.00
$2130.00 – $1159.00 = $971.00 savings ….(in one day!)
21 3 4In Out
Production Line Management
Where Do Your Place Your Slowest Worker?
At the end of ..
.
In th
e front o
...
At whateve
r po...
0% 0%0%
15
Answer Number
1. At the end of the line with the manager at the end point.
2. In the front of the line with the manager at the front.
3. At whatever position has the weakest employee
Where Do Your Place Your Slowest Worker?
A. At the end of the line, with the line manager positioned at the end point.
21 3 4In Out
Manager Here!
This allows the manager to monitor overall output, the slow employee and line pace!
Are We Done?
• What if I cleaned house and eliminated a transplant line? Can I do the whole job for the same money in the same # of days?
• Could I actually get rid of one supervisor’s salary?
Do you think it would be more efficient to eliminate one
transplant line?
1 2 3
64%
18%18%
Answer Number
1. Yes2. No3. Don’t know.
Productivity Assessment
0.0020.0040.0060.0080.00
100.00
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 3
Line 1Line 2Line 3
Independent Task Process
Positions to be eliminated!
Productivity Assessment
0.0020.0040.0060.0080.00
100.00
Pos 1 Pos 2 Pos 3 Pos 4
Line 1Line 2
Line 1Line 2
In-Series Task Process
66%
68%
Reconfigured In-Series Process = 67% average efficiency(assumes training, and effective management implemented)
Eliminating a Transplant Line? Two lines operating at 67% efficiency yields 8040 units per day.
12,000 / 8040 = 1.49 @ 8 = 11.94 hours
8 Employees * $10.50 * 11.94 hours = $1002.28
Our previous best was $1159.00…We can get the job done for $157.00 less by firing four employees and only running two transplant lines!!!!
……..and we free up a supervisor!
Benchmarks?
In this example you would set your new benchmark at 67 % efficiency and explore!
Track production (by task) to get perspective.
Reward managers that exceed a benchmark
Troubleshoot if productivity fails to reach a benchmark at any point in the future.
Tracking Benchmarks Visually
0
10
20
30
40
50
60
70
80
90
100
Snaps Pansies Dianth Vinca Salvia Begonia
Line 1Line 2
Task
Pro
duct
ivity
per
line
Transplant Operations???
If the production issue cannot be fixed……What should I do?
Incre
ase assig...
Decrease
# uni...
Incre
ase # uni...
Fire th
e manag
...
61%
17%17%
6%
Answer Number
1. Increase assigned cost 2. Decrease # units goal3. Increase # units goal4. Fire the manager!
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
What is different about the high performing firms?
10,000 hour rule
The key to success in any field is simply a matter of practicing a specific task for a total of 10,000 hours.
Source: Outliers, Malcomb Gladwell
How do they spend those 10,000 hours? They analyze resources &
capabilities to determine competitive advantages.
They tear apart the value chain and reengineer to reduce costs (lean flow).
They implement effective financial management practices (benchmarking, etc).
How often does your company review its financial situation?
1. Daily2. Weekly3. Monthly4. Quarterly5. Semi-annually6. Annually7. Every few years8. Never
4%
18%
43%
0%0%
9%10%
16%
Who do you most rely upon for financial information?
1. Accountant2. Bookkeeper or
own system3. Consultant4. Banker or lender5. Owner(s) or
yourself6. None of above
14%
48%
0%
37%
0%2%
Financial Ratio AnalysisApplying analytical techniques to financial statements and other relevant data to produce information useful for decision making.
Three Issues :
Financial analysis:
Focus
In general, each financial ratio is closely related to one of these three fundamental issues.
Profitability, Liquidity, Safety (Solvency or Risk)
One of the most important tools of financial analysis is the:
Profit margin
Asset turnover
ROI (ROA)
= x Leverage factor
= ROE
Strategic Profit Model
Net profitNet sales
x Net sales
Total assets
Net profitTotal assets
x Total assetsNet Worth
Net profitNet worth
x
Spreadsheet version of the strategic profit model
Spreadsheet version of the strategic profit model
Spreadsheet version of the strategic profit model
ROIC of selected industries
ROIC > Cost of capital = value created
Nursery grower 3.9% / 24.1%
NY Greenhouse growers 7% / 40%
ROIC = (net income – dividends)/capital
Design/Build Firms 14.2%
Maintenance Firms 16.3%
The bottom line…
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Operational Profitability
• Net Income per Square Foot per Week Net Income / GH Sq. Ft. X Weeks in OperationThis adjusts income / sq. ft. for different lengths of operations.
$0.034 per sq. Ft greenhouse space / week
Operations
• Labor As A Percent of Sales Total Labor Cost / Total Variable CostsThis is an indirect measure of labor efficiency and cost efficiency.
$159,890 / $589,980 = 0.22 or 22.0%
• Operating Expense Ratio Total Variable Costs / Total RevenueThe average % of sales price needed to cover direct costs of crop.
$440,768 / $589,890 = 0.71.7 or 71.7%
Production Efficiency Metrics
• Worker Equivalents. Total # of labor hours / year divided by 2760 (55h per week)This accounts for part-time labor and temporary workers.
(8 wkrs x 51wks x 40hr) + (19 pt-wkrs x 36 wks x 20hr) =(16,320 hours + 13,680 part hours) = 30,000 hours30,000 hours / 2760 hours = 10.8 worker equivalents!
New York Greenhouses averaged 8.9 FTE Worker Equivalents for the average 40,000 sq. ft greenhouse.
Production Efficiency Metrics
• Net Income per Worker Equivalent Net Income / Number of Equivalent Workers
This measures how well labor is used to generate net income.
$8,065.00 per worker equivalent is average.
• Sales per Square Foot Total Sales / Sq. Ft. Production Space
This establishes how well use is used to generate sales
$14.00 is the average for NY Greenhouses
Production Efficiency Metrics
• Square Feet per Worker Equivalent Sq. Ft Production / Number of Equivalent Workers
This is an indirect measure of worker efficiency / responsibility.8,502 sq. ft per FTE worker
• Greenhouse Area per Operator Total Sq. Ft. Space / Production Managers
An indirect measure of how efficiently the greenhouse is managed1.2 FTE-Managers per 40,000 sq. ft operation
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Current Ratio = Current Assets ÷ Current Liabilities
Ideal level? – 2 : 1 A ratio of 5 : 1 would imply the firm has $5 of
assets to cover every $1 in liabilities A ratio of 0.75 : 1 would suggest the firm has
only $0.75 in assets available to cover every $1 it owes
Too high – Might suggest that too much of its assets are tied up in unproductive activities – too much inventory, for example?
Too low - risk of not being able to pay your liabilities.
Current ratio
Quick (acid) ratio
(Current assets – inventory) ÷ liabilities 1:1 seen as ideal The omission of inventory gives an indication
of the cash the firm has in relation to its liabilities (what it owes).
A ratio of 3:1 therefore would suggest the firm has 3 times as much cash as it owes – very healthy!
A ratio of 0.5:1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world!
Financial ratios 4 Growers
Ratio Calculation ValueCurrent Ratio Current Assets/Current Liab 2.0 or >Quick Ratio (Cash+AR) ÷ Current Liab. 1.0Debt to Equity Total Liab ÷ Net Worth 1:1EBIT to Total Assets EBIT ÷ Total Assets 2+% > CoCTimes Interest Earned (EBT + I) ÷ Interest 6-8XCash to Currrent Liab. Cash ÷ Current Liab 10-20%Sales to Working Capital Net sales ÷ (CA - CL) varies
Asset productivity ratios
Average Collection Period AR ÷ (Credit Sales ÷ 365 days) 1.3x termsInventory Turnover COGS ÷ Average Inventory variesInventory Holding Period 365 days ÷ Inventory Turnover variesSales to Fixed Assets Net Sales ÷ Net Fixed Assets varies
Employee productivity ratios
What is Liquidity?
Liquidity – One of the most important things we will talk about today. Banker’s analyze it by first looking at your working capital.
Working Capital = Currents Assets – Current Liabilities Every business has a minimum WC
requirement for two reasons:1) To pay bills on a timely basis2) To provide a proper collateral margin for
your line of credit
Hat tip to Barry Sturdivant, Bank of The West
Typical Balance Sheet
Current Liabilities
Long-Term Liabilities
Net Worth
Current Assets
Fixed Assets
Long-Term Investmentsand Other LTA
Assets = Liabilities + Net Worth
Company with Adequate Working Capital
-- Seasonal increase & decrease in A/R & Inventory. Corresponding increase & decrease to revolving line of
credit used to finance seasonal increase to trading assets and later get repaid from collection of A/R.
(Fixed Assets & Long-Term Investments)
(Long-Term Liabilities)
(Net Worth)
Working Capital
What happens if working capital level is inadequate?
Banks need one or both of two things:1. Have the RLOC brought to a zero
balance; and/or2. Have the RLOC remain within
borrowing base parameters.
(Fixed Assets & Long-Term Investments)
(Long-Term Liabilities)
(Net Worth)
Working Capital
(1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3)
(2)
1. Working Capital You Need2. Working Capital You Have3. RLOC isn’t getting paid, or Trade
isn’t being paid on time.
How do you know if your working capital is inadequate?
You can’t pay bills on a timely basis
You don’t have enough availability on your line of credit
How is a working capital deficiency corrected?
Working Capital can only be impacted by changes in the long-term portions of the balance sheet and how they affect the cash level.
Option #1: Sell fixed assets and use cash to pay creditors or invest in additional trading assets.
New Level of Fixed Assets
(sell $1MM of fixed assets and use cash to pay down the line of credit)
(Long-Term Liabilities)
(Net Worth)
Old Level of Working Capital
New Level of Working Capital
Old Level of Fixed Assets
Option #2: Incur additional term debt
Fixed Assets
Old Level of LTD
(Net Worth)
Old Level of Working Capital
New Level of Working Capital New Level of LTD
1) This option simply moves short-term debt to the long-term section of the balance sheet.
2) To do this you must have term debt borrowing capacity which is determined by profitability, cash flow, collateral and net worth position.
Option #3: Increase Net Worth
Net Worth can be increased in these ways:1)Sell part of your company to an investor2)Inject your own cash3)Generate additional earnings
(Fixed Assets & Long-Term Investments)
(Long-Term Liabilities)
(Net Worth)
Working Capital
Option #4: Decrease your WC requirement
This is done by lowering your investment in trading assets. In other words, instead of building your working capital level, you lower your working capital requirement to meet your level.
1)Increase Inventory Turnover2)Increase A/R Collections
Fixed Assets
Level You Have
Level You Need (Long-Term Liabilities)
(Net Worth)
A few last words on working capital A lack of cash will get you into trouble
before a lack of earnings. Although you should take trade discounts,
be careful not to do so at the expense of not having cash when you need it most.
Banks are less likely these days to bail you out during the production and shipping season with an increase (even temporary) to your line.
If banks do come to your aid, it will likely involve fees and a rate increase.
Conserve Your Cash!
Delay non-strategic investments. Refinance what they can. Exercise the full length of credit
terms. Sell unused assets (if possible). Apply for credit long before it is
needed. Reduce estimated tax payments. Review insurance premiums. They aggressively manage
working capital (liquidity).
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Sales and Marketing Metrics
How Many Employees Work As Sales Reps For You?
1 2 3 4 5
78%
16%
3%2%2%
1. One – Three2. Four – Six3. Seven- Nine4. Ten to Fifteen5. Over 15
Answer Number
Salesperson Performance
010203040
506070
2001 2003 2005
Mike Roger Pam
Year
Gen
erat
ed S
ales
$1
,000
Who Was The Most Consistent Sales Person?
Pam Roger
Mike
92%
0%8%
Answer Number
1. Pam2. Roger3. Mike
Salesperson Performance
010203040
506070
2001 2003 2005
Mike Roger Pam
Year
Gen
erat
ed S
ales
$1
,000
Pam is !
Graphs alone are hard to interpret!
Who Would You Fire If You Had to Cut Back?
Pam Roger
Mike
2%
91%
8%
Answer Number
1. Pam2. Roger3. Mike
Tracking Temporary Effects
0100200300400500600700
Janu
ary
Febr
uary
Mar
ch
Apr
il
May
June
July
Aug
ust
Sept
embe
r
Oct
ober
Nov
embe
r
Dec
embe
r
200720062005
Thou
sand
s of
Dol
lars
Drought / Watering Bans
Two, Cool, Sunny
Weekends
Three rainy Weekends
Southern Living Promotion*
Sal
es
Rainy Weekends
Customer Metrics
• Units Rejected by Customer / Week
• Customer Complaints / Week
• Follow-up Customer Contacts Made
• Consecutive Years as Customer
• Percent of Total Sales per Customer This is best used by wholesalers who sell to
large clients. More than 35% to any one customer is not good!
Sales Metrics• Percent New Customer Total new customers / Total customers that year This is a direct measure of customer base growth
21 / 74 = 28% New Customers
• Percent Customers Dropped / Lost Total New Customers / Total Dropped Customers
This is a direct measure of customer turnover.
17 / 74 = 22% Customer Base Loss
Net Increase In Customer Base: 5%!
Sales Team Metrics• New Contacts / Week
Total number of new contacts / Number of weeks of sales event. … or number of sales weeks / year.
This is a direct measure of sales team efficiency.
• Customer Value Ratio Number of Orders / Dollar Value of Orders
This is an indirect assessment of overall customer value. You can also apply this metric on a per customer basis to evaluate customer base.
Remember, we want customers - not costomers!
Marketing Metrics
• Market Impact (Sales per dollar spent) Total Sales / Market Program CostsSum of advertising, sales expenses, etc.
divided into total sales generated for that particular program. Track every event!
Remember, a marketing program can be divided by market segment, product line, etc. You can track by segment to measure effectiveness that might not show up in overall market assessments!
Marketing Must Have Strategy!
Marketing Benchmarks Allow You to Evaluate
The Effectiveness of Your Strategy and Your Implementation
Marketing Metrics• Program Contact Efficiency
Total Program Costs / # Customers Contacted
• Program Customer Yield Program Costs Per Buying Customer
• Program Product Yield Program Costs / Individual Product Line Units Sold
Marketing Metrics
• Sales per Worker Equivalent Sq. Ft. Production Space / Number of Equivalent Workers
This establishes how well use is used to generate sales
$101,981.00 wholesale gross income / FTE
• Hired Labor Cost as Percent of Sales Cost Of Labor / Total Sales Income
This establishes how well use Labor is used to generate sales
24.1 % is average for NY Greenhouses.
Do You Track Shipping Costs, Routing & Driver Efficiency?
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Answer Number
1. No, Don’t Have Time2. Fuel Costs Only3. Routes & Time4. Driver Efficiency5. Yes - All Three
Are My Shipping Costs In Line With Other Businesses?
The national average for shipping costs is 1.5% of Total Sales. In the greenhouse industry, we average between 2.0 and 2.5%
What’s Included In Transportation Costs?
• Maintenance & Repairs• Freight Bills• Rental Fees• Gas / Oil • Driver Wages• Insurance• Licenses, Fees• Tolls, Tickets• Taxes
Transportation and Shipping Costs are Rising Rapidly
• Transportation Expense Cost of Shipping and Transportation / Total Sales Income
This establishes how well use transportation and shipping technology is used to generate sales
2.0 % is average for NY Greenhouses.
Total shipping costs have increased 87% in the last 5 Years, and predictions are that costs will increase another 30% in two years.
Shipping Metrics• Gallons Fuel Used / Week / Driver
• Miles off Route Distance / Week / Driver
• Percent On-time Delivery / Driver
• Percent Follow Up Orders / Driver
Shipping Metrics• Route Efficiency
Dollars spent per mile
Dollars spent per unit load value
Load value per mile driven
Load value per hour driven
Number of client visits per day
Dollars spent per number clients on route.
Conservation Metrics
• Gallons Water Used / Week
• KWH Electricity Used / Week
• KWH Used Per Dollar Gross Income Generated / Week
• Gallons Heating Fuel Used / Week
• Gross Value In Truck per Shipment
• Per Mile Cost per Dollar Gross Revenue
Do You Track Water Use?
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Answer Number
1. No2. Via Water Bill3. Via Flow Meter4. Via Computer
An In-Line Flow Meter
Human Resource Metrics
• Percent Turnover by Unit
• Percent Turnover Company-wide
• Total HR Expense Accrued Per Employee
• Number of Accidents / Injuries / Disciplinaries
Do You Track: Employee infractions, Sick days, Turn-over?
1 2 3 4 5
0% 0% 0%0%0%
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Answer Number
1. No 2. Sick Days 3. Infractions4. Turn-over/year5. 2 to 3 of the above
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Control Costs!
Costs establish the price floor.Everyone’s costs are different!
Growers have to calculate the costs for their firm!
…or be eaten alive!
Variable Costs - LABOR
“Potting” process generally accounts for 20-25% of total direct labor.
“Care as needed” cultural practices account for about 25% of total labor.
“Harvesting and shipping” process can consume up to 50% of direct labor.Look for the repetitive, tedious, time-consuming tasks and look to automate!
Every time you touch a plant,
it costs money!
Source: J. Bartok, GPN, June 2003.
Variable Costs - LABOR
The Rising Cost of Gettin’ By
• Retail consolidation• Fewer buyers• Oversupply
• Product tags/labels• JIT delivery, setup & care• Barcode/pre-pricing• Returnable shipping
equipment• Pay-by-scan• Take back unsold product• Consistent pricing• Continuous volume
replenishment• Rising input costs (e.g. fuel)• Labor availability
• Retail price pressure• Lowball competitors• Oversupply
• Rising fuel costs• Labor costs (wages) and
availability (H2B)• Increased costs of
materials (top soil, mulch)
• Increased workers’ compensation rates
• Cost of health care insurance
• Increased equipment costs
• Regulatory compliance (air & noise)
The Cost-Price
Squeeze
“These staggering costs have us scared to death”
“We are surviving, but profit-wise, it’s a squeeze.”
“Costs of energy, labor, fumigants, pots, polyethylene, delivery – everything is going up. It’s really beginning to hurt.”
Quotes from article in a trade journal.MAY 10, 1979!
Emotional reactions to rising costs?
Other cost control measures!
Costs establish the price floor. Lower break-even point – go lean. Analyze employee productivity. Lock in energy contracts at lower
rates. Look at long-term distribution
options. Buy in pre-finished and turn the
margin. Do NOT cut marketing expenses!
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Using Virtual Grower
Tools to Help You Make Decisions:
Virtual GrowerRET CanadaMicrosoft ExcelQuickbooksAcademic Software
NC StateRutgersEcke’s
Have You Heard Of and Used Virtual Grower?
Yes but N
ever ...
Yes – Trie
d It...
Yes – Se
veral ...
Yes – Use It
O...
Never Heard of...
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Answer Number
1. Yes but Never have 2. Yes – Tried It Once3. Yes – Several Times4. Yes – Use It Often5. Never Heard of It
It’s Easy To Input Data
Calculated Costs by Month
Generates Reports
Features Virtual Grower 2.0
Allows you to estimate energy costs
Allows you to verify crop / heating schedule
Allows you to play what if on technology upgrades and retrofits.
Allows you to measure / track system efficiencies and weather / cost per hour metrics.
One Little Problem• Our “Example” is based upon data provided to you on
Page 47. Table 34. See “Heating Fuel” = $53,073.00
• Please note that in 2001, the price of No. 2 heating oil was 97 cents / gallon. The 2009, price was 207 cents / gallon. To make this example more “real,” we corrected the fuel cost to reflect price increases.
• The cost of fuel for an average NY Wholesale firm would now be just over $112,000.00 We used a model GH in Virtual grower with a final heating fuel cost of $108,724.00 That should be close enough!
ExampleNew York Greenhouse: 40,000 sq ft - Old Steam Boiler
Heating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 69%Air Exchanges: 1.30 exchanges / hour
No Heat Curtain!
Fuel Types and Prices New York - Oil 2 at $2.07 / gallon
Total Heating Costs: $ 108,724.00Cost per Square Foot: $ 2.17Maximum BTU Draw : 4,340,579 btu’s
Now let’s install a modern Hot water boiler:
ExampleNew York Greenhouse: 40,000 sq ft - Modern
Heating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 78%Air Exchanges: 1.30 exchanges / hour
No Heat Curtain
Fuel Types and Prices New York - Oil 2 at $2.07 / gallon
Total Heating Costs: $ 96,179.00Cost per Square Foot: $ 1.92Maximum BTU Draw : 4,340,579 btu’s
Now let’s install a good quality heat curtain:
Net change: $12,545.00
ExampleNew York Greenhouse: 40,000 sq ft - Modern Hot Water
Heating Schedule Sep 1 to May 1 (60F-72F)Heating Efficiency: 78%Air Exchanges: 1.30 exchanges / hour
Energy Curtain Installed!
Fuel Types and Prices New York - Oil 2 at $2.07 / gallon
Total Heating Costs: $ 68,365.00Cost per Square Foot: $ 1.37Maximum BTU Draw : 4,340,576 btu’s
Net change: $27,814.00
Total Savings = $40,359.00
Annual Heat Curtain Impact
Heat Curtains cost $3.00 / sq.ft. ($120,000.00)
What If We Really Did This? $27,814.00 Energy Savings With Heat Curtain ($15,912.00) Cost of Loan (10 Years @ 6.00%)______________________________________ $11,902.00 Annual Operations Savings
Spreadsheet version of the strategic profit model
Subtract $11,902.00
Improving on Established Benchmarks
The Process Required To Improve Benchmarks
• Define• Measure• Analyze• Plan• Improve• Control
Lean Flow, Six Sigma, DMAIC
Photo
The Process Required To Improve Benchmarks
• Establish Planners (Teams)• Set Team Leaders• Hold Kick-off Meeting – Define Project• Define Metric Segments and Teams• Set Baseline Goals / Metrics Record Keeping!!!!• Establish Timeline for Reports
Define and Organize
The Process Required To Improve Benchmarks
• Document Operations / Product Flow• Define Product to Process Relationships
Transactions, Inventory, Labor, Grow Schedule• Quantify Scrap, Loss, By Products, Rework• Document Hidden Processes
Approval stops, bottlenecks, paperwork, • Define customer-driven capacity• Create new SOP’s, Quality Metrics, Output Metrics
Measure & Collect Data
The Process Required To Improve Benchmarks
• Identify process cells or families• Calculate resources and time for process• Define working groups by task• Create optimized flow pattern• Validate process design• Review future capacity vs business strategy
Analyze Plan
The Process Required To Improve Benchmarks
• Document process, Change layout• Train supervisors working in the process• Implement an employee feedback protocol• Implement employee flexibility & training plan• Create SOP’s and Visual work standards• Verify process meets sales expectations
Improve - Make Physical Changes
The Process Required To Improve Benchmarks
• Reinforcement training / certification• Verify SOP’s implemented at ea. cell / station• Establish metric reporting responsibilities• Implement control via Charts / Graphics• Evaluate upper management compliance• Maintain control of daily operations / work
Control and Maintain
Lessons From Lean Flow
AreaSchedulingProductionLead TimeBatch SizeInspectionLayoutEmpowermentInventory TurnFlexibilityC.O.G.S.
TraditionalForecast - PushSpeculative StockLongLargeSpot SamplingFunctionalLow3-4LowRising
Lean ProcessCustomer Order - PullCustomer OrderProduct SpecificSmall100% at SourceContinuous FlowHigh5-7HighLowering
Today’s TopicsTopic PresenterInformation gathering BothImportance of benchmarking CharlieOperational benchmarks PaulFinancial red flags CharlieProductivity (labor) benchmarks PaulStrategic profit model CharlieCrop production metrics PaulKey financial ratios & working capital
Charlie
Sales & marketing metrics PaulManaging costs CharlieTools for improvement PaulResources Both
Resources
Resources• Virtual Grower – Energy/Production Software• http://www.ars.usda.gov/services/software/download.htm?softwareid=108
• RET Canada – Energy Software• http://www.retscreen.net/ang/home.php
• University of Florida – Financial Resources• http://hortbusiness.ifas.ufl.edu/publications.php
• Cornell University – Benchmark & Financial Software & 2003 Publication• http://hortmgt.aem.cornell.edu/programs/hortbusiness.htm
• Financial Calculators• http://www.financialcalculators.com• http://www.bplans.com/business calculators/
Ellisonchair.blogspot.comFor more information:Ellisonchair.tamu.edu