Financial Management

Cost/Return Evaluation

v Costs and returns must be evaluated before deciding to begin or expand a nursery operation in order to determine if it is economically feasible.

v Assets, capital required and costs need to be considered.

Determining Costs

Cost of production estimates will help in making management decisions regarding:

v Scheduling of operations

v Changes in cultural practices

v Pricing

Determining Costs

v Estimating costs will be easier for nurseries with a small product mix.

v Nurseries with a more diverse product mix place species in cost groups based on similar cultural practices and production schedules.

Factors Affecting Costs

v Number of plants needed to meet market objective

v Time and space required

v Labor required

v Supplies, facilities and equipment

v Capital required to finance operation

v Efficient use of the above inputs (related to manager's skill)

Determining Costs

v Intuition

v Records of actual costs

v Projecting future costs

In-the-ground Cost

v This will allow estimation of the value of the crop only. Selling at this price will be below cost of production.

v Cost of producing the crop itself

v Plant, labor and material cost

Price-list Cost

v includes all costs included in in-the-ground cost plus overhead costs (admin. & management salaries, taxes, utilities, land, equipment).

v This will allow estimation of the cost of production.

v Selling at this value will be the break-even price.

Interest

v Cost of money

v Always included in costs even if self-financed

Determining Profit

v True profit is generally calculated by estimating sale value of the crop minus all expenses involved in producing the crop.

Sale Value

v Estimated since selling price will not be known until agreement is made between buyer and seller.

v Factors affecting sale value:

v Environment (harsh winter killing off more than expected; new disease killing off plants could either raise or lower value)

v National economy (increased interest rates = lower housing starts and fewer home improvements = less sales = lower prices)

v Supply/demand (overproduction by industry, change in consumer preference).

Forced-sale Value

v The lowest price the producer will sell at if forced to sell the plants

v Usually at or somewhat below cost

v Selling below cost allows for recuperation of some of the costs of production

Estimating Cost of Production

v Labor

v Materials

v Overhead

v Interest

Cost-Sales Analysis

v Using cost of production estimates and sales records you can determine the profitability of producing your crop.

Discounted Cash-Flow Analysis

v Sets all costs/sales to year 0 values and determines an interest rate that results in a zero net cash flow.

v This allows calculation of the return on investment. Interest table p. 519.

v You can pre-determine an amount of interest you want or need to make on your investment (total cash flow will be > 0)

v Can calculate the interest instead of guessing as in book. Equation:

v ($Net cash flow year 0)/(1 + i)n + ($Net cash flow year 1)/(1 + i)n + 1 + etc

v Where i = interest rate, n = year #. Solve for i.

v The higher rate of return you expect the faster you need to sell your product since the present value of future earnings drops faster with higher interest rates.

Handouts:
Cost of Production
Cost-Sales Analysis
Discounted Cash Flow

Financing a Nursery

v There is always a cost involved in acquiring funds, whether its interest or loss of some decision making freedom.

v There are 3 general sources of funds available to begin or expand a nursery operation.

1. Owner’s Savings

2. Borrowed funds

v Loans

v Invested money (partners)

v Contract growing

3. Contract Growing

v Contracting to produce a crop at a set price for another firm.

v Done in return for financing of (or supplies for) the production costs along with some profit.

v The benefits are to both parties involved in the contract with financial support and a guaranteed market for the grower and a guaranteed crop and price to the purchaser

v Sometimes these contracts involve sharing of management decisions.

Sole Proprietorship

v You and business are the same

v Only one owner

v Taxed as a single entity as an individual

v Unlimited personal liability- personal assets as well as business assets at risk

Partnerships
General Partnership

v Equally involved in operation of the nursery regardless of initial cash investment, some other expertise may be supplied instead.

v Partnership agreement: it is usually best to have specific responsibilities for each partner to reduce conflicts and provide a more efficient operation.

v Partners supplying only funds but without expertise in plant production can become a liability in the future if they try to make decisions regarding production.

General Partnerships

v Partners and business are the same

v Dissolution of partnership- withdrawal, death

v Multiple owners with equal rights and responsibilities

v Taxes split among partners

v Personal liability equally distributed among partners- personal assets as well as business assets at risk

Limited Partnerships

v Partnership agreement defines responsibilities of each partner

v Usually results in almost complete control of the operation by the principal partner(s) (General Partner)

v Unlimited liability for general partner

v Limits liability of other partners (Limited Partners)

v Taxes split amongst partners

v This type of partnership is most easily created by established firms or experienced managers since the performance is known.

C and S Corporations

v A separate legal entity

v Tax returns

– Separate return if C corp

– Filed as share holders if S corp (limited number of share holders)

v Limits personal liability

v Issue stock- Share holders

v Fringe benefits

v Tax benefits

v File Articles of Incorporation to create

Limited Liability Company

v Limited personal liability

v Taxed through members tax returns unless elect to be taxed as a corp

v Very flexible management structures

v Flexible distribution of profits and losses

v Fringe benefits not as flexible

v File Articles of Organization to create

v Hard to go public or offer employee incentive- no stock