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How to Increase Your Profits Through Benchmark Analysis

How to Increase Your Profits Through Benchmark Analysis. Dr. Charlie Hall Ellison Chair in International Floriculture Texas A&M University charliehall@tamu.edu. Dr. Paul A. Thomas Professor & Extension Specialist University of Georgia pathomas@uga.edu. Today’s Topics.

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How to Increase Your Profits Through Benchmark Analysis

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  1. How to Increase Your Profits Through Benchmark Analysis Dr. Charlie HallEllison Chair in International FloricultureTexas A&M University charliehall@tamu.edu Dr. Paul A. Thomas Professor & Extension SpecialistUniversity of Georgia pathomas@uga.edu

  2. Today’s Topics

  3. Is this your first time at Farwest? • Yes • No

  4. Less than 1 1 to 5 6 to 10 11 to 20 More than 20 Years in business?

  5. Under 30 30 to 49 50 to 65 Over 65 What is your age?

  6. Marketing channels? • Wholesale grower only • Wholesale and retail grower • Retail grower only • other

  7. Operating season? • Year-round • Seasonal

  8. Type of business? • Sole proprietorship • Partnership • S-corporation • C-corporation

  9. Business composition? • Greenhouse only • Greenhouse and nursery • Greenhouse & florist • Greenhouse & vegetable • Other

  10. Square feet of bench space? • Less than 50,000 ft2 • 51-100,000 ft2 • 101-250,000 ft2 • 251-500,000 ft2 • 501-1,000,000 ft2 • More than 1,000,000 ft2

  11. Low output or slow crop growth Undercapitalization Poor pricing High labor cost High materials cost Waste or overuse Poor cash flow Other Don’t know Which of these problems is most threatening to your business?

  12. Today’s Topics

  13. How have the economic conditions (and the weather) played out for the green industry?

  14. Hypercompetition!

  15. 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.

  16. Hypercompetition strategies

  17. When times are tight,cash is king!

  18. 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 correlationbetween these metrics and profit.

  19. Importance of benchmarking Companies who benchmark achieve 69% faster growth and 45% greater productivity than those who don’t. PWC Trendsetter Barometer Survey

  20. You can’t manage what you can’t measure!

  21. 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.

  22. OFA Bulletin May/June 2008

  23. Today’s Topics

  24. Adopting Operational Benchmarks For Long Term Success 2009 OFA ShortCourse

  25. 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

  26. What I will cover:Labor EfficiencySales and MarketingCrop Production

  27. 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!

  28. How many weeks is your operation open for business? 29 • 11 (Spring Only) • 22 (Spring/Fall) • 52 (Full Year) • 26 (Half Year) • 44 (Eleven Mo.) Answer Number

  29. How many full time employees do you have? • One • 6 • 12 • 24 • Over 24 0 Answer Number

  30. How many supervisors manage those employees? • One • Two • Three • Four to Five • Over 5 0 Answer Number

  31. How do you pay your “worker bees” ? • Hourly Wage • Piece Work • Task Unit • Sub-Contract • Familial Slavery 0 Answer Number

  32. Small Changes Add Up! Several simple changes may bring you back to profitability.

  33. Change in Profit to a 1% Increase in: Change + 26.90 % + 24.63 % - 7.17 % - 5.25 % - 4.18 % - 3.93 % - 2.28 % - 2.18 % - 0.97 % Parameter Yield Production Increase Labor Hours Labor Cost (Wage) Equipment Investment Management Cost Packaging Costs Fuel Interest Rate Source: Kirschling and Jensen, 1974

  34. 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!

  35. 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

  36. 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

  37. 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

  38. Today’s Topics

  39. What are the red flag warning signs signaling those in trouble?

  40. Are you having difficulty meeting your bills in a timely manner, indicating cash flow problems? Yes No

  41. Are you experiencing a shrinking market for your product? Yes No

  42. Are you frequently losing customers? Yes No

  43. Is there an increase in customer complaints, revealing that your business is failing to meet their needs? Yes No

  44. Do you find that inventory levels are climbing faster than sales, and you are building up more inventory than sales warrant? Yes No

  45. Is your company highly leveraged and thinly capitalized? Does your bank have more at stake in your business than you do? Yes No

  46. Do you have essentially a one-person management team? Is your company overly dependent upon any one person? Yes No

  47. Is your business suffering from poor management communications? Are decisions not being disseminated down from the top? Yes No

  48. 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. Yes No

  49. Is your company very late in producing financial statements? Yes No

  50. Are you experiencing sales growth but no growth in net income? Yes No

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