management | 1st of a 9-part series by charlie hall …...sales per sq. ft. of bench space (by...

16 | Greenhouse Management & Production | January 2010 | www.GMProMagazine.com

Management | 1st of a 9-part series

Success in business can be mea-sured in many different ways. The most prominent measures tend

to be cash-fl ow related in that if there is money available at the end of an account-ing cycle, company offi cials typically feel pretty good about what they’ve accom-plished. However, the most prominent, progressive and profi table fi rms tend to be those in which company offi cials continually ask themselves these types of questions:• How are we doing fi nancially?• How do we compare with others?• Are we making progress fast enough?• Are we using the best practices?• Are we tracking the right measures?

Measuring business processesBenchmarking should be the primary method used by companies to answer these questions and to measure/evaluate various aspects of production, marketing and customer service processes in rela-tion to the best management practices in the industry. Benchmarking allows fi rms to develop plans on how to adopt best practices, usually with the goal of in-creasing some aspect of performance.

Reasons to benchmarkA 2003 PricewaterhouseCoopers Trend-setter Barometer survey found that com-panies that benchmark achieve 69 per-cent faster growth and 45 percent greater productivity than those that don’t. Bench-marking is a powerful management tool because it overcomes paradigm blind-ness. Paradigm blindness can be summed up as always thinking: The way we do it is the best because this is the way we’ve always done it.

Companies can use benchmarking to measure various aspects of their business, including production, marketing and customer service.

By Charlie Hall and Paul Thomas

Benchmarking opens fi rms up to thinking about new methods, ideas and tools to improve their effectiveness. It helps break down resistance to change by demonstrating methods of solving

problems other than the one currently employed and demonstrating that these methods work because they are being used by other fi rms successfully.There’s an old managerial adage that

Use benchmarking to measure your company’s success

Table 1. Potential metrics for fi nancial and operational benchmarking

FINANCIAL METRICS OPERATIONAL METRICS

Total annual greenhouse sales Weeks operated per year (by location)

Total greenhouse debtFull-time worker equivalents (labor hours/2080)

Sales per sq. ft. of bench space (by location)

Area per full-time worker equivalent (FTE)

Total sq. ft. weeks per year (# weeks x sq. ft.)

SFW per full-time worker equivalent (FTE)

Income statement line items as a % of sales

Gross margin full-time worker equivalent (FTE)

Net income per sq. ft. Hired labor expenses as a % of sales

Net income per sq. ft. week (SFW)Net income per full-time worker equivalent (FTE)

Gross margin (sales - cost of goods sold) Machinery investment per sq. ft.

Net profi t margin (net profi t/net sales)Average collection period for accounts payables

Total cost per sq. ft. Inventory turnover ((COGS/average inventory)

Total cost per sq. ft. week (SFW)Inventory holding period (365/inventory turnover)

Overhead expenses as % of salesSales to fi xed assets (net sales/fi xed assets)

Overhead expenses per sq. ft. week (SFW)

Sales to working capital

Asset turnover (total sales/total assets)Production rates (# units completed per task)

Return on assets (net profi t/total assets) Quality measures (size, fl owering, etc.)

Financial leverage (total assets/net worth)Safety measures (# days w/o lost-time injury)

Return on equity (net profi t/net worth) Customer turnover

Sales per full-time worker equivalent (FTE)

Average # of complaints per customer

Average sales and profi t customer Returns and adjustments

Financial Benchmarking Jan 2010.indd 16 12/16/2009 3:50:10 PM

18 | Greenhouse Management & Production | January 2010 | www.GMProMagazine.com

Management

says “you can’t manage what you don’t measure”. But in this instant information age some companies and their manag-ers may be experiencing an information overload. My rule of thumb is: If you are not going to take action based on the results you fi nd, then don’t measure it. In other words, don’t spend time and energy mea-suring something you aren’t willing to change in the fi rst place. The key ques-tion to always ask is: Does the potential benefi t to be gained from collecting, measuring and analyzing this informa-tion exceed the cost of obtaining it?

Measuring and motivatingThe bottom line is that you get what you inspect. Major score keeping areas in a greenhouse business include:1. Financial measures, e.g. return on as-

sets, sales volume and gross profi t.2. Operational measures, e.g. production

rates, quality and safety measures.

The key is to fi gure out which metrics (things to be measured) are important and use this information to educate em-ployees about the correlation between these metrics and profi t. When employ-ees begin to see and understand this correlation, it is amazing how intrinsi-cally motivating this becomes for them because they can now understand how their jobs affect their company’s profi t-ability and ultimately how it affects their own paycheck. This is true provided the proper incentives are in place that tie pay to performance.

Simply the bestBenchmarking also helps defi ne the best-in-class companies that continually perform above industry averages despite an industry’s economic conditions. What makes a company best-in-class is that it operates much like a decathlete. Top ranking athletes who compete in decath-lons excel across a broad set of events. The winners accumulate the most points among all events. They may win some events, but usually not all of them. They know their own strengths and weakness-es and focus their training in the “must-

win” events. They spend the remainder of their training time being at least mini-mally competitive in the other events. This is also the case with companies considered to be the best in an industry. Best-in-class companies excel across a broad set of processes and they beat com-petitors in some areas but not all. They are not best-in-class in all per-formance areas, but they are in those that match their strategies and priori-ties. They know their core competencies. They typically know their competitors. They spend most of their resources in areas they know they must win and are minimally competitive in other not-so-important areas. Undoubtedly, the key is to fi gure out what processes are “key success factors” and which ones aren’t.

Types of benchmarkingOnce the key success factors are identi-fi ed, there are two major types of bench-marking procedures that managers can choose from. Internal benchmarking, which in-volves benchmarking within a company, compares your own company’s perfor-mance against a previous time period (i.e., previous quarter, same quarter last year, etc.). This is often referred to as time-series benchmarking. Competitive benchmarking, which examines benchmarking performance or processes with those of competitors, compares your company’s performance against similarly-sized fi rms in the in-dustry. This is often referred to as cross-sectional benchmarking because you are comparing your company against a “cross-section” of the industry. Unlike other manufacturing indus-tries, there are not a lot of cross-sectional benchmark data available for horticultur-al companies, and even fewer specifi cally pertaining to greenhouse businesses. The best way to glean benchmarking information regarding greenhouse op-erational measures is by scanning trade journals, university research reports, attending educational conferences and trade shows, doing on-site visits to other greenhouse operations (via tours and personal visits) and talking with other

greenhouse managers outside your pro-duction region, who are usually more willing to share information. Measuring company-level productivity over time will indicate corrective actions to ad-dress ineffi ciencies in production, mar-keting and customer service practices.

Benchmarking metricsGrowers should glean as much infor-mation as they can from the sources aforementioned in developing their own benchmarking system. Table 1 offers some suggestions as to the metrics grow-ers should consider in establishing such a system. While the table may seem initial-ly daunting, I advise growers to choose one or two benchmark metrics each year to incorporate into their systems. What gets measured gets managed. Concentrate on measuring the right things, then on measuring them effi -ciently. Focus only on the areas of great-est concern in your business. Measuring anything that does not directly affect profi tability, performance or safety only adds burden and takes away from those measures that are truly important. Charlie Hall is professor and Ellison

Chair in International Floriculture, Texas

A&M University, Department of Horticul-

tural Sciences, [email protected]. Paul

Thomas is professor and extension spe-

cialist, University of Georgia, Department

of Horticulture, [email protected].

An Internet-Based Benchmarking SystemAn internet-based financial bench-marking system (Horticulture Busi-ness Analysis System), was devel-oped for the greenhouse and nurs-ery industry through a partnership between the University of Florida and the Florida Nursery Growers and Landscape Association. The system, available at https://hortbusiness.ifas.ufl.edu/analysis, is free of charge to all greenhouse and nursery growers. For more: Alan Hodges, Uni-versity of Florida, Food and Resource Economics Department, (352) 392-1881, Ext. 312; [email protected].

Financial Benchmarking Jan 2010.indd 18 12/16/2009 3:50:20 PM

18 | Greenhouse Management & Production | February 2010 | www.GMProMagazine.com

Management | 2nd of a 9-part series

Companies can use benchmarking to measure various aspects of their business, but they have to be willing to make changes based on the analysis results.

Benchmarking your way to success: Part 2


In the fi rst article on benchmarking (see January 2010 GMPro, Page 16), we made reference to a 2003 Price-

waterhouseCoopers Trendsetter Barom-eter survey that found companies that benchmark achieve 69 percent faster growth and 45 percent greater produc-tivity than those who don’t. That fi rst article reinforced the need for bench-marking and the types of benchmarks greenhouse businesses should consider tracking. Major score-keeping areas in a greenhouse business include both fi -nancial measures (e.g. return on as-sets, sales volume and gross profi t) and operational measures (e.g. production rates, quality and safety measures). This article provides more details about how these types of benchmarks are calculat-ed and evaluated.

Strategic profi t modelProbably the most common (and obvi-ous) fi nancial goal of greenhouse busi-nesses today is to make a profi t. How-ever, to simply refer to “profi tability” in general is not enough. There are various measures of profi t-ability, but the two most commonly re-ferred to include return on assets (often

called ROI) and return on net worth. Return on assets (ROA) looks at the economic viability of a company where-as return on net worth (ROE or return on owner equity) examines the return being generated for the company’s own-ers. Both have their own value in ana-lyzing performance. It is important to understand how return on investment is calculated and how it can be im-proved. Return on equity is considered the most meaningful way to evaluate overall company profi tability. These two primary profi tability ra-tios are driven by three other perfor-mance-related ratios: profi t margin, asset turnover and fi nancial leverage. Each of these represents a different strategy or pathway to improve return on investment. These fi ve ratios can be combined into what is commonly called the strategic profi t model (sometimes referred to as the DuPont Model). It is simply a graphical representation of a comprehensive return on investment analysis. The strategic profi t model is shown in the box below.

Profi t margin = Net profi t before taxes ÷ Net sales x 100The fi rst and most important pathway

to profi tability is profi t margin manage-ment. For example, a profi t margin of 6.9 percent means that for every $1 of sales the company is able to produce 6.9 cents in profi t before taxes. Managing profi t margin means focusing on sales productivity, gross margin management and operating expense control.

Asset turnover = Net sales ÷ Total assetsAsset turnover refl ects the sales a grow-er produces per dollar invested in as-sets. For example, a ratio of 1.0 refl ects that a grower is generating $1 in sales for every $1 in assets. If a grower’s as-sets, cash, accounts receivable, inven-tory, property, equipment, and all other assets can be used as effi ciently as pos-sible, then a maximum amount of sales can be generated from a given asset in-vestment.

Return on assets = Profi t before taxes ÷ Total assetsx 100Return on assets is the direct result of the fi rst two pathways to profi t -- profi t margin multiplied by asset turnover. This measure of performance is a good indicator of a grower’s ability to survive

Profi t Margin

AssetTurnover

ROA(ROI)

LeverageFactor

x x= = ROE

Net Profi t Net Sales Net Profi t Total Assets Net Profi tNet Sales Total Assets Total Assets Net Worth Net Worth

x x ==

STRATEGIC PROFIT MODEL

Benchmarking Feb 10.indd 18 1/19/2010 2:57:41 PM


Management

and prosper. As a rule of thumb, the pre-tax return on assets ratio should at least equal (and preferably exceed) the interest rate associated with the cost of capital.

Financial leverage = Total assets ÷ Net worthFinancial leverage measures the total dollars of assets per dollar of net worth. This benchmark ratio measures the extent to which a grower uses outside (non-owner) fi nancing. The higher the ratio, the more the grower relies on out-side fi nancing. For example, a ratio of 1.5 times suggests that for every $1 in net worth, a grower has $1.50 in total assets. If for every $1.50 in total assets the owners put up $1, then outsiders put up the remaining $0.50.

Return on net worth = Net profi t (before taxes) ÷ Net worth x 100The end result of the strategic profi t model is return on net worth (equity). It is seldom possible to generate an ade-quate rate of return on net worth by em-phasizing just one of the previous prof-itability pathways. Each pathway should be examined carefully for improvement opportunities and then trade-offs made in order to increase overall profi tability. Any plan for improvement should not be based upon any single measure of performance, but be developed with the complete picture in mind. Greenhouse businesses must earn an adequate return on investment to satisfy the owners’ needs. The table be-low provides some general benchmark guidelines for return on assets and for return on net worth.

Financial ratio benchmarksGrowers, suppliers, bankers and outside creditors have a wide range of other fi nancial ratio benchmarks at their disposal to measure the overall fi nan-cial integrity of a greenhouse business. Some of the more common benchmark measures for you to consider include:

Current ratio = Current assets ÷ Current liabilitiesThe current ratio measures the mar-gin of safety that management needs in order to allow for the inevitable un-evenness in the fl ow of funds through the current assets and current liability accounts. A company needs a supply of current funds to be assured of being able to pay its bills when they come due. As a general rule, the current ratio should be 2.0 or higher.

Quick ratio = (Cash + Accounts receivable) ÷ Current liabilitiesQuick assets include cash, marketable securities and current accounts receiv-able. Presumably, these items can be converted into cash quickly at approxi-mately their stated amounts, unlike in-ventory which is the principal current asset excluded from this calculation. The quick ratio is, therefore, a measure of the extent to which liquid resources are readily available to meet current ob-ligations. A guideline for the quick ratio is 1.0.

Debt to equity = Total liabilities ÷ Net worthThe greater the proportion of its fi nanc-ing that is obtained from owners, the less worry a company has in meeting

PRIMARY FINANCIAL OBJECTIVE

RETURN ON

ASSETS

RETURN ON

EQUITY

EFFECT ON COMPANY PERFORMANCE

Minimum 4-5% 8-10%Minimum long-term return

necessary to ensure survival.

Target 8-10% 15-20%Usually satisfi es owners minimum

needs, but doesn’t provide for growth or o! set infl ation.

Top performance 15-20% 30-40%Would be representative of the most

profi table fi rms in the industry.

Benchmarking Feb 10_digital.indd 20 1/27/2010 9:51:43 AM

Management

Greenhouse Management & Production | 21

its fi xed obligations. At the same time, excessive reliance on owner fi nancing slows the rate at which a greenhouse busineess can grow. The debt to equity ratio shows the balance that manage-ment has struck between debt and own-ers’ equity. A mix of $1 debt to $1 equity is usually considered prudent.

EBIT to Total assets = Earnings before interest and taxes ÷ Total assets x 100EBIT to total assets is a return on invest-ment ratio that provides a profi t analysis based on earnings, before interest and income taxes. This ratio is best compared with a company’s annual interest rate on borrowed funds. If a greenhouse busi-ness’ EBIT to total assets ratio is higher than its cost of capital, there is a favor-able spread between the two. A spread of at least 2.0 points is desirable.

Times interest earned = (Profi t before taxes + Interest) ÷ InterestThe times interest earned ratio measures the number of times profi t before inter-est and taxes will cover total interest payments on debt. The result indicates the level to which income can decline without impairing a company’s ability to meet interest payments on its liabilities. If the ratio falls below 1.0, a company is not generating enough earnings to cover the interest due on loans. A reasonable target is six to eight times.

Cash to current liabilities = Cash ÷ Current liabilities x 100This is the most stringent test of the ability of a greenhouse business to meet its short-term obligations with existing cash balances. To be truly conservative with cash, this ratio should be in the 10-20 percent range.

Sales to working capital = Net sales ÷ (Current assets - Current liabilities)This ratio measures the ability of a com-pany to generate sales without tying up high levels of investment in work-ing capital. A ratio of 1.5, for example,



ManagementManagement

means a business can generate $1.50 in sales for every $1 invested in work-ing capital. This ratio can be impacted by changes in any of the three work-ing capital items: improving inventory turnover, reducing accounts receivable collections or obtaining more favorable accounts payable payment terms.

Asset productivity ratiosGiven the signifi cance of both accounts receivable and inventory in terms of man-aging cash fl ow, it is important to measure their productivity. For both of these asset categories the objective is not to minimize their value. Rather, the objective is to uti-lize both for maximum profi tability.

Average collection period = Accounts receivables ÷ (Credit sales ÷ 365 days)The average collection period can be evaluated against the credit terms of a company. As a rule, the collection period should not exceed 1.3 times the regular payment period. That is, of a company’s typical credit terms call for payment in 30 days, then the average collection pe-riod should be 39 days or less.

Inventory turnover = Cost of goods sold ÷ Average inventoryInventory turnover is an indication of the velocity with which merchandise dollars move through a business. If the turnover fi gure were 2.75, this would mean that the company sells out the equivalent of its inventory value 2.75 times per year. Intuitively, the more fre-quent the inventory turnover, the better off a company will be.

Inventory holding period = 365 days ÷ Inventory turnoverThe inventory holding period refl ects how many days of inventory are on hand. That is, it shows how long it should take to sell off existing invento-ry. Business managers and owners must be concerned with a holding period that is longer than necessary due to the high costs of capital tied up in excess inventory. On the other hand, reducing inventory levels too much could result in lost sales if certain products are not available when customers want them. The cost of carrying inventory has to be balanced against the profi t opportuni-ties lost by not having product in stock ready for sale.

Sales to fi xed assets = Net sales ÷ Net fi xed assetsThe horticulture industry requires a sig-nifi cant investment in fi xed assets, par-ticularly various types of equipment. To reach a suffi cient level of profi tability, these fi xed assets must be utilized as ef-fi ciently as possible. This ratio provides a basis for comparing fi xed asset utiliza-



Management

TM

tion across different types of production operations.

Employee productivity ratiosEmployees are the lifeblood of an orga-nization. Without a properly motivated and compensated work force few grow-ers can produce much more than basic levels of performance. Employee payroll costs make up the single largest expense category on the income statement.In controlling employee payroll, the key to success is not the absolute level of compensation, but rather the produc-tivity of employees. The key employee productivity ratio is sales per employee.

Sales per employee = Net sales ÷ Total full-time equiva-lent employeesThis is simply the level of sales gener-ated per full-time equivalent (FTE)

employee. The ratio provides a means to estimate how many additional em-ployees will be required as a company expands its sales base.

Need to make changes?Our rule of thumb for benchmarking is: If you are not going to take action based on the results of your analysis, then don’t bother measuring it. Don’t mea-sure what you aren’t willing to change. Hopefully, the discussions thus far have challenged you to at least consider ad-ditional metrics in order to make more informed managerial decisions. Charlie Hall is professor and Ellison

Chair in International Floriculture, Texas

A&M University, Department of Horticul-

tural Sciences, [email protected]. Paul




An Internet-Based Benchmarking SystemAn internet-based fi -nancial benchmarking system (Horticulture Business Analysis Sys-tem), was developed for the greenhouse and nursery industry through a partnership between the University of Florida and the Florida Nursery Growers and Landscape Association. The system, available at https://hortbusiness.ifas.ufl .edu/analysis, is free of charge to all greenhouse and nurs-ery growers. For more: Alan Hodges, University of Florida, Food and Resource Eco-nomics Department, (352) 392-1881, Ext. 312; awhodges@ufl .edu.


16 | Greenhouse Management & Production | March 2010 | www.GMProMagazine.com

Management | 3rd of a 9-part series

Greenhouse growers can use benchmarking to conduct what-if analysis regarding changes being considered in their company’s business.

Applying the strategic profit model in the real world


In the February issue of GMPro (Page 20) we provided an over-view of the Strategic Profi t Model,

as well as selected fi nancial ratios that can serve as a barometer of the fi nancial performance of your greenhouse busi-ness. The Strategic Profi t Model (also known as the DuPont Model) gives a visual view of a company’s fi nances and provides the ability to understand and analyze fi nancial performance and re-turn on investment. This month we pro-vide examples of how to use the Strate-gic Profi t Model to conduct sensitivity analyses (what if’s) regarding strategic changes or tweaks you may be consider-ing for your business.

Driving profi tabilityProfi tability analysis and assessment of the fundamental drivers of profi tability are critical components of evaluating the fi nancial performance of a green-house business. Performance measures like operating profi t margin, asset turn-over ratio, return on assets, and return on equity—and more importantly how they are impacted by marketing, pro-duction, investment and fi nancing decisions—are extremely valuable to a greenhouse manager, particularly in time of economic stress. Operating profi t margin shows the amount each dollar of sales yields to net income. Asset turnover rate measures the revenues generated per dollar of assets and indicates how effi ciently the busi-ness uses its assets. Return on assets is a measure that

managers can use to determine if capital is generating an acceptable rate of return. Return on equity helps manag-ers assess whether or not the debt of a greenhouse business is working for or against them. Together, these measures help to show how well a business is performing fi nan-cially. These four measures are core to the manager’s analysis of business fi nancial performance, and are succinctly summa-rized in the strategic profi t model.

Improving performanceA standard measure of fi nancial success for any business, greenhouse or other-wise, is return on equity (ROE). Assum-ing a grower has an accrual adjusted income statement to obtain net income and a cost-basis balance sheet to obtain owner equity, the ROE is an easy metric to calculate using the simple formula of net income divided by owner equity.

However, viewing the ratio separately, rather than in combination with other metrics, does little to inform manage-ment on how to improve performance. If ROE is found to be less than re-turn on assets (ROA) or has declined recently, the Strategic Profi t Model sug-gests two basic approaches to improve performance. Analysis can be done to determine whether the ROE can be im-proved through the income stream or the investment stream (Figure 1).

The income streamInitially, most growers may be con-cerned more with the income stream than the investment stream because the production decisions made in a green-house business usually have a more direct effect on the variables in the income stream. These income stream variables include selling price, produc-tion-related expenses, net sales, profi t

Figure 1. The income and investment stream of the strategic profi t model.

Benchmarking March 10.indd 16 2/17/2010 2:25:05 PM


Management

margin and the use of assets. If growers discover a major weakness in their ROE, backtracking through the income stream and determining where changes can be made will easily identify a set of potential reasons for the weakness. For example, if a grower discovers his company’s ROA is unsatisfactory, this weakness can be traced back to as-set turnover and net operating profi t margin since these are the major com-ponents of ROA. The analysis can be further tracked to net sales and total costs if the operating profi t margin is determined to be the main reason for the low ROA. Net sales could be improved by either increasing the price received (better marketing and differentiation strategies) or by increasing the volume

of product sold (increasing yields or productivity; selling to larger buyers; fi nding new markets, etc.). Likewise, operating profi t margin can also be en-hanced by reducing costs of production (through the use of technology, automa-tion, lean fl ow techniques, etc.). An astute grower will most likely consider all of these actions (Figure 2), but the Strategic Profi t Model offers an opportunity to do some comparisons and determine what options will most benefi t the producer.

The investment streamThe second approach to improving ROE, through the investment stream, culminates in the fi nancial leverage multiplier (assets divided by equity/net worth). Increasing fi nancial leverage

means that a company uses more debt fi nancing relative to equity fi nancing. Interest payments to creditors are tax deductible, but dividend payments to any shareholders are not. Thus, a higher proportion of debt in a company’s capi-tal structure can lead (mathematically) to a higher ROE. Financial leverage benefi ts diminish, however, as the risk of defaulting on interest payments increases. So if the greenhouse business takes on too much debt, the cost of debt rises as creditors demand a higher risk premium and ROE decreases. Increased debt makes a positive contribution to a company’s ROE only if the company’s return on as-sets (ROA) exceeds the interest rate on the debt. Most of the backtracking through the

Figure 2. Strategies for improving operating profi t and asset turnover in the greehouse business. Adapted from “Key Financial Perfor-mance Measures for Farm General Managers”, ID-243, Purdue University Extension.

Benchmarking March 10.indd 18 2/17/2010 2:25:16 PM

Management

www.GMProMagazine.com | March 2010 | Greenhouse Management & Production | 19

��

investment stream follows total assets. From basic accounting, total assets are equal to total liabilities plus net worth (otherwise known as owner equity). This simply means all assets are either claimed by creditors or owners—allow-ing the investment stream to be broken into two additional sections, total debt and owner equity. It is important for a grower to understand what changes oc-cur in ROE when liabilities, equity and assets are restructured. For example, a grower might hypoth-esize that by decreasing his business’ debt load, profi tability will increase be-cause the interest expense of the busi-ness decreases. However, by analyzing the investment stream of the Strategic Profi t Model, the grower will realize that if this reduced debt load requires an increase in owner equity to maintain the asset base of the business, the fi nan-cial leverage multiplier will decline and

the ROE may also decline. Again, by per-forming simple comparative statistics, the grower will see the consequences of different fi nancing decisions.

A high ROEIs having a high ROE always better. As any economist worth his/her salt would say “It depends.” Generally, the higher the ROE the better since it represents the return to your own equity (sweat and otherwise). But not all high-ROE companies make good investments.Some industries have companies with high ROE because they require rela-tively few capital assets, such as some service-providing fi rms. Other indus-tries require large investments in in-frastructure before companies generate their fi rst dollar of profi t. However, you cannot conclude that service fi rms are better investments just because of their high ROE.

Generally, capital-intensive busi-nesses have high barriers to entry, which limit competition. On the other hand, high-ROE companies with small asset bases have lower barriers to en-try, but they face more business risk because competitors can replicate their success without having to obtain much outside funding. Therefore, ROE is still a good indicator, but is best used when comparing companies in the same sec-tor within an industry.

In order to be profi tableProfi tability (or the lack thereof) has three parts: operating effi ciency (profi t margin), asset use effi ciency (asset turnover) and fi nancial leverage (equity multiplier). The successful greenhouse manager must be able to make effective decisions infl uencing all three elements.1. To survive at all, a company must be

effective in its use of revenues to gen-

Benchmarking March 10_digital.indd 19 2/25/2010 10:24:34 AM


Management

��

erate profi ts (operating effi ciency--profi t margin).

2. To generate profi tability, a company must use its investment in assets wisely to convert revenues to profi t (asset turnover-effi ciency).

3. If a company can generate a return on assets greater than its net borrow-ing costs, it can return profi ts to in-vestors more effectively by fi nancial leverage—using borrowed money to generate profi ts rather than tying up owners’ funds (equity multiplier). Needless to say, this must be ana-lyzed very carefully.

Charlie Hall is professor and Ellison Chair

in International Floriculture, Texas A&M

University, Department of Horticultural

Sciences, [email protected]. Paul




An internet-based horticulture benchmarking systemAn internet-based fi nancial benchmarking system (Horticulture Business Analysis System), was developed for the greenhouse and nursery industry through a partnership between the University of Florida and the Florida Nursery Growers and Landscape Association. The system, available at https://hortbusiness.ifas.ufl .edu/analysis, is free of charge to all greenhouse and nursery growers. This system consists of data entry forms, a historical database of business records, a report generator and a security encrypted web site user in-terface. Users of the system 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, profi tability levels, locations (state, county) and years. For more: Alan Hodges, University of Florida, Food and Resource Economics Department, (352) 392-1881, Ext. 312; awhodges@ufl .edu.

Benchmarking March 10_digital.indd 20 2/25/2010 10:24:45 AM

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22 | Greenhouse Management & Production | December 2010 | www.GMProMagazine.com

Management | 9th of a 9-part series

W hen profi t margins are tight, companies look to fuel, fer-tilizer, growing media and

other essential resources as places to cut expenses. However, these usually aren’t the best inputs to try to save money as they form the basis for production. Low-ering greenhouse temperatures to save on fuel expense can actually increase a crop’s overall cost. Purchasing a lower-quality growing medium or fertilizer can be disastrous unless major production management changes accompany the changed sourcing for production inputs.

Another aspect of resource man-agement is documenting a company’s carbon footprint. The utilization of re-sources signifi cantly impacts the carbon footprint of any company. If a business

Companies can use benchmarks to improve resource conservation and get a handle on determining their carbon footprint and demonstrate economic impact.

By Paul Thomas and Charles Hall

Fuel Use Ratio (assess fuel use impact)

The number of gallons of fuel used in heating, transport, etc.*

The net tax generated from sales to the county or state

*Fuel Use Ratio needs to be calculated by fuel source. Diesel is calculated separately from gasoline, propane, etc.

Water Use Ratio (assess water use impact)

The gallons of water used in production per year per acre

The dollars tax income generated for the county/state, etc.

Electricity Use Impact (assess electricity impact)

The number of kilowatt hours used per year per acre

The dollars tax income generated for the county, state, etc.

Composting Ratio (assess tax contribution)

The number of pounds/cubic feet of organic waste generated per year

The number of pounds/cubic feet recycled on-site or sold per year

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wants to be seen as a “green” or “sustain-able” company, it must have an under-standing of how its own carbon footprint works. The use of benchmarks applied to resources can give a company the data it needs to accurately describe its carbon footprint and the steps it needs to take to reduce it.

Monitoring resourcesThe fi rst step in monitoring resources is to itemize a company’s inputs. This in-cludes water, electricity, growing media, fertilizer, fuel consumption (heating and transportation) and time.

There are different goals for individ-ual metrics. Water, fuel and electricity are all related to community conserva-tion and economic impact. Basic crop inputs, labor and time are related more to internal effi ciency. Tying resource metrics to money and economic impact changes the dynamic. Assessing and re-porting resource usage in relation to tax income generated and number of jobs maintained gives meaning to the met-rics that decision makers will appreci-ate. From this base data, a company can track its own progress while developing essential talking points and establishing its “green” credibility.

Customize metricsThere are dozens of relationships be-tween information and product that could be assessed. That is why it is neces-sary to customize the metrics to a com-pany’s situation and needs. For electrical assessment, most companies already have meters installed. For water, most greenhouses in the United States have yet to install fl ow meters. It is best to in-stall a fl ow meter in each bay, section or

Resource metricsMeasurable metrics for resources and carbon footprint interactions can be set up as follows:

The fi rst step in monitoring resources is to itemize a company’s inputs, including growing media, fertilizer and fuel.

ProductionBenchmarks

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greenhouse. This allows for crop-by-crop assessment, and the assessment of indi-vidual growers if this applies.

Composting can be easily measured by placing compost eligible materials in 50 gallon drums and then tracking the number of barrels that are dumped on the compost pile each week. If drums are used, the shrink from individual green-houses, bays or sections can be accurately assessed. On a larger scale, estimate the cubic yards of compost with geometry.

Carbon footprint benchmarksThe fi rst step to understanding a com-pany’s carbon footprint is to map the resource-use structure of the business. This can include everything from kilo-watt hours of electricity used to the miles driven by employees.

The second step is to calculate the company’s carbon emissions. This is not easy to do. There are many fi rms that

charge signifi cantly to calculate the con-version of gasoline or electricity into tons of carbon emissions per unit.

There are a few companies that pro-vide online resources and assistance that do not cost anything, including Carbon Trust. The Carbon Trust website (www.

carbontrust.co.uk/Pages/Default.aspx) offers a conversion publication (#clt085) that enables a company to do many of the calculations to determine its emis-sions. A carbon footprint calculator is also on this site that allows a company to plug in its base numbers once the initial

The fuel used to heat a greenhouse and run delivery trucks is considered a direct carbon emission.


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Management

Direct metricsEmployment Impact Ratio (assess job contribution)

The number of tons of carbon emission generated per year

The number of e! ective full-time jobs maintained per year

Community Impact Ratio (assess tax contribution)The number of tons of carbon emission generated per year

The amount of community tax dollars generated by the business

Indirect metrics:Commuting Ratio (assess employee impact)

The number of gallons gasoline used by employees per year

The number of e! ective full time jobs maintained per year

Recycling Percentage (assess resource reuse)The number of pounds of plastic/paper/metal recycled per year

Pounds of non-production related materials purchased per year*

*If plastic, metal or paper is used in the fi nal product that is shipped, these materials aren’t easily recycled by the grower. Document only those items such as plastic greenhouse glazing, paper products and metal used but not directly incorporated into the fi nal product being sold.

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conversion math is done. This enables a company to create a sound basis to report its carbon footprint. Once a com-pany obtains the calculations, it becomes easy to track its carbon footprint year after year.

Determining carbon emissionsThe next thing that needs to be done is to establish a grower’s direct and indirect carbon emissions. It is im-portant to divide these up as they impact a company’s as-sessments. The fuel used to heat a greenhouse and run delivery trucks is considered a direct carbon emission. The gas employees use or the gas used by trucks deliv-ering products to the greenhouse are considered indirect emissions.

The carbon it takes to produce raw materials, such as plastic greenhouse fi lm, is not one of the grower’s emis-sion sources. This carbon assessment is associated with the raw material producer. However, the producer/sup-plier from which a grower buys the raw materials is part of the grower’s carbon assessment. A local producer/supplier has a lower footprint due to the closer delivery than one 1,000 miles away. Considering this, car pooling by employees reduces a grower’s indirect emissions. The reduction in fuel used after installing a heat curtain re-

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duces a grower’s direct emissions.The bottom line is that external

stakeholders such as lawmakers, regula-tors and consumer groups will be inter-ested in whether or not a grower reduc-es emissions per unit produced or per annum and if the grower is participat-ing in programs or efforts to reduce in-direct emissions. These reductions can be linked to dollars of tax benefi ts or jobs to underscore not only the grower’s “green” efforts, but also the economic impact the grower’s carbon emission is generating for the community. This dual approach to benchmarking a grower’s sustainable status makes these efforts invaluable when the company is en-hancing its market position, defending against scrutiny and when recruiting employees and new customers.

One of a company’s goals is to re-duce or maintain the carbon emissions per unit of output or dollar of tax paid. It is alright if the number of tons of car-

bon dioxide increases as long as it is in proportion to a quantifi able increase in production or tax contribution. What is undesirable is to have production go fl at and emissions go up.

Additional metricsThe eight metrics discussed can show that a grower cares about the environ-ment, its carbon footprint, community impact and effi ciency. A search of the Internet will yield additional metrics that can be used by growers to have an impact on the environment and a com-pany’s carbon footprint.

From an internal perspective, this exercise forces employees to think about waste reduction, car-pooling, wa-ter conservation and recycling as job-related expectations, rather than phil-osophical nuisances. If a greenhouse owner tracks these metrics, they can be shared with employees. If one of these metrics increases rather than decreases,

it is costing a company money — both profi t and hard-earned public relations capital.

Paul Thomas is professor and extension

specialist, University of Georgia, Depart-

ment of Horticulture, [email protected].

Charles Hall is professor and Ellison Chair

in International Floriculture, Texas A&M

University, Department of Horticultural

Sciences, [email protected].

Installation of fl ow meters in each bay, section or greenhouse allows for crop-by-crop assessment, and the assessment of individual growers if this applies.


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