In my last article on the subject of profit, I encouraged business owners to have a clear understanding of how much profit they must generate during most seasons.
The simple exercise of determining the fundamental cash needs of the business was contrasted with the (slightly) more complex method of estimating Return on Capital Employed.
My main message was that, in my opinion, the first point of annual business planning is to determine what surplus the business must generate to meet its basic commitments and family needs. This is a fundamental objective of being in business.
In effect, we are starting from the bottom up. Rather than commencing a planning exercise as usual—with estimated number of bins multiplied by the expected return—we start with the answer we want and work backwards to determine if and how the business will meet its cash objectives.
Determining required average return
Having determined cash objectives, the next element of the financial plan is to estimate the average return the business must generate from each hectare of mature planting.
Commencing with the cash surplus we want to achieve, we add back the range of costs that will be incurred during the season.
To determine these costs, our starting point could be the last few years’ financial accounts, with some tweaking of these figures to allow for inflation, or for special issues we are aware of. These costs include:
- Interest borrowing costs and bank charges
- All overheads (non-production expenses)—from accounting and advertising through to telephone, travel and watch dog
- Production expenses that don’t change much regardless of production.
On that last point, my experience indicates that most orchard costs don’t vary greatly with production; they tend to repeat in a similar manner each season, or they may be influenced by something other than production. For example, a similar volume of water may be applied each year, or spray and fertiliser programs may be similar.
Events that influence these are as much to do with water availability or pest pressure as they are to do with the volume of production.
Some expenses truly vary with production, such as picking and freight, and these costs need to be treated in a different way from the others.
Similarly, businesses which have a packing facility need an understanding of their average packing, distribution and marketing costs.
Rather than a narrative, the best way of showing this is to provide an example (see Example, opposite). Spreadsheet software such as Excel provides a simple method of working with these figures.
Planning for business
To some, the example may seem too simple, or simplistic. As ever, my experience is that too many primary producers set out at the start of each season on a wing and a prayer.
Their own experience suggests that financial planning is too complex, or time-consuming, or they don’t have the aptitude.
Given the clear challenges facing the fruit industry today, we need to cut through this way of thinking in order to make the best decisions for our future.
Unfortunately, much advice and training on the subject of financial management tends to get into the very complexity that stifles any desire to plan.
Planning for business success is one of the most important business tasks. I believe it is better to use some simple methods of understanding—at least a ball-park view of business objectives—than to do nothing.
These may be pretty rough compared to more sophisticated and detailed methods, but they don’t take much time and they do prompt questions and ideas about business performance and family objectives.
The planning tools I have written about in these articles could be used effectively in one to two hours a year, and their estimates would help shape the detailed annual budget.
That’s not a lot of time out of the business, and once your spreadsheet model is set up, it can be used as often as you wish.
Example: see Tree Fruit November 2011
