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Archi-ponics: Commercial Crop Production, Part 3 – Understanding Cash Flow

Calculating your cash flow helps keep your business profitable. Calculating your cash flow helps keep your business profitable.

As hydroponics becomes more mainstream, not only more families, but more crop producers are using hydroponics systems. Compared to conventional farming methods, hydroponics is extremely labor efficient and uses fewer resources. Clearly that reduces the grower’s expense; that’s why hydroponic crop production can be much more profitable than conventional farming.

That said, any farm operation that wants to succeed needs to have a firm grasp of their own expenses. An operator needs to know how his business compares to other operations. And operators need to see where they are making money and where they are losing money. All this sounds simple enough. Basically, it is. My experience is that a profit and loss spreadsheet is the best way to visually comprehend your expenses so you can truly understand where your money goes.

In last week’s article, we discussed some of what goes into the profit and loss columns, but you should also understand how to categorize your operation’s expenses. That will really help to clarify what your numbers are telling you. There are three main expense categories used in the profit and loss: 1. Variable Costs, 2. Controlled Costs, and 3. Fixed Costs.

Variable Costs are expenses related to the number of units produced and sold. For example, if you grow a case of lettuce, and you pack that lettuce in a wax box, the number of wax boxes you need depends on how many cases of lettuce you are producing. So, generally speaking, packaging, fertilizer, and insecticides are considered variable costs.

Once you have categorized your expenses, then take a step back and ask yourself if your money is flowing to the areas that you believe makes the most sense for your business.

Controlled costs are expenses that the operator can control. Usually, labor is categorized as a controlled cost. Most people think it is a variable cost, since labor does coincide with how many units are produced. However, the farm operator might hire additional labor for work that isn’t directly related to the total units produced, such as an accountant, or a lawyer. It’s also possible that you, the operator, might hire someone to go to the grocery store to demonstrate your product. Again, this labor is not directly associated to producing units, and therefore is considered controlled.

Lastly, Fixed Costs are expenses that are the same no matter how many units are produced and sold. This may include equipment, taxes, and rent. Unless you have an unusual rental agreement, you will pay the same amount for rent regardless of whether you sell one unit, or 1000 units of your product.

Once you have categorized your expenses, then take a step back and ask yourself if your money is flowing to the areas that you believe makes the most sense for your business. If it’s not happening, make corrections. Your changes can have immediate, midterm, or long term effect, so be patient. Once the cash is flowing correctly, you can really determine how much it truly costs to produce each unit. That can help you determine what the appropriate profit margin should be. That’s information that ought to dictate not only what you grow, but how you grow it. ;

The bottom line is, farming is not just about growing crops - that’s only half the battle. Paying attention to your cash flow and logistics is just as important because, at the end of the day, the profitability of your operation dictates everything.

Click here to read Part 1 of this series.

Click here to read Part 2 of this series.

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Colin and Karen Archipley are among the country’s foremost hydroponics entrepreneurs.
Last modified on Friday, 03 August 2012 13:20

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