Greenhouse Financing & Accounting

Financing a Greenhouse Business

Raising capital to start any business can be a challenge. Before turning to a bank to take out a loan, you should investigate agricultural grants and funding through the USDA. Federal, state, and city governments often offer loans at subsidized rates to encourage agricultural development. These loans are likely to have better interest rates than a loan from a bank and could be more generous if you have less than perfect credit.

Budgeting and Accounting for Agricultural Businesses

The bottom line is that Profit = Revenue - Expenses. Managing a greenhouse business means tracking and calculating expenses to ensure the business stays profitable and runs efficiently. The first two financial steps in starting a greenhouse business are to open a business bank account and set up a way to record expenses and income. Good record keeping will simplify the process of filing taxes. The Farm Financial Standards Council offers materials that can guide greenhouse business owners in organizing their finances.

The horticulture business requires a surprising amount of math. In addition to budgeting and bookkeeping, growers will need to make simple calculations for how many plant containers will fit in their space and how much growth medium will be needed to fill them (starting a greenhouse business). Managing supply costs accurately and knowing what it is costing you to produce each plant will guide you in creating a budget and establishing pricing.

Enterprise Budgeting

There are three types of budgeting. The first is enterprise budgeting where receipts of income, costs, and profits are calculated. This kind of budgeting helps evaluate the efficiency of the business financially, estimate the benefits of changes in practices, provides a basis for the business plan, and supports credit applications. Determining specific costs can be difficult, so estimates are often used when preparing an enterprise budget. In enterprise budgeting, total costs are calculated by adding fixed expenses to variable expenses.

Fixed Greenhouse Expenses

• Must be paid regardless of whether or not a crop is being produced
• Depreciation, insurance, marketing, management salaries, etc.
• Labor, while more accurately accounted as a variable cost, is easier to allocate to crop production cost if it is treated as a fixed expense.

Variable Greenhouse Expenses

• Change depending on how many plants are to be grown, and crop needs
• Pots, plugs, seed, substrate, labels, chemicals, etc.

Calculating Crop Production Cost

Shorthand method for fixed cost allocation to plant unit (pot, bunch, tray, etc.). This method is easy and can be surprisingly accurate.

1. Calculate variable costs; divide by number of plant units.
2. Multiply the sum of step 1 by 1.5 or 2. The sum is the estimated cost per plant unit.

Example:

Total variable costs- $500

Number of plant units- 550 pots

1. $500/550 = $0.90/pot
2. $0.90 x 1.5 =  $1.35/pot total cost

For more precise uses, the fixed costs must be determined for calculating cost per plant unit. One problem with this method is that it assumes the greenhouse will be filled to capacity for the whole year.

First, determine square feet used and weeks in grow cycle per month. Square feet used can be calculated from plant container size multiplied by number of plants.

Example:

10” x 10” pots = 100” each = 100”/12” = ~ 8 ft2 per plant

April 400 ft2 x 12 weeks (8 ft2/pot x 50 plants = 400 ft2)

March 80 ft2 x 10 weeks (8 ft2/pot x 10 plants = 80 ft2)

May 45 ft2 x 12 weeks (8 ft2/pot x 5 plants = 45 ft2 plants)

Next, calculate the total square feet used per growing weeks (ft2/wk).

Example:

April 400 ft2 x 12 weeks =  4,800 ft2/wk

March 80 ft2 x 10 weeks = 800 ft2/wk

May 45 ft2 x 12 weeks = 540 ft2/wk

4,800 ft2/wk + 800 ft2/wk + 540 ft2/wk = 6,140 ft2/wk

Now fixed costs can be allocated to each plant unit using the dollars per square foot per week method ($/ft2/wk). Determine space required per pot, amount of time pot is in greenhouse, and total fixed costs.

Example:

Pot space- 8 ft2

Time in greenhouse- 12 weeks

Total fixed costs- $2000

Multiply total amount of usable greenhouse space by the number of weeks in a year (52) to find square feet per week (ft2/wk). Divide total fixed costs by square feet per week to find overall $/ft2/wk for production of a pot.

Example:

For a 600 ft2 greenhouse,

$2000/(600 ft2 x 52) = $0.06/ft2/wk

Next, multiply the total square feet per week for the pot by the overall $/ft2/wk.

Example:

2.222 ft2 weeks x $0.06/ft2/wk = $1.33

Add estimated variable cost to estimated fixed cost.

Example:

$0.90 + $1.33 = $2.23 cost per plant pot

Applying an estimate of the actual space used will adjust the previous calculation to be more accurate. Estimate the percentage of greenhouse space used each month. Multiply by the number of weeks in use that month. Then add the sums together.

Example:

April 400 ft2 x 12 weeks =  4,800 ft2/wk

March 80 ft2 x 10 weeks = 800 ft2/wk

May 45 ft2 x 12 weeks = 540 ft2/wk

4,800 ft2/wk + 800 ft2/wk + 540 ft2/wk = 6,140 ft2/wk

Divide the fixed costs by total estimated ft2 weeks for the greenhouse.

Example:

$2000/6,140 ft2/wk = $0.33/ft2/wk 

Multiply total ft2/wk for the pot by overall $/ft2/wk for the greenhouse to find cost per pot.

Example:

2.222 ft2 weeks x $0.33 = $0.73

Add the estimated fixed cost to the variable cost to find the total estimated cost per pot.

Example:

$0.90 + $0.73 = $1.63 actual cost per plant pot

Break-Even Analysis

From the calculations and estimation made with the enterprise budget, a break-even analysis can be made. The break-even price of a product is the projected total costs divided by the expected yields. The break-even yield is calculated by dividing the projected total costs by the expected price of the product.

Whole-Farm Budgets

Enterprise budgets are also helpful in projecting cash flow and developing a whole-farm budget. Whole-farm budgets estimate the profitability of the whole farm business. A whole-farm budget includes estimated total income and variable costs and any other income. The fixed costs such as insurance, taxes, interest, depreciation, utilities, and other expenses are subtracted from the income.

Cash Flow Budgets

A cash flow budget is similar to a general ledger where day to day spending and income is recorded. Cash flow budgets help keep track of expenses and can be used for making estimations used in the enterprise budget.

Partial Budgeting

Partial budgeting is the second type of budgeting. It is used for planning and decision making to compare costs and benefits of current practices and alternatives of interest. Partial budgets ignore any factors of farm profits that would not be changed by the decision. When making a partial budget it is important to consider what costs are hard numbers or soft numbers. While some factors may require estimation, using more actual numbers will give a more accurate analysis. Another method is to calculate a best and worst-case scenario considering numbers that have had to be estimated.

Four Questions Answered by Partial Budgeting

1. What new/additional costs will there be?
2. How much will current income be reduced?
3. How much new or additional income will be received?
4. What current costs will be reduced/eliminated?

Steps to Creating a Partial Budget

1. State the proposed change.
2. List the additional costs.
3. List the reduced income.
4. List the additional costs.
5. List the reduced costs
6. Calculate the change in profit.
7. Consider intangible aspects such as safety, the time needed or saved, training needed, ect.

Capital Budgeting

The third type of budget is a capital budget. Capital budgets consider changes in the value of money over time. Partial budgeting does not make these considerations, so it may not give an accurate appraisal of changes that may be planned for years to come. Capital budgeting calculates internal rates of return and payback periods. This is useful and commonly used when evaluating investment options. Preparing a capital budget can be complex, but it is important for considering large investments that will have costs and benefits over a long time period.

Supply Chain Participation

In a supply chain growers cultivate crops and work together in farm groups that aggregate several farms, bring crops to the processor, and act as a liaison. Processors purchase crops from the farm group, sort and grade the product, process the product, and sell it to the retailer. Retailers purchase from processors to sell products to customers or other retailers. 

There are risks to each ring of the supply chain. Farmers could face drop failures, farm groups could fail negotiations, processors can have shortages and excesses, and retailers can experience low sales. There are also great benefits to the supply chain since farm groups can aid farmers with crop inputs, make good contracts with processors, and processors can offer different types of end products.

Profitability in the Supply Chain

• Farmer:  Profits divided by farmer groups 
• Farmer Group: 10‐15% 
• Processor: 25‐30%, pays farmer group one week after receive goods 
• Retailer: 15‐20%, pays processor 30 days after receiving goods 

Greenhouse Taxes and Legal Liability

The IRS Farmer’s Guide is a great resource for information regarding agricultural accounting and taxation. Greenhouse business owners will need to consult state and local governments for information on what other taxes will apply to them. At a minimum, owners will need to register to collect sales taxes and pay income and property taxes. Forming an LLC will reduce personal liability and protect personal assets in the case the business fails or is sued.