Precision counts

Can you hear the collective sigh of relief? We’re entering that time of year when a break from the intensity of the nursery growing season seems right there, within reach.

But like in that great game of football - the fourth quarter is not the time to ease up on the gas. It’s time to do our homework.

If you attended the state-of-the-industry address during AmericanHort’s Cultivate’22, you heard important clues as to why buckling down on fiscal planning in the last quarter of the year is a sound strategy.

The Garden Center Group reported that 2022 year-to-date total retail sales were down 5.5%. While the average sale at its IGC members was up slightly more than 8%, the total number of transactions was down a little more than 12%.

Craig Regelbrugge, AmericanHort’s executive vice president of advocacy, research and industry relations, said workforce security and development will continue to be one of the top strategic platforms for his team. While the Biden administration released the largest number of H-2B visas ever in 2022, he warned there could be new H-2A wage rules coming in 2023.

Dr. Charlie Hall, AmericanHort's chief economist and the Ellison Chair of Texas A&M University’s Department of Agricultural Sciences, said rising input costs are barriers to growth among nurseries struggling with profitability. This is on top of continuing industry labor scarcities and product distribution issues, and the ongoing need to raise grower prices. He predicts an economic correction is coming and that there is a 50% chance of a recession by the middle of 2023.

Budget for change

Ebbs and flows are certainly not new to the grower industry - and they’re not much of a surprise, either. Perspective always begs attention in 4Q when retail season ends and the weather turns. The grower industry is collectively at its best when we individually commit to our nurseries’ value propositions and strategically plan for its fiscal needs.

For most of us in this business, payables can threaten to surpass receivables in 4Q. At Loma Vista Nursery, we set our annual sales and revenue budgets to account for market fluctuations. The way we manage cash flow in one year is paramount to our success in the next.

Our No. 1 tool for managing cash flow and measuring business performance is our annual zero-based budget, which includes precision planning based on sales revenue, input costs and variable and fixed expenses. We adopted this approach about 15 years ago and it has served us well.

According to global management consulting firm McKinsey & Company, zero-based budgeting is a repeatable process that builds a sustainable culture of cost management over time. At Loma Vista Nursery, we don’t start with the previous period’s budget and adjust it as needed. We develop a new, customized budget every year from scratch, starting from zero.

Zero-based approach

For example: nursery containers. We do not budget for them by adding 10% to last year’s number and then putting it in the budget. We do the homework by determining exactly how many containers our production plan requires.

With homework in hand, we back out our inventory against the planting plan for the remainder of the current year. From there, we can accurately determine how many containers we will need next year and budget for them.

Because of market and supply uncertainties, we use the best information available from our nursery container suppliers to determine what our spend will be in the next year and when it will occur. We factor that into the zero-based budget as a line item.

We group our expenses by departments so we can easily capture specifics, like indirect labor costs. This practice gives us a good projection of cash coming in and cash going out and forecasts how we will end the year. It’s much more detailed than our general profit and loss statement because it specifically delineates our input costs.

It takes longer to put together a zero-based budget. Adjusting the prior year’s budget up or down is a simpler approach. But zero-based budgeting is well worth the investment in accuracy, time and peace of mind. It’s also interesting homework that can tell you where your nursery is making marks and where it’s missing them.

Zero-based benefits

I don’t like losing sleep. We use zero-based budgeting because we do not want to know approximately how much we will spend on, for example, tree liners. We want to know with precision how much we will spend on them and when. The amount we budget will match the acknowledgements and confirmations we receive from our vendors and the products we take on delivery.

When our zero-based budget is complete, we will also know if and when and how much we may need to borrow from our line of credit. Based on the average of our accounts receivables, we’ll also know when we can pay it back. Knowing this allows us to forecast our interest expenses accurately and provides relief that keeps us out of mounting debt.

Practicing and honing a transparent rhythm of planning, budgeting, forecasting and analyzing has transformed our company. Through strategic analysis, we know what works well and understand where change is necessary and why. We can make more effective decisions as a team to ensure a successful business in the coming year.

Bonding results among every departmental level because staff and managers are part of the zero-based budgeting process. This helps employees feel confident about the company they work for and its leadership. Our team will still have a good year in the unlikely event that we don’t meet our sales goal - because we will hit our sales budget.