Naomi and Reid are thinking about retirement. Sure, they’re still young, in their early 30’s, but they know that if they don’t start socking away some money now, they will never save enough to support themselves in their golden years. Not only that, they want to pay for the kids’ college; it’s what their parents did for them, and they want to be able to do that for their kids too. As farmer/entrepreneurs, this savings will come from the profits in their business.
They launched First Light Farm ten years ago. Initially they just grew and sold vegetables, but they slowly expanded the operations to include chickens for meat and eggs, flowers, and pigs; they planted an orchard so they could sell fruit. They built a farmstand, and grew their CSA membership. By the end of their third year in business, they generated enough profit to support themselves and their young family.
Now, Naomi and Reid need a plan for growth. Organic growth has gotten them this far, but to grow their business bigger, they need to be more strategic. They called me wanting to gain a better understanding of their business and how to grow their business strategically.
We set out in a four step process.
Step 1 – Understand current operations
Before we could even think about how to grow, we reviewed the current state of the business. What products are most profitable? What sales channels are most productive? Is there a gap in the business that could generate more profit?
Naomi and Reid dug deep into their numbers. They evaluated the profitability of their different products – flowers, broiler chickens, eggs and vegetables. They looked at how much revenue they earned from their CSA vs. farmstand; wholesale vs. retail.
After some analysis, they could see that their farmstand, despite earning significant revenue, wasn’t generating much profit, and certainly not enough to support the overhead. Their vegetables were most profitable, and they were actually losing money on the pigs. The flowers earned their keep, but they weren’t huge money makers.
Step 2 – Evaluate Opportunities for Growth
As they thought about growth, they recognized that isn’t just about increasing top-line revenue, it is about bottom-line profits. And growth can come in two ways: growing the core business or expanding into a new enterprise.
Expanding the core business
For Naomi and Reid, the farm-store held promise as a growth opportunity. After talking with a retail consultant, they learned they undercharged for their resale items (meat they purchased and sold from a local farmer, jams and jellies, and so on) and they could increase their prices by 20% for a standard and competitive mark-up. With minimal effort, this would increase profits by $6,000. They also noticed that over the past few years, revenue from the farmstand steadily increased – maybe there’s an opportunity to grow there.
The vegetables were most profitable, so it seemed that portion of their business was ripe for growth. Just this past year, they grew the egg operation sufficiently that that too was profitable.
Last year, they spent $14,000 on the pigs – from paying for the bedding, feed, processing and so on, and earned just less than that from the sale of the meat. While they saw an opportunity to increase their pork sales, they didn’t want to increase production unless they could figure out how to reduce the costs of raising and processing pigs
Expand into new enterprises
A new enterprise comes with more unknowns – you may have a sense of the potential revenue and expenses, but no historical financials to base the assumptions. Expanding into a new enterprise comes with more risk but also the potential for greater reward.
With the farmstand growing, Naomi and Reid considered creating value added products such as salsas, sauces and jams. With the farm-stand, they had a ready sales channel. And with the efficiencies in the vegetable production, they had plenty of fruits and vegetables.
Run the Numbers
With all the back-work, Naomi and Reid had a solid understanding of their historical numbers. They could begin plotting out what expanding their operations would mean to their cash flow and profitability. What investments would be made, what expenses would increase, and how much additional profit could they expect.
They calculated “back-of-the-envelope” numbers, and figured that if they could grow an additional $50,000 worth of produce annually, they could add $25,000 to their profits.
Step 3: Create a Plan
An increase of $50,000 in production doesn’t just magically happen. Seeds and supplies need to be ordered, staff needs to be scheduled, recipes need to be developed and product needs to be processed.
Naomi and Reid decided that in their first year, they would target an increase in production of $25,000, the second year $50,000 with the 5 year goal of increasing production by $250,000. With the stepped up production, they figured on stepped up costs, and planned out their purchasing, infrastructure and staffing needs to achieve their goals.
Just like production doesn’t magically increase, neither do sales. Naomi and Reid sketched out their plan to sell the products – in their farm store, at farmers markets and eventually wholesale.
With the plan laid out, Naomi and Reid realized that a loan would help them make the initial jump in growth: to purchase new equipment or prepay for supplies. Of course, to apply for a loan, they needed to create financial projections. This would demonstrate to the banks they had a plan for increasing sales, moderating expenses, and generating enough profit to pay back the loan and start saving.
Step 4: Track and Measure
A business plan is written with starry eyes and lofty goals. You may know for certain some details, but not all. It’s not until you’re in the thick of your growth plan that you really know how things will evolve. You may incur unexpected costs, or gain efficiencies faster than expected. You may realize that one sales channel is not available after all, but another is. Seasonal demands may shift.
With all the vagaries of the business plan, it’s important to look back to make sure you’re on track. You wrote the plan with end in mind, but if the path changes, then you need to adapt. By reviewing your plan often and comparing it to the actual business you can make adjustments to ensure you reach your goals.
The best way to track and measure your progress, is to have a good bookkeeping system in place. With solid records, you can review your progress – revenues and expenses – and compare them to the projections in the business plan. If you notice that sales are ramping up more slowly than expected then you review your marketing strategies to better sell, cut back on expenses to ensure that your cash flow doesn’t spiral out of control and review your product quality to ensure that your customers are buying the product you intend. With regular review of your progress, you can make micro-adjustments to ensure you stay on track.
Of course – if your actual profitability exceeds expectations…. Good for you! I send you my heartiest congratulations.
Need helping articulating your growth plan? Give us a call or check out The Farmer’s Office.
Whether you’ve been in business for 10 months or 10 years, you’ve probably turned over the calendar to 2017 with the goal of increasing profits. I know I have.
For me, I spent the last week of 2016 (when all my revenue had been accounted for, and the expenses entered), digging into my financials; looking at what went well, what didn’t, and how I want to increase profitability for the coming year. The past year was a time of transition and experimentation for me: I had two books published and I spent more time speaking at conferences and promoting the books. It was interesting to see how it all manifested itself in the numbers. The difference in the two books was stark – though I generated more revenue from the cookbook, the promotional costs for the cookbook, not surprisingly, were greater than the business book. While the time preparing for each event was more or less the same; for cookbook events, I also bought food and printed recipes. For The Farmer’s Office events, I just showed up. The measure for a successful event for each book is very different.
As I sifted through my QuickBooks data, I also realized I needed to make changes to how I tracked my financials. What worked before doesn’t make sense now that I have book sales and promotion. To get meaningful information, I reclassified many transactions.
For the New Year, I can make goals for how I want my business (and book sales) to grow, I have an improved system for tracking my progress, and I have a basis to measure my success.
If your goal is to increase the profitability of your business over the next year, then you need a plan to get there. And there’s a process to get there: To create that plan, you need a solid understanding of your business’s economics; and you may need to resolve to make some changes in your bookkeeping habits. (It always comes back to bookkeeping, doesn’t it?)
Here are 9 resolutions to help you tackle the financial management of your business and stay on track to improving your profitability.
Who doesn’t love a good spreadsheet? Beautiful and clean formats with elegant formulas and cell references, they are the epitome of grace in business. They not only look great but they can help business owners test assumptions and better understand the implications of different business decisions.
Okay, maybe I’m alone in this. But how do you test the feasibility of a new venture or plan for growth? What happens to your profitability if your sales projections are 10% less than anticipated? How much of a loan can you afford to buy a new truck? With a well-constructed spreadsheet, you can do all that!
My colleagues often tease me that I talk wax on about “dynamic spreadsheets.” Too often I see spreadsheets that do not fully benefit from the power of Excel; they are used only use it as a way to list numbers or words, with little regard for formatting much less using formulas. But when I work with clients to help plan out a growth strategy or apply for a loan, it’s not just a neurotic tendency towards tidy spreadsheets. It’s about creating a dynamic tool that can help entrepreneurs understand the different levers in their business (and lenders can easily evaluate the investment opportunity).
So what do I mean by “dynamic” and “levers”?
Small business owners send out dozens of invoices a month (a food producer or farmer who sells wholesale, a consultant like me, or catering company), it can be difficult to track who’s paid and who hasn’t without a good system in place. If you send a client multiple invoices a month (like many farmers and corporate caterers do), this can be even more difficult: they may have paid some but not all, and you have to keep track of which one. In fact, that happened to me recently – I had sent 5 invoices to a single client (one for each project), and when the payment came, it was not for the full amount of all 5 invoices. If I wanted the client to pay the full amount, I needed to let her know which ones were outstanding. Continue reading
Math, along with numbers in general, scare many small business owners. Rather than deal with this fear, they often stick their heads in the sand and ignore the hard truths and opportunities that come from understanding the financials. Helping farmers understand numbers, and feel empowered by them, has been the focus of my work for the last 8 years, and the impetus for The Farmer’s Office.
As important as the numbers are, successful businesses need more than just a good handle on them. A few weeks ago I visited with two different farmers; both lamented the drought conditions and the bone dry ground. While both farms experienced painfully low production volumes, one was in danger of going out of business; the other was just suffering a bad year.
What struck me most was that one farmer (let’s call him Slavo) generated $1,400 per acre in revenue, whereas the other (Moppet) was earning $15,000 per acre. Both farms suffered the same drought and both farms had comparable soil conditions. Yet, one is decidedly more successful and better positioned to weather an off-year.
How much revenue do you want to earn in the coming year? $150,000? $300,000?
If you’ve read books like The Secret you know that you need to put out into the universe what you want. But putting down on paper or into the universe what you want isn’t a guarantee of achieving your goals. You need an action plan to get there.
The action plan may be a marketing plan (how to get the customers in your door, buying your products) or an operating plan (how will you produce your goods and services). And in order to define how many customers you need, and how you will service them, you need a deep understanding of your sales goals.
In this article, I’m going to address how to break down your revenue goals such that you can create the action plan. To understand your revenue goal, translate it into number of customers and average sales.
In Part I, I shared the process by which I created the manuscripts for The Farmer’s Kitchen and The Farmer’s Office. For as difficult as this may have seemed, it really was the easy part. I wrote about my passion, what lights me up. The production phase was far outside my comfort zone, and more difficult. You can hire designers and marketers, or you can do it yourself.
Part II: Publish Your Book
Step 1: Layout and Design
In the editing phase, I encouraged you to think about the structure of the book, and how you want it to be formatted. How many levels of headers do you have? What do you want each one to look like? Now you want to take you formatting ideas and apply it to the layout of the book.
For many entrepreneurs, planning growth through spreadsheet analysis is pretty straightforward. Though entrepreneurs may not like numbers, or have a particular affinity towards them; numbers are black and white. Human Resources, on the other hand, are more nuanced, with many shades of gray. I watch my clients struggle with their new roles as managers (instead of practitioners); and I’ll admit, I’ve struggled with this too as I’ve grown my consulting practice: how to balance the “doing” with the “managing.” What is my new role in the business? What roles do new hires play?