Business - Survival in an Economic Downturn: Focus on Business Basics

It is important to focus on business basics, especially in tough economic times. The following the first in a series reviewing business basics for horticultural firms.

The end goal of any horticultural business is to produce a profit. Profits = [Revenues – Costs]
Whether profits are positive depends on revenues and costs. From the equation, there are two options to increasing profits: keep revenues as large as possible and keep costs as small as possible.

In addition, you need to have a clear understanding of costs incurred. Costs of running a business fall under two broad categories: overhead (fixed) costs and variable costs.

Overhead or "fixed" costs do not change as you alter your output. Examples of overhead costs include what are known as the "DIRTI 5":
1) Depreciation of equipment
2) Interest on investments (borrowed capital)
3) Repairs and maintenance of structures and equipment
4) Taxes
5) Insurance
Many other costs may fall into overhead such as office and record keeping costs, property rental, and energy required for office or shop heating and electric. Reducing overhead costs can increase profits but is not always feasible.

Variable costs vary, or rise and fall, with changes in your output. Inputs such as fertilizers, pesticides, containers, potting mix, liners, mulch, plant materials, fuel, and labor are examples of variable costs.

Your job as a business manager is to know your costs and to keep the costs in line with your revenues. Very simply, make sure that your cash inflow exceeds your cash outflow. Revenues play a key role in making that happen. Revenues can be defined as the selling price of the product(s) or service(s) times the number of units sold. Therefore revenues can be increased by selling more product(s) or service(s) and/or by raising the prices.

Adapted from "Marketing Nursery Products" by John J. Haydu, University of Florida.