Know Your Business and Make Sensible Capital Expenditures

By Dan Gerace, Production Manager, Welby Gardens

I, like many in horticulture, came from the science side with a passion for biology, plant science, and gardening. Traditionally, horticulture is the art and science of growing fruits, vegetable, flowers or ornamental plants. Colorado State University’s horticulture degree description of horticulture has a more modern take—applied scientific principles in the growing, marketing, processing and utilization of fruits, vegetables, flower and foliage plants, trees, shrubs, and turf grasses. The business aspect has become a very crucial part of horticulture, and together with the science, is necessary to be successful in this industry.

As you read, think about the following as business advice from a non-business major. The definitions are included just so we are all on the same page:

  • Capital expenditures (CapEx) – Investment made to secure future profitability. These are expenditures that have long term effects and drive the direction of the organization.
  • Return on investment (ROI) – Measured as revenue increase, cost reduction, and/or time saved. It is calculated as the gain from the investment minus the cost of investment divided by the cost of the investment, expressed as a percentage or ratio.
  • Payback period – Time it takes to get back the amount of money originally invested in something.
  • Profit margin – Measure of how much money a company is making on its products or services after subtracting all the indirect and direct costs. Generally, above 10% is good and 5% is too low.
  • Depreciation – The practice of spreading the cost of a capital expenditure over several years, which can help with cash flow and tax savings. Currently, bonus depreciation can be used to write off up to 80% of the capital expenditure in the first year, reducing your taxable profit. This program decreases by 20% each year over the next 3 years and will cease to exist in 2027.

First CapEx Experience

My first experience in making a CapEx decision came a few years after I became a grower. It seemed that overnight natural gas prices jumped to three times higher than they had been the season before. Prices of the products were set, most of the other expenses were set in motion, and with this single line item, we were looking at little to no profit at the end of spring. We need natural gas to heat the greenhouses as growing crops too cold means they suffer and may not be ready for the market.

The answer to this dilemma was to use less fuel. So, how? We needed to improve the efficiency of the facility. The lowest hanging fruit, the most bang for our buck was to install energy curtains. In the simplest of terms, the payback period was two years. That is, all the costs associated with the systems purchase and installation would save enough fuel in two years to completely pay for that investment which had at least an 8-to-10-year life before more investment would be required. A no-brainer, right? Well like I said, little to no profit means only spending cash on the absolute necessities. Before a system was purchased, fuel costs came down about as fast as they had risen. At this lower cost of fuel, the project had more like a 6 to 8 year pay back and a lower ROI, so that project never happened.

Work Smarter

Every year my partners and I evaluate many possible CapEx projects. Mostly they are based on what we need to run our business efficiently. One of the best ROIs we had in the last decade was the purchase of transplanting machines. At the time labor had become our biggest concern. With a shortage of workers, we couldn’t just throw more people at the problem anymore. Fewer available workers and people leaving for other industries meant we needed to drastically increase wages to even get help. Labor costs were quickly out pacing our market and shrinking our profit margin yet again. We began to run labor studies. How could we get more output? We needed to work smarter not harder. After evaluating the labor numbers, we purchased a large automated/robotic transplanter line. The system improved the output per person and paid for itself in labor savings in less than two years. Since then, our investment into punch transplanters has further increased our labor-saving efficiencies, and getting crops planted on time increased our overall revenue.

Balancing Act

Why doesn’t every greenhouse have the latest automation, energy efficient equipment and the most highly compensated employees of all fields? Well… it is a balancing act. There is not an unlimited supply of cash and if there is extra, have the best plan ready. The best advice is to truly know your costs, address your most critical needs and be constantly looking for new ways to evolve to be more efficient.