FINANCIAL ANALYSIS OF A SMALL BEDDING PLANT NURSERY IN FLORIDA

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1 Table 4. Estimated variable costs and annual fixed and variable costs of four irrigation systems using well water for potted chrysanthe mum production in a 4 ft x 42 ft structure, Variable Costs $3./hr Electricity Total variable costs/crop Annual Fixed and Variable Costs Annual variable costs Fixed costs (Table 2) Total annual fixed and variable costs/house Total annual fixed and variable costs/acre Capillary mat $ 31 $ 62 $ 377 $ 1,8 $11,46 $12,964 $ 3,324 Tube weight One 9 Day Crop $ 31 $ 2 $ 367 Four 9 Day Crops $1,468 $,112 $6,8 $1,687 Overhead Hand sprinkler watering $ 63 $ 333 $ 963 $3,82 ^2,86 $6,712 $1,721 $ 28,3 $ 7 $ 28,47 $113,628 $ 2, $11,628 $ 29,648 Annual fixed and variable costs varied among irrigation systems and water sources. Regardless of water source, the tube weight and hand water systems had the lowest and highest annual fixed and variable costs, respectively. Costs for the capillary mat and overhead sprinkler systems were affected by the water source. The use of less water by the capillary mat more than offset the higher cost of water when using municipal water, while the overhead sprinkler system using lower cost well water had a lower annual fixed and variable cost. As can be interpreted from this analysis, growers con templating building new structures or installing new irriga tion systems should compare the fixed and variable costs of the different systems available. For example, the tube weight system offers a potential cost savings of $34 ($1,721- $1,687) per acre per year. Hence, during times of decreasing quantities of water and increasing costs to pump or pur chase water, this savings could likely increase in the future. The tube weight system in this light could be viewed as insurance against higher irrigation costs. The replacement of an existing system, however, re quires a different evaluation. In order to change from the existing to a new irrigation system, the fixed and variable costs for the new system must be less than the variable costs of the existing system. For example, a grower will not save money by abandoning an overhead sprinkler system with annual variable costs of $3,82 and replacing it with a tube weight system that has an annual fixed and variable cost of $6,8. In the future, as has been in the past, growers will adopt irrigation systems that produce favorable returns over costs. Low volume irrigation systems are already cost competitive for new installations and appear to be an insurance policy for future energy and water shortages. The use of water for irrigating crops will undoubtedly continue to play a major role in Florida's agriculture. Pro ducers understanding that irrigation is a necessary produc tion input which requires management and large capital ex penditures will likely benefit from the planning of eco nomically efficient irrigation systems. Literature Cited 1. Chapin Watermatics, Inc Automatic Watering for the 7's, Unpublished material prepared for Chapin Watermatics, Inc. Water town, New York. 2. Harrison, Dalton S Irrigation systems: What's best for you? Fla. Grower and Rancher. 66(11)22. December, and Rush E. Choote Selection of Pumps and Power Units for Irrigation Systems in Florida. Fla. Asr. Extol. Sta Cir. 33. a 7 s y 4. Lynne, Gary D. and Clyde F. Kiker Water Use in Southwest FloridaAn Economic Perspective. Univ. of Fla. Food and Resource Economics Department, Economic Report 82.. Waters, W. E. and Charles A. Conover Chrysanthemum Pro duction in Florida. Fla. Agr. Expt. Sta. Bui. 73. Proc. Fla. State Hort. Soc. 92: Ralph Semprevio VPI and SU, Department of Agricultural Economics, Blacksburg, Virginia 2461 Dan L. Gunter and J. Robert Strain I FAS, University of Florida, Food and Resource Economics Department, Gainesville, Florida Abstract. Potential investors in greenhouse plant produc tion must know how returns from the investment compare with other alternative uses of their capital. Determination of the financial feasibility of a greenhouse investment re quires enumeration of the capital items and the variable inputs required along with a projection of sales. Proforma financial statements can then be developed and used to evaluate the financial feasibility of the proposal. In this paper a financial analysis of a small bedding plant nursery is presented. The procedure used for this analysis may be used to evaluate other types of investment proposals. FINANCIAL ANALYSIS OF A SMALL BEDDING PLANT NURSERY IN FLORIDA Florida Agricultural Experiment Station Journal Series No This study resulted from interest expressed by investors with limited capital in the production of flowering bedding plants. An engineering cost approach was used for this evaluation. Input prices reflect 1977 levels and were taken from published sources. Minimum capital investment pro duction techniques were assumed for the cost estimates (as long as they encompassed accepted horticultural practices). For example, hand watering was utilized rather than an irrigation system. Potential bedding plant producers can use the information in this report as a guide in evaluating their own proposed nursery. Each potential investor should perform a financial feasibility analysis which incorporates information specific to their own operation. Description of Proposed Operation The proposed operation was to be located in central Florida. The potential investor owned the land which already had a well. The business was set up as a proprietor ship. The proposal included two 3 X 96 feet CRITERION pre-fabricated greenhouses. These could be assembled by two men within a week's time. The design utilized wooden 38

2 benches with screen tops yielding 197. square feet of bench production area per greenhouse (Figure 1). Twentynine benches could be placed in each greenhouse. Each bench had space for 39 flats each containing 6 plants. Thus, 2,262 flats could be produced during each crop period. An area was set aside within each greenhouse for potting to eliminate the cost of a separate potting shed. In future years, a potting shed could be added thereby increasing the production bench area. Initially, watering was to be by hand. Again, in future years this could be automated through the use of a watering system which would likely in crease the quality of watering. The owner was expected to provide the largest portion of the labor during the six months of production. One part-time worker to assist with transplanting and watering should be sufficient for this size of operation. Market Considerations Flowering bedding plants (such as petunias, geraniums, and mangolds) are commonly sold on contract. The 1977 rate was about $3.2 per flat (6 plants per flat). Conven tional retail outlets are retail greenhouses, nurseries and garden centers. About 3 percent of the total volume is sold through mass merchandising outlets such as variety and discount stores. Retailing directly is possible permitting a higher return (up to $8. vs. $3.2 per flat average selling price) but there are added costs such as transportation and ~:. 1 additional labor. No budgets were prepared for the retail alternative. The timing of sales is important as the plants are at their most salable size for approximately one week. Plants may be kept longer if refrigerated to halt growth. There are two main markets per year, the first around February 1 and the second around September 1. Growing time for most bedding plants from seeds, including germination time, is around ten weeks. Thus the greenhouses are only in operation for about six months of the year. Therefore, the opportunity exists for alternative income to be earned during the other six months. These alternatives were not evalu ated. Capital Asset Requirements and Costs Capital building and equipment needs were estimated at $11,193 (Table 1). No salvage value was expected for any of the assets. Annual depreciation was calculated on a straight line basis and amounted to $1,23.44 per year. Variable Costs Cost information for Table 2 on gas, electricity, taxes, license, bonds, insurance and repairs was taken from an earlier study on greenhouse production cost with adjust ments made for inflation [2]. Other cost items were based on dealer price lists. A discount could be expected if order ing these items in quantity but was not taken into account in these figures. Total variable costs were estimated at $8,11.26 for the year or about $1.8 per flat (Table 2). 's-1 ".,' Fig. 1. Sample greenhouse layout for bedding plants, ;g o Projected Cash Flow The plan was to start construction of the greenhouse in October. This should have allowed plenty of time to get prepared to meet the February market. Information in Tables 1 and 2 provide the basis for a cash flow analysis (Table 3) to analyze liquidity and loan repayment capacity for the first year of operation. Operating capital (or beginning cash balance, line 26) consisted of $4, initial investment provided by the owner and a $12, loan. The loan at 9% interest was scheduled for equal semi-annual payments during the first four years of the project (line 24). The summary shows the first year cash balance of $6,28 (line 29). Table 4 summarizes the cash flow projection for the first five years of operation. The net cash flow to the owner (line 9) is the expected cash flow resulting from the sale of plants Table 1. Estimated capital building and equipment needs for the production of bedding plants, small Florida nursery, Description Cost Useful life Annual depreciation allowance Greenhouses Heaters & Fans Benches Coverings Equipment Totals 2 3' x 96' CRITERION 2 MODINE PA 1 A heaters $28 4 WINDMASTER DC 36 G-2 fans $41 Wolmenized 2x4 and exterior plywood screen covering on bedding benches MONSANTO 62.6mil.12 AMEREX U-V FILM inflating equip. 47 percent shade material black polypropylene Germinating chamber Misc. tools, hoses, carts, HOZONE regulator sprayer,96 2,21 Years , ,193 1,

3 _ Table 2. Estimated variable expenses for production of bedding plants, small Florida nursery, Description Units Quantity per crop Price Flat* Cost Crop Cost Annual Cost Containers Media Seedsy Tags Chemicals Labor Fuel* Electricity* Taxes, licenses, bonds* Insurance* Repairs* Cell paks 6 cells/pak 1 paks/flut 1 flats/case Open flats Pre-mix plus fertilizer Assorted Plastic 1/flat Regulator Insecticides Hired for transplanting and watering LP gas case case 4 cu. ft. bag 1/128 oz. each lb. hr , ,3. 1, , , TOTAL ,7.63 &,11.26 zbased on 2,262 flats per crop. ybased on petunias with each package containing 2, seeds and a 9% germination rate. *Based on Gunter, Business Analysis of Foliage Nurseries, 1976 [2]. minus operating expenses, interest and principle payments on the loan, and income tax payments. These figures do not take into account an owners salary as part of the costs. The difference between line 9 of Table 4 (net cash flow to owner) and the cash balance figure appearing on line 29 of Table 3 for the first year consists of an excess of loan and owners investment over cash outlays. Table 4 shows only cash flow resulting from operations. In year four, the loan is paid off resulting in a $3, ($3, principle and $ interest) increase in cash flow in year five. Criteria For Investment Evaluation Net present value (NPV), a method for considering the time value of money, provides one economic criterion for accepting or rejecting various investment alternatives [1]. It consists of converting expected cash flows in the future to a present time basis through discounting. Investors com paring two investments will select the project yielding the highest net present value of the expected cash flow. Discounting is the opposite of compounding. For example $1, invested at 1% will be worth $1,1 at the end of one year. Conversely $1,1 to be received one year from now is worth $1, today at a 1% discount rate. Se lection of the discount rate for use in evaluation of an in vestment is often based on the required rate of return or on the highest returns that can be earned on capital in vested in the next best alternative. NPV is calculated as [1]: where: EQUITY NPV -CAPITAL + Pi, P2> 31 Vn = INVESTMENT I + i Vn annual net cash flow that can be with drawn each year, salvage or terminal investment value, n = number of years included in the in vestment analysis for the project, and i = the discount rate or required rate of return on the capital investment. In the proposed bedding plant operation the owner provides $4, of equity capital. The NPV of cash flows to owner (Table 4, line 9) for five years at a 1% discount rate is: NPV = -$4, , = $3, The positive NPV indicates that the project returns more than the selected discount rate (1%) and therefore is an acceptable project from this stand point. The NPV of the projected cash flow stream for the next five years at a variety of interest rates is shown in Table. The owners original investment of $4, is paid back by the fourth year at any discount rate chosen. The cash flows used for the NPV calculations come directly from Table 4. Sensitivity of Annual Returns Effects of various prices and salable output levels can also be examined (Table 6). The average price of $3.2 per flat which was used in this study along with a 9 per cent yield resulted in annual returns of $. This value was calculated as: Flat production X percent salable plant X price operating expenses depreciation or: $4,24 X.9 X $3.2 = $ Sales Expenses - Depreciation $ Annual Returns The expenses do not include the interest cost, note repay ment or owner's salary. If losses are 3% (or 7% of the plants are salable), annual returns are reduced to $938 at the $3.2 price. Ob viously retailing the plants shows a much higher annual

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5 Table 4. Five year projection cash flow summary for the production of bedding plants, small Florida nursery, PERCENTSALABL^lANTS^r Years Total cash inflow* 2. Cash operating exp. 3. Depreciation 4. Interest on loan. Taxable income ( ) 6. Income tax* 7. Principle payment 8. Total cash outflow ( ) 9. Net cash flow to owner (1-8) 3, 3, 3, 3,,114 *4,24 flats at $3.2, 9% salable.,_.,,,, u ynot a cash expense but an expense which should be included when taxable income is computed. The straight line depreciation method was used. xassuming $3, personal exemption. Table. Net present value of cash flows for bedding plants at various discount rates*, small Florida nursery, Discount rate Present Value SELLING PRICE PER FLAT (DOLLARS) Fig. 2. Break-even prices for producing bedding plants, small Florida nursery, in Figure 2. The equation used to calculate the break even price is: 2% 4% 6% 8% 1% 12% 14% 16% -2,22-2,1-2,79-2,66-2,631-2,66-2,68-2,74-2,726-1,44-1,13-1,212-1,29-1,364-1,43-1,2-1,66-1, ,912 1,628 1,36 1, ,26 6,26,68 4,944 4,376 3,86 3,391 2,963 2,71 total costs percent salable flats X number flats For example, $9,34.3/flat.9 X 4,24 If only 7% of the flats are salable, the break-even price for total costs increased to $2.9. zcalculations are based on a return of $ per year for the first four years and $,114 in the fifth year (from Table ) with a $4, initial owner investment. Table 6. Estimated annual returns from production of bedding plants, small Florida Nursery, 1977.z Percentage salable plants Selling Price Per Flat retail ,73 3,313 1, ,673 2,22 4,218 17, ,4 2,48 3,313,123 19, ,182 3,144 4,1 6,28 21,49 1,843 2,861 4,897 6,932 23,219 2,46 3,39 4,614,688 7,837 2,28 zcalculated as total revenue minus total cost or (flat production x percent salable x price) (operating expenses + depreciation) Costs do not include owners salary or interest costs or note repay ment. Flat production is based on 2,262 flats per crop with two crops per year. return, but no allowance for additional marketing costs associated with retailing were included. Another question often posed is what price per flat must be received in order to break-even. Break-even prices for various percentages salable flats using total costs, cash costs, and total costs plus a 1% variable price increase is shown 312 Projected Financial Statements Information from Tables 3 and 4 was summarized into a statement showing income, expenses and profitability for the first and fifth year of operation (Table 7). At the $3.2 price level with 9% salable flats, retained income is pro jected to be $242 the first year and $ the fifth year. The statement of financial position (balance sheet) shows the assets, liabilities and net worth at the end of the first and fifth year of operation (Table 8). The cash on hand at the end of the first year comes from the cash flow projection (Table 3, line 29). The $9,97 in fixed assets is derived by subtracting the depreciation for the first year from the original cost of $11,193. Total assets at the end of the first year are valued at $16,242. After a $3, note payment, the $12, note has been reduced to $9,. Sub tracting the liabilities from the assets provides the net worth ($16,242 - $9,) of $7,242. The financial position at the end of year five was calcu lated in a similar manner and shows net worth to be $2,846. It must be noted that these figures do not allow for any owner salaries to be withdrawn from the business. Also, cash holding at the end of the fifth year will be altered in the sixth year as the germinating chamber and shade ma terial will be fully depreciated suggesting a possible end of their useful life. Financial Feasibility Calculations indicate the owner's investment could be

6 Table 7. Projected income statement for first and fifth year of a bedding plant operation, small Florida nursery, Table 8. Projected statement of financial position, small Florida bedding plant nursery, Amount First Year Fifth Year Balance Sheet End of First Year End of Fifth Year Income: Plant Sales Expenses: Cell paks Open flats Pre-mix Seeds Tags Growth regulator Insecticides Hired labor Fuel Electricity Taxes, licenses, bonds Insurance Repairs Depreciation Total Expenses Net Returns Less interest paid Net Income Less note payment Retained income 1,36 1, , , ,34 3, 242 3,232 1,36 1, ,2 4 6 recovered in year three with a.7 percent or lower dis count rate. The net cash flow to the owner could be $1,48 annually for the first four years, then increase to $,116 for the six months operation during year five. The net worth could increase from $7,242 at the end of the first year of the project to $2,846 at the end of the fifth year, assuming no owner salary was withdrawn from the business during this time. This could be a suitable investment for someone with land and time on their hands, and who is able to forego an income stream for the first four years. Otherwise, it would not be recommended that this venture be under taken on the scale investigated in this study. On a larger scale, a healthy return could perhaps be generated. However, , Assets Current Assets: Cash Total Current Assets Fixed Assets: Book value of fixed assets LessAccumulated deprec. Total Fixed Assets Total Assets Liabilities Current Liabilities: Taxes payable Total Liabilities Long Term Liabilities: Notes payable Total Liabilities Net Worth Total Net Worth Total Liabilities & Net Worth 6,28 11,193 9, zsum of total cash difference Table 3, line flows for years 2 through from Table 4. 6,28 9,97 116,242 $ 9, 7,242 $16,242 1,833* 6J8 1,833,13 $2,846 $ o 2,846 $2, of 6,28 and annual cash different production techniques, hence capital requirements and operating expenses mean alternative size operations would need to be evaluated in the same manner as the operation evaluated in this report before a decision was made. Literature Cited 1. Hopkin, J. A., P. J. Barry and C. B. Baker, Financial Management in Agriculture, The Interstate Printers and Publishers, Inc., Gunter, Dan L., Business Analysis of Foliage Nurseries in Florida, 1976, Food and Resource Economics Department, IFAS, University of Florida, Gainesville, October, Proc. Fla. State Hort. Soc. 92: PIXIOLA: A NEW CUT FLOWER FOR FLORIDA1 Gary J. Wilfret IFAS, University of Florida, Agricultural Research & Education Center, 7-6th Street East, Bradenton, FL 338 Additional index words, corm, cormel, miniature gladiolus, standards. Abstract, Thirty-eight Pixiola (small-flowered gladiolus) cultivars were evaluated for their flower and corm pro ductivity in Florida. Criteria (i.e. spike length, flower size, etc.) were established to define a Pixiola for use as a new cut-flower crop for Florida production. Spike length among iflorida Agricultural Experiment Stations Journal Series No cultivars ranged from 31.6 inches ('Monkey Face') to 46.1 inches ('Jackpot'). These 2 cultivars also produced the extreme rachis (flowerhead) lengths of 11.9 and 2.3 inches, re spectively. Only 17 cultivars had flowers with a maximum diameter of 3 inches, the limit established for a Pixiola. 'Gallery' produced the most spikes per corm planted but 'Cheerleader' produced the greatest number of marketable spikes. Corm yields were proportional to number of flower spikes produced. Gladiolus (G. hortulanus) have been developed through interspecific hybridization over the past 173 years into one of the major cut flowers grown in the United States (4). Over 148 million gladiolus spikes were sold in the U.S. in 1978, with a wholesale value of 16.2 million dollars (9). Historically, most breeders selected gladiolus plants with 313