Profit analysis. Even the name of it sounds intimidating. In this post, we are going to go over what profit analysis is, why it is a powerful tool for the financial health of your flower farming business and how to increase your profitability.

What is a profit analysis for a flower farmer?

The act of performing a profit analysis is looking at the financial choices and moves that you made during the year. It is a hard look in the mirror, if done properly. We are going to take all the spending and sales, tear them apart, then question every decision. This process is going to require stripping away your feelings or thought process at the time of making those said decisions.

Whether those decisions were right or wrong, the numbers are going to begin to leave us a trail of bread crumbs to either repeat those decisions that were fruitful, reassess the ones that have potential or abandon the ones that cost us profits.

Why do we want to perform a profit analysis as a flower farmer?

Simple, to aide us in making better financial decisions to increase the profitability of our flower farming business.

While understanding what were are trying to achieve might be rather simplistic on the surface, actually understanding how the many financial variables is effecting your bottom line is quite complex.

Alas, do not lose hope. This is a subject I speak to many of my small business clients often.

The complexity of this task funnels down to really only three main ways that will allow you to increase your profits:

Price point
Cutting costs
Selling more

Before getting into analyzing your profitability, let’s breakdown these three areas further.

1. Price point for flowers

Oh pricing. We have such a love-hate relationship when it comes to pricing but it is such an important and impactful directly area effecting the bottom line for your flower farm. Too low of price and you will find yourself successful in terms of selling out of product, but on the other hand, at the end of the day will barely have any profits to show for it. Conversely, product priced too high results in low sales still leaving you with barely any profits to show for your efforts which can even feel worse tossing flowers into the compost.

Pricing is a topic that we could write several blogs on and still not cover all the nuances. In this blog, the focus is not how to price but rather how to analyze what your current pricing is. Profit analysis needs profits to analyze and you can’t have profits without sales and you can’t have sales with out already priced products… it is quite the ripple effect.

I’m going to share with you a ripple effect we faced when we first started out.

Supply versus demand and it’s effect on pricing for the flower farmer

Our first “real” year of actively selling flowers, Jessica and I were approached by a market manager to become a vendor at her rather esteemed farmer’s market. The market’s flower farming vendor was retiring after nine years of selling at the market. Since the market manager approached us in late April to start becoming vendors in early June, we were wholly unprepared.

Fortunately, the market manager had gleaned knowledge from the previous flower farmer and took us under her wing. The market manager set up a meeting with the retiring flower farmer for us and shared her knowledge on everything she thought we needed to know, which included our pricing. The previous flower farmer was the only flower vendor at the market and they sold there for almost the entirety of the market’s existence, shy of one season. They had set the expectations of quality and value of bouquets.

The market manager instructed to keep our price points and offerings the same as the previous flower farmer.

The thing is, our flower farming business model and our season in life was incredibly different than the previous flower farmer. They had acres, high tunnels, were of retiring age and the flowers she grew didn’t need to be profitable. The previous flower farmer only needed enough sales to cover their costs since their main product offering that carried them were vegetables.

Her husband also had a profession outside of their farm. Us, on the other hand, were a young family strapped for cash without money to invest in the bells and whistles of walk in coolers and we had 1600 square feet to work with! Most importantly, we were looking to the flower sales for profit, not to only break even.

With good intentions, the market manager convinced us to stick with the price point and sizes of the previous flower farm’s offering. A “small” $5 bouquet and a more lavish $14 mixed bouquet.

This is an appropriate time to introduce the most cliche of economics: supply versus demand.

The farmer’s market was a popular and beautiful market. Thanks to that and the previous flower farmer, the demand for flowers was there. Thousands of people poured into the market Saturday morning. The demand was great but supply, well, that was a totally different issue.

Remember, we had a lot less volume and more sales need than the previous flower farmer. A farmer’s market that starts at 8:30am and you sell out at 10am may sound like a victory, but it wasn’t. Market rules stated: even if you sold out, you had to stay until the end of the market, which was 1pm. Consequently, for three hours we were stuck and it didn’t really make us money.

Be careful when changing the price point of your flower farming products

To be clear, volume of product was not solely to blame on our selling out fast. There was demand at the market but price played a huge factor. Our prices were too low! After a few weeks of selling out too fast with not much to show for it, we made the hard decision and increased our prices. After that, we found a bit more balance.

We didn’t sell out as fast and we began to see enough profit to satisfy us at that time. The demand was there, supply was limited, therefore, the customers who were willing to pay more got the prize. We still ended up selling the same amount of product, but by raising our prices we were able to be more profitable with that amount of product.

The supply versus demand is not limited to farmer’s market sales. When I stop and think about it I can’t actually come up with an example of a sales outlet/product where supply versus demand does not apply from weddings to farm stand bouquet to dahlia tubers, it applies.

Idealistically I would recommend that you experiment with what you price your offerings until you see your revenues maximize as a whole but that is not realistic. Unfortunately, most customers don’t take too kindly to weekly fluctuation of prices.

Determining and analyzing whether or not you are pricing your product offerings correctly takes some reflection.

Some questions to ask yourself during the reflection process:

Are you selling out of all of the product that you are able to get out of the field but at the same time not having much to show for it? If so, raise your prices.
Are you having a lot of potential customers balking at your prices or ghosting you after they receive your price list? Consider lowering your prices.
Are you finding yourself unable to keep up with the demand of your product but are content with the sales revenue? Consider raising your prices. It will even out your work load by lessening the demand for your product, allowing you less output without losing revenue.

Final point, if you do determine that you need to raise or lower your prices, don’t go at it too aggressively. Ease into changing your prices slowly and watch how the market reacts. You don’t want to go about it too forcefully that you overshoot your ideal price point.

Sometimes your pricing isn’t the problem with you profitability, let’s go into the second way to increase profits.

2. Cutting Costs for your flower farm

Reducing costs takes looking inwards and enacting self control.

I know my experience with Jessica, there isn’t a pretty flower that she has met that she doesn’t want.

I do have to give it to her that the variety of flowers and components that we grow have saved us a time or two and allowed her to make some beautiful arrangements but they don’t always lead to increased profits. Being able to look critically at what you spent your money on during the year and how it translated to sales and profits allows you to be able to see the areas of bloat.

It also allows you to see the areas that caused straight up loss and need to be cut to increase profits.

When Jessica approached me with wanting to start a flower farming business, I asked her: how was she going to sell the flowers and who was going to buy her flowers? She would respond with such confidence “I don’t know but they will sell.”

Well, she was both right and wrong. At our last property, she sold mostly every stem we could grow but when we upgraded to our current property- it was a different story. We have been able to grow so much more than we previously could that at times is has lead to us overgrowing certain varieties that didn’t sell.

Overgrowing cosmos is a much less risk than overgrowing some other varieties. You are out the small cost of seed, soil and the opportunity cost of having a different variety grown in that space. It’s not ideal but not a deal breaker. If you are overgrowing high cost varietals such as tulips or ranunculus- you’re going to be out a lot more than just opportunity cost. Reducing the amount of varieties that didn’t sell or were profitable is one way to reduce costs.

Similarly, chasing “unicorn” or the latest and hottest varieties when your offerings and sales don’t really justify the investment is a good way to spend more than you need. While that trending dahlia variety may be gorgeous, you may also be able to find a more affordable variety that is similar. Un-patented varieties and varieties that have been around for longer than a couple years will be much more affordable to invest in.

The less you spend, the more potential for maximizing your profitability easier. By controlling the impulse purchases of these more newer and expensive varieties is another way to reduce cost.

Limiting spending on seeds, bulbs and corms is only one area. Other business expenses such as advertising that didn’t give you the return on that investment. Various subscriptions, memberships or other services that you are not longer using, finding value or are advantageous enough to help you increase knowledge or profitability.

DIY-ing tools and materials that make sense such as making your own bouquet sleeves in lieu of pre-made ones if your product’s price point can’t absorb the added cost.

Most of your expenses can and should be analyzed to see if they can be reduced or straight up removed.

After all this, maybe you feel you have priced your products correctly and that your expenses are relatively lean but you are still looking to increase profits. This leads us to the last way to increase profits.

3. Sell More

Time to hustle and sell more product, it’s that simple…

You can do this by sheer volume, added value items, season extension- there are so many ways to be able to sell more. Selling your products through different sales outlets, having snowball products, proper marketing. In this post, we are not going to go into telling you how to sell more, though we have plenty of blogs to help with that along with more on the way. Truly, all the topics we have currently and to come are only scratching the surface on the ways to increase sales.

What I want to focus on here is how to understand if your pricing and spending are in line with where they should be, then all you may be missing is more sales.

Let’s go over some ratios that can better help you determine if selling more is the solution to growing your profitability.

Gross profit & operating profit margins

There are a couple ratios to help you better understand how the sales you make stack up against your expenses, specifically Cost of Goods Sold.

The Gross Profit Margin (GPM) is a ratio of how much profit you made in relation to how much it cost you to make its, your Cost of Goods Sold (COGS).

Let’s backtrack really quick. Cost of Goods Sold (COGS) is only the expenditure (expenses) that go directly into making (growing) of your product. For the flower farmer some COGS examples are:

Seeds, corms, bulbs, tubers, plugs, etc.
Soil & Amendments
Packaging
Direct Labor
Garden supplies (irrigation, weed cloth, etc.)

The idea is to identify the items that go directly into the product and they are items that if removed, you wouldn’t have the product.

Now back to Gross Profit Margin…

The Gross Profit Margin (GPM) for any given farm/grower is relative. I would estimate a healthy GPM would be in the range of 65-90%. This means that is only cost you 10-35% to generate your revenue (sales).

Does this mean that if you have a GPM of 50% or lower that you have a problem? Perhaps. It could also mean that your margins are slimmer and that what you lose in GPM you make up in volume of sales, that your overall Net Income is at an amount that is healthy for your business.

If your GPM is lower than 65%, you should consider why in this order:

Is my product priced correctly?
Am I spending too much on COGS?
Do I need to make more sales?

Hmm… those three items sound familiar, don’t they?

Once again, if you feel confident in your pricing and spending then you need to increase sales.

Next ratio is Operating Profit Margin (OPM), which takes GPM one step further by adding to your expenditures general and administrative expenses (all the other expense besides COGS). OPM needs to be looked at in conjunction with GPM.

The idea is that you first make sure that your GPM is inline with where it needs to be and then you look at all the other expenses that really tell the story of how you ran your business. Once again it is hard to give a concrete recommendation of what a healthy OPM is but I would estimate and say, in general, between 30-60%.

Let’s take a look at a scenario where we take a look at the GPM and OPM and what it means. Let’s say your GPM came out to be about 80% (healthy) but your OPM calculated out to be 20% (not healthy).

From this scenario we can deduce that the growing of your product is good but your operating of your business can use some improvement. Some areas to look at in a situation like this example would be Advertising, Dues & Subscriptions, administrative wages or other glaring expenses.

If both your GPM and OPM fall into “healthy” percentages along with you feeling that your pricing and spending are all within reasonable levels then don’t worry about adjusting them. Rather, put your energy into making more sales.

What if though your GPM is at 60% and you don’t think you could possible reduce your COGS any further than you already have? More sales would definitely be the answer here. In most cases, if you have given proper consideration to your pricing and expenditures all that is needed to push you into being more profitable is more sales.

We know though, more sales is always easier said than done.

Your numbers spin the tale of you and your farm.

It answers many essential questions that as a business person you should be seeking such as:

Am I hitting my goals in profitability?
Am I maximizing the farm’s profitability?
Am I pricing my products correctly?
Am I overspending?
Am I selling enough?

Coupled with utilizing the ratio formulas we shared if any of those answers are no, you can really begin to pinpoint what went wrong along the line in your decision making process. On the other hand, if you are doing it right it will help tell you how to keep repeating that success.

Taking the time to go over your numbers will allow you to make better decisions for your flower farming business to allow it to grow, thrive and be manageable. Ultimately, for your flower farming business to be profitable.

Analyzing Profitability for the Flower Farmer