Budgeting for the flower farmer's second year and beyond
Ah, budgeting.
Where you sit at the dinner table listening to your spouse’s justifications for needing another 500 dahlia tuber clumps while they have over 5,000 individual tubers wintering over in the garage.
Obviously, you are too narrow minded to see all the gaps in our already existing dahlia collection with color and variety. You couldn’t possibly expect them to make do with this inferior palette of colors for next year’s design engagements! How can you not see that they will easily pay for themselves when everyone comes flocking to buy flowers from them next year because they have the most in demand varieties? It just makes sense, right?
In all good fun though, we do like to sit down together in the beginning of the year and rough out a budget.
Like a real budget!
One with forecasted sales based upon industry trends and National economic estimates, and with included hurdle incentives for Jessica if she reaches them… Isn’t that how you’re supposed to do them? I mean… that’s what I was taught they would be like in my managerial accounting classes in college.
Joking aside, if you are here, you won’t be preparing a budget like big corporations do for their management.
To be honest, if the budget is just for your use, you can make it look and work however is best for you. In the end, all that matters is that you get the information out onto paper. This allows to to better formulate a strategy for you flower farm for the coming season.
However, in the event you are making your budget with your spouse, none of my guidance constitutes marital advice (and I do not recommend touching the dahlia button- there are never enough dahlias, just smile) ☺.
With all my legal disclaimers aside: what is budgeting and what will it look like in the context of small business flower farming?
Note: this blog post is focused on second year flower farming and beyond. If you are a first year flower farmer check out this blog to get you budgeting for your first year without historical data.
Our Goals When Creating a Budget for the Flower Farm
Budgeting can be broad and complex or refined and concise. This all depends upon what you are hoping to get to out of it.
Most budgets, and in the case of budgeting for a flower farm, focuses solely on the profit and loss. Profit and loss deals with activity (normally for a period of one year).
What we want to do is:
Take that activity for the prior period (prior year)
Analyze the prior period
Identify extraordinary events that effected the activity in the prior period
Extrapolate a guess/plan for the coming period
I know, I’m scratching my head too after writing that. Let’s break it down first into the three main categories of activity and see if we can make this a little clearer…
The Three Main Categories of Activity
Revenue
Revenue will undoubtedly be the easiest category to identify, while at the same time the most unclear on what it will actually be.
When we are talking about “revenue” we are talking “sales.”
There really isn’t too much more to it than that.
What sales did you make in the prior period and what kind of sales do you hope to make in the coming period?
This is where it can become difficult, but don’t worry, I have a few pieces of advice that make it a little easier to come to a number for the coming year.
Before we get to that, let’s look at the other categories of activity.
Cost of Goods Sold
Cost of goods sold (COGS) are expenditures that either directly go into the creation of the item for sale or are directly related to the manufacturing of the item. Also, this could be the purchase cost of an item to be resold.
For a flower farmer/farmer-florists some examples of these items would be:
Vessels/containers for arrangements
Packaging
Purchased flowers for resale
Materials that go into making an item such as wreath rings, wire/twine and anything else as such.
The nice thing about COGS when it comes to budgeting is that the cost should mostly scale with your revenue:
More sales = More COGS
Less sales = Less COGS.
General & Administrative Expenses
With General & Administrative expenses (G&A) we can expect to find any other type of expenditure that wasn’t covered in COGS.
These expenses will range from insurance cost, office expenses, dues and subscription fees, etc.
When it comes to budgeting, some of these expenses won’t change from year to year, while others will and will scale with revenue. Even still other expenses will have no rhyme or reason.
This is honestly where the majority of your time will go to in the budgeting process and where you have the most control at achieving the profitability goals for your business.
Fixed Assets (Big Purchases!)
Okay, I lied, let’s make this category number four…Fixed Assets! These are your big purchases such as large equipment and infrastructure.
Large equipment and infrastructure expenditure are difficult to handle when it comes to budgeting but are very important.
The difficult part about fixed assets is that for tax and financial reporting purposes, you are required to “Capitalize” any large equipment/infrastructure purchase that you make.
To explain the management and classification of fixed assets, however is very difficult. Honestly, this is where having a licensed CPA is advantageous since the managing and classifying of fixed assets is in their wheel house and they can guide you through this.
With that said though, fixed assets are not reported on the Profit & Loss and rather are held on the balance sheet. Only a portion of the asset is depreciated every year.
How should we handle the purchasing of fixed assets?
Well once again it depends…
If you are trying to grow your business debt free and on its own accords, then I would recommend including them at the full purchase price in the year of acquiring them.
However, if you would like to finance them, then you can take the monthly payments for the year and utilize that number.
And even further, you could choose to use that “Depreciation Expense” that your CPA calculates for you on your tax return.
However you choose to handle fixed assets is up to you and should be based upon what works with your strategy for your business development. Remember, what I am presenting to you is not a standard corporatized management budget. It is a modified and manipulated budget to work within the confines of small scale flower farming.
With that said, lets look at some other crazy ideas of mine and how to estimate changes a for the coming year.
Ways to Anticipate Changes in the Coming Year
For us, the simplest way to anticipate the changes in the coming year is to break the potential changes into three categorizes:
What do we know?
What do we guess?
What do we hope?
What do you know?
Until something is history, we can’t know with certainty anything. This hit us in 2020 season when a majority all our weddings we had booked were either cancelled or moved to 2021. The budget is never going to be dead on and at best we are just hoping it’s close (or at least gets us moving in the direction we want to go). For the most part, we know what we are contracted to provide, assuming nothing crazy happens in the world.
What areas do we categorizes under “what do we know”?
The easiest to start with is weddings. We start booking weddings at the end of summer the prior year. We have our standard retainer fee which is a percentage of the full engagement price, then we know that we will collect the remaining percentage of the engagement fees in the year of the event.
Another area that we can include in this category would be bouquet subscriptions on payment plans. What we are hoping to identify in this category any hard concrete numbers that we can.
We don’t want speculative numbers in here, just what we know we are contracted for.
What do you guess?
One of the hardest things about being a business owner is having faith that you will make the same sales, at the same time of year, year after year.
We know (guess), that come June we will have last minute brides reach out to us for bulk buckets for weddings. We also know that the majority of our bouquet subscription sales happen right before deliveries begin. As you experience the seasons, you start to get a sense of how and when sales happen. If you’re doing things right, you start to see them increase as well. So when I say “Guess” I’m really referring to historical data; what did you have for sales in your prior year?
Don’t be confused, I’m not saying what did you have for sales in the prior year and what do you hope to increase them by. We’re just talking about what you had previously.
The important thing about identifying these first two categories is that these numbers should give you a basis of what revenue you can expect to bring in. The numbers from these categories will be something to plan with and know that you will have working capital. If you are at a good place in your business, this might be all that you are planning on making for the coming year and the numbers could be relatively close. If you are still in a growth phase, then this will only be a jumping off point for you estimated revenue.
What do you hope?
Here’s where it gets fun and you get to dream a little. What do you want to happen in the upcoming year? What do you think will happen (not so much fun)?
Sure, you can approach this logically if you want. You can look at the current flower market and try to extrapolate whether or not it will lead to increase in sales for you, or potential a loss of sales. You can also, if you have more than one year, look at the difference from year to year and figure that you should have about the same growth or shrinkage. Or, you can take hold and dream big: set your sales goals high!
I ask you, what do you hope will happen?
This part is all up to you and you can be as realistic or in the clouds as you want. Be sure that it keeps you on the path that you want and doesn’t get you in financial trouble, if things don’t happen just right.
Now that I have outlined everything, let’s pull together what we’ve discussed so far.
Pulling Your Flower Farming Budget Together
If you haven’t guessed by now, I’m about to suggest you go get a print out of your last years Profit & Loss.
This is going to be the foundation of your personal budget.
To help you along, for our Flower Farmer email subscribers, I have provided a budgeting template schedule that you can download in either Excel, Numbers or as a PDF to fill out by hand. You can find this in the Flower Farmers Subscribers Only and the Flower Farmer Challenge pages that is also for our flower farmer subscribers.
I highly recommend working with either the Excel or the Numbers one, as they will allow you to input custom formulas which will make the whole process way easier (I have also input the formulas that I think you need to make the process as easy as possible).
Pro tip: if you’re comfortable with Excel and QuickBooks, I recommend exporting your last years Profit & Loss to an Excel file and then formatting the spreadsheet to mimic what I have provided in the downloadable. It will greatly streamline the process we are about to go though and will help you in subsequent years blow through the process even faster!
As you can see we are going to be working with four columns:
Prior year activity
Known activity
Estimated activity
Total budgeted amounts
The prior year activity doesn’t require much explanation take: your prior year printout and get the activity into the appropriate cells.
This is now your foundation. We’re making progress, see it’s not too terrible!
From here, we’re are going to go category by category and fill in the known or estimated amount.
Revenue
Determining your total budgeted revenue will take a fair bit of effort and consideration, but will be vital as we will use it later on to determine certain estimated expenditures.
First, let’s start with the easier part and work with what we do know.
As I previously laid out, this is where you can pull together all the revenue that you are contracted to receive: weddings, payment plans and anything else that you are in agreement to provide. Add them all up and put the total number in the corresponding cell under “Know/corresponding income account”. For the “know” area it is that simple.
Don’t go searching for sales that are on the edge just to put something here or inflate the numbers so you feel better, be real with yourself and it will bring you a lot more value out of the whole process.
With the easy part out of the way, let’s dive into the side of revenue that will set the tone for the rest of you budget.
We now need to consider what you hope to achieve in the coming season:
Do you hope to grow (revenue, not plants)?
Have you considered how you will grow (once again, revenue not plants)?
Are you going to get into a new avenue of sales that you haven’t before (weddings, farmers markets, bouquets subscriptions, etc.)?
Do you want to refine your offerings while expanding the ones to focus on?
How will this all effect your potential sales in relation to what you had last season?
If you have already made changes to your offerings or business strategy maybe you have already seen some type of response from your actions. Maybe you have people commenting on your IG post telling you how they can’t wait to see you at farmer’s market or for you to deliver their first bouquet. Maybe you have had brides reach out to you and you are already in talks with them to provide their wedding flowers. Or, perhaps you haven’t seen any response to your efforts. Whatever it may be, you need to be able to extrapolate out of this how you will think this will affect your sales.
I know this isn’t easy, but remember, this is just an educated guess at best.
Let me try and offer a simple solution for those of you that aren’t making drastic changes to your offerings this coming year and have had a solid year of prior sales:
Pick a relatively conservative growth goal for this coming year. Something between 5% to 15%. If you already are established and have a rolling business but you just need to focus a little more on making sales, then something within this range should be achievable. By making your goal something realistic it will not only lift your spirits later in the year, if you achieve it (or even more if you blow passed it), but it will also keep your spending confined to a more conservative amount. More so than if you went big with you goals and set out to achieve something like 50% more sales.
As you are going to see next, your estimated revenue is going to directly correlate to your budgeted COGS and some discretionary spending. Therefore, staying in realistic margins helps confine your spending.
As for those of you that are making big changes to your business models or have other complexities at play that make guessing your “Estimated” revenue difficult, let’s look at a few ways to get to a number.
The first way, that will probably get you the closest and get you the best information, is to talk to another business owner in the industry. Now, I can’t stress enough how humbly and delicate you should approach this, especially if you choose to talk to another flower farm in your area. This may come across as competitive, and you need to remember that other people with established markets need to think about their business first and making sure that it’s continuation is secure. However, as I stated previously, this will probably get you the best idea of what you can expect.
I would definitely recommend asking people that you won’t be directly competing against in your local market for sales with. There are lots of forums out there with tons of people who will give out free information and you will most likely be able to find one of them that has done what you are hoping to do.
The second way is to is to sit down and work out, by hand, a best guess for sales based upon what you know about the product you are selling (wedding packages, bouquets, bulk buckets) and how long you will be harvesting flowers from your field.
For example: you can only do so many weddings in the season and you have a minimum price of $X,XXX. Let’s assume you are willing to take on 20 weeks of weddings multiplied by your minimum would be…$XX,XXX
The idea here is to sit down and put your best guess to paper. In the end will it be accurate? Maybe, if you get lucky, but most likely it won’t. However, it will get you somewhere close, and if you approach it conservatively, you will have something to hold yourself to during the season to make sure you don’t overextend yourself financially.
Whew! With all that said, you need to make your best guess, and put it in the “Estimated/Sales” cell. Now that you have your “know” and “Estimated” numbers you can now add them up and put them in the “total” cell.
Fortunately from here, things start moving a lot quicker, hang in there with me!
Cost of Goods Sold (COGS)
The thing about COGS is that they should almost always directly correlate to total revenue. In the preparation on business tax returns, if we see a clients’ revenue go up for the year and the COGS stays the same (or the opposite) it’s a pretty good sign that something is wrong and needs further attention. When it comes to calculating your budgeted COGS, it’s easy enough to do because of that strong correlation between the two areas. To calculate the budgeted amounts under the COGS category is straightforward. All you do is take the percent difference between last year’s total revenue and the total budgeted revenue and apply the factor to your prior year numbers. I know that might be a little confusing so let’s look at an example.
Example: how to calculate percent difference factor
Prior year revenue: $20,000
Estimated Revenue: $23,000
Formula: % Difference = Budgeted Revenue/ Prior Year Revenue
Percent Difference factor: 23,000/20,00 = 1.15 or 115%
Example: how to apply percent difference factor
Prior year packaging expenditure: $655
Formula: Packaging Budgeted = (Prior year amount) X (% Difference Factor)
Packaging Budgeted: $655 X 1.115 = $753
If you are using the Excel spreadsheet that I provided in the subscribers download section you should notice that the “Estimated” column auto populated the accounts in the COGS category, once you have your prior year numbers in along with your total budgeted revenue.
General & Administrative Expenses (G&A)
In some respects, the general and administrative expenses are easier than COGS, but there are still some tricky accounts to consider. Overall, these expenses can be broken down into, as I see it, three groups.
First group we have are expenses that are going to be the same from year to year. No matter how much money you make they won’t change. Examples of these accounts would be Insurance, Dues & Subscriptions, Property Taxes, Rent, etc. I should give a minor disclaimer: yes these expenses will not be exactly the same and will most likely go up slightly, but it should be negligible and won’t have much effect on the whole picture.
The second group are accounts that semi correlate to your revenue. I say “semi” because all the true accounts that directly correlate to your budgeted revenue were already listed in COGS but there are still a few expenses in G&A that rise and fall with the changes in revenue. A good example of this would have to be Advertising. You definitely hope that the more you spend on Advertising the more sales you make, thus the more revenue the higher the Advertising.
I know it’s kind of backwards in logic but for budgeting purposes it works. Another example would be Merchant Service Fees. Since this is a percentage of all credit card processing so as Revenues go up, you can sure bet that Merchant Service Fees will too.
The last grouping of accounts are ones that are neither related to revenue nor ones that stay the same from year to year. These ones will be the wild cards of your budget. Some of them will be similar to prior year amounts, while others will be totally random. Examples of these accounts would be Utilities, Repairs & Maintenance, Equipment Rental, Trash & so many more.
Now that we have identified the three groupings of accounts and how they individually function, it’s time to put this knowledge to use and finish up your budget.
I would recommend starting with accounts that will not be changing from year to year. These will be your easiest accounts as all you have to do is input the prior year numbers in the current budgeted column. From there it’s onto the accounts that semi correlate to your budgeted revenue. I would handle these the same way that we handled the COGS accounts and apply the percent difference ratio to the prior year numbers and call it close enough.
Finally, you have to tackle all the accounts that are random. Some you can guess that they will look the same as the prior year, others you will need to take your best educated guess on. In the end, try and remember, this is just a budget: don’t stress over the numbers too much.
What to Do with Your Flower Farm’s Completed Budget
Congratulations!
You now have a completed budget but what now?
Do you put it up on the fridge with your kids artwork and ignore it for the rest of the year?
Do you throw it in the junk draw and wait till it gets too crumpled and beat up to read anymore and throw it away?
No!
The answer is that you use it to make business decisions. Use your budget to hold you true to your planning and as a motivator.
Don’t think of your budget as something as specific as a road map. I know, I know, you’re going to say “but there’s multiple ways to a destination” so why not like a road map? The truth is that you don’t know where you are going, things change along the way and you need to be ready to reassess your aim and roll with whatever comes.
I would suggest, a budget is more like bowling with the bumpers on. You are aiming in one direction with a few different goals/achievements in mind but you are not quite sure which one of them you are going to actually hit or will work out. The budget in this analogy is the bumpers, that are there to keep you going in the correct direction. There is not a guarantee of success nor that you will hit your goals (the pins) but they make sure that you are always aiming towards your goals and keeping you out of the gutters.
What this means is that when it comes time to put together your seed order and you find it going over budget by $300, maybe you cut back on some of the varieties that you thought would be nice but don’t necessarily need. It might also mean that when your budget only has you making $4,000 net at the end of the year, it might not be the year to invest in that BCS with all the fancy attachments that you want.
We find that the biggest thing it does for us personally, here at Sierra Flower Farm, is our budget helps us to keep in mind to save up enough cash to cover all the fall orders that come at a time when your sales are done for the year, along with any infrastructure investments the business has “earned” by us utilizing our budget. Whatever it means for you, it should be there to help you make decisions on spending with your end goals in mind.
Finally, I think the least thing that people think a budget can provide is motivation. It’s hard to imagine motivation coming from something that might stifle your spending and may feel as though it is holding you back from the thing or crops that you think will make your business boom. Think about the big picture. How game changing do you think it will be when you can have a walk-in cooler to use to store, hydrate and elongate your offerings? Or a high tunnel that can extend your season by six or more weeks?
When you look to your budget to keep you in line, to keep putting away those profits so that you can get the cooler or that high tunnel and not watch all your money get nickel and dimed away with small emotional purchases. This year we are personally looking to our budget for many large infrastructure purchases and projects that we know will be game changing for us on our farm. Yes, it is restricting at the moment but it is also a motivator for us because we know, above all else, we want to see these projects come to fruition.
I hope that you do take the time to sit down and pencil out a budget for your business this year and that you are able to use it in a meaningful way. For our Flower Farming Newsletter Subscribers, we have a free download to get you started! Be sure to visit the subscribers only page to get access. If you haven’t signed up for our Flower Farming Newsletter yet, you can sign up at the end of this post and a welcome email will be sent to you with the password to access all the FREE goodies we give to our subscribers.
I know we all find it difficult to set aside time for tasks that don’t actually generate any sales but you might just find that biggest thing you do for your bottom line isn’t the sales you make but the expenditures you don’t. Invest this time into yourself and your flower farming business, it is worth it.
As always, we are looking forward to helping you hand blooms soon!
Graham & Jessica