MICHIGAN GREENHOUSE AND NURSERY FINANCIAL STUDY

by

CINDY BIRCHMEIER

B.S., University of Wisconsin-River Falls, 2000

A THESIS

Submitted in partial fulfillment of the requirements

for the degree

MASTER OF AGRIBUSINESS

Department of Agricultural Economics

College of Agriculture

KANSAS STATE UNIVERSITY

Manhattan, Kansas

2005

Approved by:

Major Professor (Allen Featherstone)

ABSTRACT

Currently the Michigan greenhouse and nursery industry ranks second in

agriculture commodities in cash receipts in Michigan. It accounts for 15.2% of Michigan’s

total agriculture industry and for 3.8% of the total U.S. greenhouse and nursery receipts.

Because of this industry’s growing importance to Michigan agriculture, this research is

dedicated to identifying those factors that affect the profitability of Michigan’s greenhouse

and nursery operations. The goal is to provide accurate financial information to producers

and service providers in this industry so that these operations will remain viable into the

future.

The results show that the wholesale operations had higher profit margins than the

retail operations and that the most profitable wholesale firms were those that sold the

majority of their product to brokers and retail operations. From a balance sheet standpoint,

the wholesale operations also showed more financial strength in that they were more liquid

and more solvent than the retail operations. However, the sample size is relatively limited

for the retail segment of this study, so the results may not be representative of the

greenhouse and nursery industry in Michigan as a whole.

A model was developed to analyze those factors that had the most impact on

profitability. Results of the regression analysis suggest that it is difficult to predict the

factors that influence profitability; however, the return on assets was more easily predicted.

Results suggest that net profit margin and solvency are correlated with the return on assets

of a firm.

i

TABLE OF CONTENTS

LIST OF TABLES ............................................................................................................... iii

LIST OF FIGURES .............................................................................................................. v

CHAPTER 1: INTRODUCTION ....................................................................................... 1

CHAPTER 2: LITERATURE REVIEW ........................................................................... 4

CHAPTER 3: THEORETICAL MODEL ......................................................................... 7

3.1 Introduction ................................................................................................................. 7

3.2 Business Categories .................................................................................................... 7

3.3 Financial and Accounting Definitions ........................................................................ 8

3.4 Regression Modeling ................................................................................................. 13

CHAPTER 4: METHODOLOGY .................................................................................... 14

4.1 Objectives .................................................................................................................. 14

4.2 Data Gathering ......................................................................................................... 14

4.3 Survey Design ............................................................................................................ 15

4.4 Model Design ............................................................................................................ 16

4.5 Summary .................................................................................................................... 17

CHAPTER 5: RESULTS ................................................................................................... 18

5.1 General Business Characteristics ............................................................................. 18

5.2 Financial Introduction .............................................................................................. 21

5.3 Balance Sheet Analysis ............................................................................................. 23

5.4 Ratio Analysis ............................................................................................................ 29

5.5 Income and Expense Analysis ................................................................................... 32

5.6 Profitability Analysis ................................................................................................. 36

5.7 Efficiency Analysis .................................................................................................... 38

5.8 Regression Analysis .................................................................................................. 43

5.9 Wholesale Segment Analysis ..................................................................................... 44

5.10 Summary .................................................................................................................. 50

CHAPTER 6: CONCLUSION .......................................................................................... 51

6.1 Overview .................................................................................................................... 51

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6.2 Limitations of the Research ...................................................................................... 53

6.3 Future Research ........................................................................................................ 53

REFERENCES .................................................................................................................... 54

APPENDIX A: SURVEY ................................................................................................... 55

APPENDIX B: BALANCE SHEETS ............................................................................... 59

APPENDIX C: INCOME STATEMENTS ...................................................................... 62

iii

LIST OF TABLES

TABLE 5.1 BUSINESS ACTIVITY AND STRUCTURE CHARACTERISTICS ..... 20

TABLE 5.2 BUSINESS FACTOR IMPACT ................................................................... 21

TABLE 5.3 DESCRIPTIVE STATISTICS ON THE SIZE AND SCOPE OF

BUSINESSES ....................................................................................................................... 23

TABLE 5.4 AVERAGE BALANCE SHEET COMPARISONS, FISCAL YEAR 2003

............................................................................................................................................... 28

TABLE 5.5 AVERAGE LIQUIDITY COMPARISONS, FISCAL YEAR 2003 ......... 30

TABLE 5.6 AVERAGE INCOME STATEMENT FOR MICHIGAN

GREENHOUSE AND NURSERY OPERATIONS, FISCAL YEAR 2003 ................. 33

TABLE 5.7 AVERAGE INCOME STATEMENT FOR MICHIGAN WHOLESALE

GREENHOUSE AND NURSERY OPERATIONS ........................................................ 34

TABLE 5.8 AVERAGE INCOME STATEMENT FOR MICHIGAN RETAIL

GREENHOUSE AND NURSERY OPERATIONS ........................................................ 35

TABLE 5.9 PROFITABILITY RATIO ANALYSIS ALL SEGMENTS, FISCAL

YEAR 2003 ........................................................................................................................... 37

TABLE 5.10 GREENHOUSE AND NURSERY PROFITABILITY COMPARISONS,

ALL OPERATIONS, BY ROA QUARTILE, 2003 ........................................................ 38

TABLE 5.11 AVERAGE ASSET TURNOVER AND WORKING CAPITAL/SALES

EFFICIENCY RATIOS, 2003 ........................................................................................... 39

TABLE 5.12 DETAILED EFFICIENCY ANALYSIS FOR MICHIGAN

GREENHOUSE AND NURSERY OPERATIONS, FISCAL YEAR 2003 ................. 40

TABLE 5.13 GREENHOUSE BUSINESS EFFICIENCY COMPARISONS: ALL

OPERATIONS, BY RETURN ON ASSETS QUARTILE, 2003 .................................. 42

TABLE 5.14 REGRESSION ANALYSIS- ROA ............................................................. 44

TABLE 5.15 COMPARATIVE AVERAGE BALANCE SHEET FOR WHOLESALE

OPERATIONS BY DISTRIBUTION CHANNEL, FISCAL YEAR 2003 .................. 46

TABLE 5.16 AVERAGE ASSET BASE COMPARISON BY DISTRIBUTION

CHANNEL ........................................................................................................................... 47

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TABLE 5.17 COMPARATIVE AVERAGE WHOLESALE INCOME STATEMENT

BY DISTRIBUTION CHANNEL, FISCAL YEAR 2003 .............................................. 47

TABLE 5.18 COMPARATIVE RATIO ANALYSIS WHOLESALE OPERATIONS

BY DISTRIBUTION CHANNEL, FISCAL YEAR 2003 .............................................. 49

TABLE 5.19 GREENHOUSE BUSINESS EFFICIENCY COMPARISONS:

WHOLESALE OPERATIONS, BY RETURN ON ASSETS QUARTILE, 2003 ....... 50

TABLE 5.20 GREENHOUSE BUSINESS PROFITABILITY COMPARISONS:

WHOLESALE OPERATIONS, BY RETURN ON ASSETS QUARTILE, 2003 ....... 50

v

LIST OF FIGURES

FIGURE 1.1: MICHIGAN’S TOP 5 AGRICULTURE COMMODITIES AS A

PERCENT OF THE TOTAL AGRICULTURE INDUSTRY, 2003 .............................. 2

FIGURE 5.1 MAP OF SURVEY PARTICIPANTS ....................................................... 18

FIGURE 5.2 MICHIGAN GREENHOUSE AND NURSERY AVERAGE BALANCE

SHEET, FISCAL YEAR 2003 ........................................................................................... 24

FIGURE 5.3 MICHIGAN WHOLESALE GREENHOUSE AND NURSERY

OPERATIONS AVERAGE BALANCE SHEET, FISCAL YEAR 2003 ..................... 26

FIGURE 5.4 MICHIGAN RETAIL GREENHOUSE AND NURSERY

OPERATIONS AVERAGE BALANCE SHEET, FISCAL YEAR 2003 ..................... 27

FIGURE 5.5 AVERAGE EQUITY COMPARISONS, FISCAL YEAR 2003 ............. 30

vi

ACKNOWLEDGMENTS

This thesis is dedicated to all those who supported me and encouraged me while I

have completed this program. To my husband, Darron, thank you for your patience,

understanding, proof reading of countless papers and doing chores while I dedicated my

time to the MAB program. To my parents, Clarence and Dorothy, you have always

supported me in whatever I have wanted to do. Thank you for believing in me and

teaching me that hard work and dedication do pay off. Thank you to my brothers, sister,

other relatives and friends for all of your encouragement throughout the years. Your love

and support mean more than you will ever know.

To my classmates, thank you for your friendship. Getting to know and learn from

each of you has been a wonderful experience. I wish you all the best in your future

endeavors and hope that our paths will cross again.

I want to thank the staff at GreenStone Farm Credit Services for your

encouragement and support as I dedicated my time to this process. I would like to

especially thank all of you that assisted me in gathering information for this study. Your

help and time is appreciated.

I would also like to thank the facility and staff that work with the MAB program at

Kansas State. Your contributions to this program are too numerous to mention and are

what have made this a rewarding experience. To Drs. Featherstone, Boland, Williams and

Williams I would like to thank you for serving as members of my committee. Your

patience and mentorship through this process have made this thesis possible.

1

CHAPTER 1: INTRODUCTION

The United States is the largest producer and marketer of nursery and greenhouse

crops in the world and is the fastest growing segment in American agriculture. According

to the American Nursery and Landscape association, in terms of economic output, nursery

and greenhouse crops represent the third most important sector in US crop agriculture, and

ranks seventh among all commodities in cash receipts and is among the highest sectors for

net farm income.

The Michigan nursery and greenhouse industry is no exception to that rule, and

plays a vital role in Michigan’s agricultural industry. In 2003, the greenhouse and nursery

industry ranked second among Michigan’s agriculture commodities in cash receipts

according to the Economic Research Service of the U.S. Department of Agriculture (2004).

The greenhouse and nursery industry in Michigan had total receipts of $579,694,000 during

2003. This accounts for 15.2% of Michigan’s total agriculture industry and for 3.8% of the

total U.S. greenhouse and nursery receipts of $15,193,378,000 in 2003 (figure 1.1). In

addition, the Michigan Farm Bureau states that Michigan ranks first in nation in the

production of impatiens, petunias, flowering hanging baskets and geraniums. Michigan

produces 14% of the nation’s petunias with over 6 million flats. The state also produces

2.4 million flats of impatiens, and sells 4.78 million hanging baskets and more than 1.84

million pots of geraniums.

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Figure 1.1: Michigan’s Top 5 Agriculture Commodities as a Percent of the Total Agriculture Industry, 2003

Corn11.10%

Soybeans10.40%

Cattle and Calves5.40%

Dairy Products20.80%

Greenhouse/Nursery15.2%

Dairy Products

Greenhouse/Nursery

Corn

Soybeans

Cattle and Calves

As a significant portion of Michigan’s agricultural economy, it is imperative that

producers in the industry along with individuals that service this industry understand the

current market conditions. The industry has seen drastic changes and developments in the

structure of the industry within the last few years. This includes the emergence and major

market presence of the big box stores and home supply stores carrying a large percentage

of greenhouse and nursery products. This phenomenon has had an effect on both the

wholesale and retail sectors of the industry.

This study utilizes the financial information from GreenStone Farm Credit Services

on various retail and wholesale operations in the greenhouse and nursery industry

throughout the state of Michigan. Moreover, a voluntary survey of GreenStone customers

was conducted in order to gather consistent production and efficiency data to be analyzed.

3

The underlying motive for this research is that in order to have a long-term viable

operation in this industry or to be able to correctly service this type of operation, one must

know the financial position that a producer is facing. Currently very limited information

has been published regarding the financial position of the industry as a whole. The goal of

this research is to provide producers within the industry as well as service providers that

deal with these operations the information needed to understand the variables that affect

these accounts. Therefore, this study will attempt to provide accurate financial analysis and

benchmarking information that can be used by producers and service providers within the

industry as a means of improving operations. Furthermore, this thesis will determine what

segment(s) are most profitable within the Michigan greenhouse and nursery industry and

specifically examine the net profit margins of retail and wholesale operations in Michigan.

In addition, those forces that affect these margins will be identified.

4

CHAPTER 2: LITERATURE REVIEW

In the last two decades, major market changes have reshaped the green industry.

According to Brumfield in a speech given at the 2003 Agricultural Outlook Forum

“Producers on the wholesale side of the industry are becoming more segmented into those

producing for the big chain stores and those who direct market or sell to independent,

upscale garden centers.” She went on to say, “The industry has shifted to a consumer-

driven, rather than producer-driven, economy.” In other words, producers are concerned

about the cost of production and are looking for ways to manage labor expenses while at

the same time improving their own business management to control costs while providing

consumers the products they desire.

It is logical to conclude that in order for producers to control costs they must have

sound financial analysis. The importance of detailed, accurate, and timely financial

reporting has become a ‘hot topic’ within the green industry. This notion is further

supported by Brumfield and Mafoua when they state, “The preventive approach to

managing financial risk is to have accurate, up-to-date financial records, financial analysis

of key ratios and cash flow projections and statements” (8). Moreover, it is important to

benchmark those financial numbers with others in the same business segment.

P.J.van Blokland, also supports the importance of financial analysis by saying,

“Agricultural firms need to make good marketing and financing decisions” (41). One of

those decisions is determining the goals of the organization and this typically includes the

firm being profitable. The major tools van Blokland encourages managers to use include

the following: balance sheet compilation including liquidity and solvency analysis,

5

complete income statement including profitability and margin analysis as well as efficiency

and repayment analysis, enterprise budgeting, and a firm cash flow statement.

Uva and Richards (2003) developed a financial analysis tool that allowed them to

analyze greenhouse business operators specifically located in New York State to complete

a comprehensive business analysis of the firms included in their survey. At the same time,

the operations were able to benchmark their financial performance with other operators

located in New York whom participated in the financial analysis research survey. Their

research reported financial information including: balance sheet analysis including ratio

analysis, income statement analysis and measures of profitability, cash flow analysis,

analysis of capital, operating and labor efficiency and then benchmarking of the previously

mentioned measures. The information was then broken out by marketing channels, size of

greenhouses, and geographical locations. The study consisted of 45 New York greenhouse

operations and was completely voluntary; therefore, the information contained therein may

not be representative of the entire New York industry. To compensate for the comparison

of different sized greenhouses, many of the variables analyzed were calculated on a “square

foot week” basis thus allowing for the allocation of indirect, variable and fixed costs for

operations of different sizes and operating cycles. Uva and Richards state that although the

financial analysis helps greenhouse managers evaluate the firm’s performance during a

given year, there is no universal agreement among experts on which ratios to use in the

financial analysis. While the analysis provides valuable information about the firm, the

value of the information improves if other similar businesses provide the same information

for comparison purposes. Financial benchmarking is even more useful if it can be related

6

to specific driving forces that cause certain phenomenons within a given industry to occur.

In other words, if there is a continuing trend among similar firms within an industry, then it

is important to understand the driving force that is causing the trend among those firms.

For example, a person would want to identify the fact that margins are narrowing, but it

would be even more valuable to know that increased labor costs are the major cause of

those narrowing margins.

As presented in the discussion above, financial analysis is deemed by many experts

to be perhaps the most important aspect in the successful strategic management of any

business. However, because many businesses are unwilling or unable to provide accurate

financial information, it is often difficult to benchmark a given industry. Another major

hurdle for this type of analysis is the inconsistent methods used for collecting the

information. This is not helped by the fact that industry experts do not unanimously agree

upon the ratios that are critical for analysis. This makes it difficult to be consistent within

and between studies for comparison purposes. Therefore, the financial analysis and

business summary information on the greenhouse industry that is available for review is

limited. Uva and Richards have been leaders in compiling a greenhouse business summary

and financial analysis study and then using that study for benchmarking purposes. The

purpose of this study is to further develop the financial and business industry analysis

information available in Michigan and to identify which business segments within the

industry are most profitable. In addition, the study will also determine what variables are

most closely related to the overall profit margins.

7

CHAPTER 3: THEORETICAL MODEL

3.1 Introduction

Information compiled by financial institutions and academic researchers for

financial analysis and green industry benchmarking require that fundamental economic

aspects need to be defined in order to understand and compare the results between studies.

Greenhouse categories must be explained and financial and accounting considerations

defined. This study also provides an explanation of regression modeling, which will be

used as a means of identifying the relationship between independent and dependent

variables.

3.2 Business Categories

The green industry is made up of floriculture and nursery crops. “Floriculture crops

include: bedding plants, cut cultivated greens, cut flowers, flowering potted plants, foliage

plants, and floriculture propagative material. Nursery crops include: broadleaf evergreens,

coniferous evergreens, deciduous shade trees, deciduous flowering trees, deciduous shrubs

and other ornamentals, fruit and nut plants, Christmas trees (cut and to be cut), transplants

for commercial truck crop production and propagation material (except transplants for

commercial crop production)” (Brumfield, 2003). Floriculture and nursery operations can

be split into two different marketing channels. These channels are retail or wholesale. In

this study, retailers are defined as those businesses having more than 50 percent of total

receipts from retail transactions, while wholesalers are defined as those businesses having

more than 50 percent of total receipts from wholesale transactions. The wholesale group

can be further defined as to whom their product is sold to. Typically wholesalers sell their

product to the following groups: box centers, independent retail garden centers, retail

8

locations-other, landscape operations and to re-wholesalers or brokers. Box centers are

referred to as those retail outlets that carry multiple product lines of home and garden

merchandise. Examples include but are not limited to Home Depot, Lowe’s, Wal-Mart and

K-Mart. The wholesale category can therefore be further broken down based on the

distribution of their product. The various sub categories are the operations that sell their

product to box stores, retail garden centers, other retail outlets, landscape firms and brokers

or other wholesalers. The operations fit into one of these categories based on where the

majority, 50% or greater, of their product is sold.

The categories are defined as such because that is typically how the green industry

is divided in Michigan. The main focus of this study is to determine which of these

business segments is most profitable and what variables are most highly correlated to

profitability.

3.3 Financial and Accounting Definitions

Because there are no universally accepted formulas or definitions by experts on

financial reporting and ratio analysis, it is imperative that financial and accounting

functions be clearly defined. The following are definitions for the specified segments of

the financial analysis that will be used in this study. The following measures can be used

by lending firms, management and others as a means of critically analyzing the strengths

and weaknesses for a given firm and how that firm compares in relation to similar firms in

the industry. There are several key measures and statistics that will be used to determine

capital and capacity characteristics of the firms analyzed. These key measures are

commonly classified into the following four categories: liquidity, solvency, efficiency and

9

profitability. Some of these calculations will be used for regression analysis to determine

which dependent variables have the greatest impact on profitability.

Balance Sheet- The balance sheet reports a business’ assets, liabilities and equity at

a specified time. The accounting equation is as follows:

Assets = Liabilities + Owner’s Equity

The balance sheet is also referred to as the “Statement of financial position”

because it shows what proportion of the assets the owner can claim versus what the bank

can claim (Uva and Richards, 2003).

Income Statement- The income statement is a summary of all receipts and

expenditures a business has over a particular period of time (Uva and Richards, 2003). The

time period used in this study is one year. The result is either net income or net loss. The

income statement is also referred to as a profit and loss statement.

As stated previously, one common way to analyze the financial soundness of a

company is to look at the company based on liquidity, solvency, efficiency and profitability

factors.

Liquidity as a whole measures the company’s ability to pay current obligations.

This is commonly determined through the following measures:

Working Capital- (Current Assets - Current Liabilities)

Current Ratio- (Current Assets / Current Liabilities)

10

Working Capital/Asset- (Working Capital / Total Assets)

Equity- (Total Assets – Total Liabilities) This is the amount in dollars that the firm

owns.

Solvency ratios measure the company’s ability to meet payments associated with

the total debt structure of the business including long-term debt. How solvent or leveraged

a company is may most commonly be measured by the following ratio.

Owner Equity- (Equity / Total Assets)

Profitability measures often provide an individual with a basis for determining how

well a business operates.

Gross Operating Sales- is defined as total dollars generated from sales of the

business.

Cost of Goods Sold- is defined as the cost associated with obtaining the product or

service that is to be sold.

Gross Profit- (Gross Operating Sales - Cost of Goods Sold)

Operating Expense- is defined as the cost associated with selling and administering

the product to be sold.

Total Operating Income- (Gross Profit - Operating Expenses)

11

Total Net Income- (Total Operating Income + Non Operating Income – Interest

Expense – Income Taxes (+/-) Extraordinary Gains or Losses)

Gross Profit Margin- (Gross Profit/ Gross Operating Sales) is expressed as a

percentage. According to investorwords.com (A, 2005), gross margin reveals how much a

company earns taking into account the costs that it incurs for producing its products and/or

services. Companies that are closer to the end retail customer typically have higher gross

margins then those that are closer to the raw product. This occurs because a majority of a

retail company’s expenses are associated with costs related to marketing and delivery,

whereas a wholesale company typically incurs their costs in the production of the product

and therefore has slimmer gross margins.

Operating Profit Margin- (Total Operating Income/ Gross Operating Sales) is

expressed as a percentage. This percentage indicates how efficiently the company is

operating and is a measure of how well variable operating expenses are controlled

(Investorwords.com, C, 2005).

Net Profit Margin – (Total Net Income / Gross Operating Sales) is expressed as a

percent. Investorwords.com (B, 2005) states, “This percentage is indicative of how

effective a company is at cost control.” The higher the net profit margin the more effective

the company is at converting revenue into actual profit. Net profit margin is a good way of

comparing companies in the same industry. It can also be used to compare companies in

different industries, as it gauges relative profitability. For the purposes of this thesis, net

12

profit margin is used to determine which business segment is the most profitable within the

green industry.

Debt Coverage Ratio- is a measure of repayment ability of the firm and is

calculated as such: EBITDA / (Current Portion Long Term Debt + interest).

EBITDA- Earnings before interest, taxes, depreciation and amortization is

calculated by adding interest, taxes, depreciation and amortization to total net income.

Amortization-

Return on Assets (ROA)- (Total Net Income + Interest Paid) / Total Assets

Return on Equity (ROE)- (Total Net Income / Equity)

Efficiency measures determine how well a company is utilizing its asset base and

the following measures are indicators of efficiency.

Asset Turnover (ATO) - (Gross Operating Sales / Total Assets)

Working Capital/Sales (WC/Sales) - (Working Capital / Gross Operating Sales)

Sales/Total Facility Area- Gross Operating Sales / Total Square Feet of Greenhouse

and Sales Area

Net Income/Total Facility Area- Total Net Income / Total Square Feet of

Greenhouse and Sales Area

13

Total Facility area/Labor Hour- Total square Feet of Growing Area + Sales Area)/

Labor Hour

Sales/Labor Hour- Gross Operating Sales / Labor Hour

Net Income/Labor Hour- Total Net Income / Labor Hour

Labor Hour- is defined as the total annual number of labor hours for both

permanent and temporary employees.

3.4 Regression Modeling

Regression analysis is “A statistical technique that attempts to explain movements

in one variable as a function of movements in a set of other variables through the

quantification of a single equation,” as explained by Studenmund, (2001 7). In other

words, regression attempts to explain how independent or explanatory variable movements

affect the movement of a single dependent variable. Regression analysis is used to quantify

estimates of economic relationships. It quantifies the relationship and strength that

independent variables have on a dependent variable. This is done through the use of

financial data from the group. However, the regression does not prove causality between

the independent and dependent variables, but sound economic theory along with a

significant quantitative relationship can lead to inferring a causal relationship. This study

uses regression analysis to quantify the relationship between the independent variables: net

profit margin, working capital to sales and owner equity and the dependent variable: return

on assets.

14

CHAPTER 4: METHODOLOGY

4.1 Objectives

The objectives of this thesis are to utilize financial data to determine what segment

within the green industry is most profitable, and to use linear regression modeling to

determine what factors are highly correlated with profit. Variables measuring liquidity,

solvency, profitability and efficiency are being used for the financial analysis

measurements and numerous variables will be utilized for the regression analysis to

determine the effect on profitability.

4.2 Data Gathering

Based on the information supplied by the National Agricultural Statistics Service,

sales in the state of Michigan for 2003 nursery crops were $150,451,000 and the sales for

floriculture products was $322,754,000. Therefore, total green industry sales were

$473,205,000 in the state of Michigan for 2003. GreenStone Farm Credit Services data

were used to determine what percentage of the total green industry market share were

customers of GreenStone by sales. Product codes 180 and 181, which are the codes used

for customers who are engaged in ornamental floriculture and nursery products and

horticultural specialties sales were used. Once duplicate files were eliminated, thus

ensuring that there was only one representative file per actual business and sole

proprietorship, GreenStone customers accounted for total gross farm income from nursery

and floriculture products of $238,008,225 within the state of Michigan. Thus, GreenStone

customers make up roughly 50% of the market share as determined by total sales.

15

The decision to limit the study to GreenStone customers was made because

financial data on these customers were readily available. A survey was used that collected

production information along with gaining permission to be involved in the study.

Information within the study was only used on those customers who provided permission.

The financial information was then gathered on the respondents from various financial

analytical tools used by GreenStone, mainly Farm Equity Manager and Moody’s on fiscal

year 2003 data. By using the financial information collected on these customers by

GreenStone, it ensured that the financial information used in the study was sound and was

relatively uniform in nature.

4.3 Survey Design

The survey had voluntary participation, and all information on an individual

company basis has been and will remain strictly confidential. The survey was sent to 162

operations throughout the state of Michigan. An initial letter explaining the study along

with the survey, found in appendix A, was sent to all GreenStone customers with product

codes of 180 and 181. Of the 162 surveys sent out, 73 were returned for a response rate of

45.06%.

The survey was designed with multiple sections. The sections asked for

information in key areas including: demographics, general farm operations, products sold

and ownership structure. The demographic information of each business was uncovered

through questions regarding origin and location. General farm operation questions

consisted of items such as labor hours, number of full time employees, number of part time

employees, business operation hours (open all year or part of the year), list of managers and

16

their respective job duties, and computer usage for inventory, accounting, marketing,

communications and greenhouse production control. Products sold asked for the

percentage of sales in various plant categories as well as the percentage of space devoted to

various operations. Ownership questions asked about the business structure, management

team and their responsibilities, and any contracting services that are used by the business.

4.4 Model Design

The estimation technique used in this study is the linear regression model. A linear

regression model utilizes independent variables and functional form to estimate the

equation for a dependent variable.

In general, linear regression is specified as follows:

Y = f (X1, X2, X3, … Xn)

where Y is the dependent variable since it depends on or is correlated with the X variables

and X’s are independent variables.

The functional form of the model is the following:

ROAt = B0 + B1NPMt + B2WC_Sales01t + B3OEt +Ei

where t refers to an observation, B0 is the intercept, ROA is the return on assets NPM is net

profit margin, WC_Sales01 is the percentage of working capital to sales, OE is owner and

Ei is the error term.

17

Net profit margin is expected to be positive because as the net profit margin

increases for a firm so does the return on assets. Working capital to sales could be either

positive or negative as the relationship of this ratio to return on assets is unknown. Owner

equity could be positive or negative as the relationship of this ratio to the return on assets is

unknown.

With the completion of the model setup, the definition of the variables and the

expected signs for each variable, the dependent variables are tested for statistical

significance in respect to the independent variable. Multiple scenarios are tested to

determine if additional variables influence return on assets and if there are other dependent

variables that have more explanatory ability in relation to independent variables than ROA

does. This testing is completed using Eviews software. This is different from the rest of

the statistical analysis completed in the study, which uses SPSS 12.0.

4.5 Summary

The chapter summarizes how the data was gathered and modeled to complete the

financial and regression analysis in order to meet the objectives of this thesis.

18

CHAPTER 5: RESULTS

5.1 General Business Characteristics

Of the 73 survey participants 54 were categorized as wholesale operations and 14

were categorized as retail operations. The remaining five participants did not fit into either

category, as the information was not available to make that determination.

The map below provides the locations of the various 73 operations that responded

to the survey.

Figure 5.1 Map of Survey Participants

19

Computerization for the group as a whole is used to varying degrees (Table 5.1).

Overall, computerization is used mostly for accounting, e-mailing and production

scheduling as well as for inventory, faxing and greenhouse production control. The use of

the computer for financial investing, banking, marketing, and landscape design is done

minimally. The wholesale sector typically uses the computer more than the retail sector for

accounting, production scheduling and greenhouse production. The retail sector utilizes

computers more than the wholesale sector for marketing and landscape design (Table 5.1).

In general, the retail operations used contracting services more than the wholesale

operations (Table 5.1). As a percentage, the retail operations contracted more business

planning, payroll, marketing, inventory, financial investing and accounting activities than

the wholesale operations. The wholesale operations as a percentage contracted more tax

consulting than the retail operations. Overall, tax consulting and accounting were the two

most widely contracted business activities with 79.5% and 61.6% of the 73 respondents

stating that they used these services.

As a group, retail operations were slightly more likely to have multiple entities in

their business organization than wholesale operations with 28.6% of retail operations

having multiple entities and 25.9% of the wholesale operations having multiple business

entities (Table 5.1). In addition, only 17 or 23.3% of the operations are sole

proprietorships. Thirty-five or 47.9% of the operations are incorporated, which is the

dominant ownership structure for both the wholesale and retail categories. The remaining

operations were comprised of limited liability corporations, limited liability partnerships, or

general partnerships. Ownership structure was fairly uniform between the wholesale and

20

retail operations with 24.1% of the 54 wholesale firms and 28.6% of the 14 retail firms

operated as sole proprietorships. The only difference between the ownership structures was

that 14.3% of the retail operations were partnerships as compared to 1.9% of wholesale

operations.

Table 5.1 Business Activity and Structure Characteristics

Number % of Total Number % of Total Number % of TotalComputerized Business Activity Accounting 64 94.10% 11 84.60% 48 96.00% Inventory 38 55.90% 7 53.80% 28 56.00% Financial Investments 19 27.90% 3 23.10% 13 26.00% Banking- Wires/ACH 23 33.80% 4 30.80% 18 36.00% Marketing 21 30.90% 8 61.50% 13 26.00% E-Mail 55 80.90% 11 84.60% 42 84.00% Faxing 35 51.50% 7 53.80% 25 50.00% Landscape Design 7 10.30% 3 23.10% 3 6.00% Production Scheduling 41 60.30% 5 38.50% 34 68.00% Greenhouse Production Controls 36 52.90% 4 30.80% 31 62.00% Other 6 8.80% 2 15.40% 4 8.00%Contracting Services No Contracting Services Used 10 13.70% 1 7.10% 8 14.80% Tax Consulting 58 79.50% 11 78.60% 43 79.60% Business Planning 20 27.40% 5 35.70% 14 25.90% Payroll 28 38.40% 9 64.30% 18 33.30% Marketing 11 15.10% 7 50.00% 3 5.60% Inventory 13 17.80% 3 21.40% 9 16.70% Financial Investing 17 23.30% 4 28.60% 12 22.20% Accounting 45 61.60% 10 71.40% 32 59.30%Multiple Entity Structure Yes 21 29.20% 4 28.60% 14 26.40% No 51 70.80% 10 71.40% 39 73.60%Ownership Structure Partnership 3 4.20% 2 14.30% 1 1.90% Incorporation 35 48.60% 7 50.00% 24 45.30% Sole Proprietorship 17 23.60% 4 28.60% 13 24.50% Limited Liability Corporation 16 22.20% 1 7.10% 14 26.40% Limited Liability Partnership 1 1.40% 0 0.00% 1 1.90%

Entire Group WholesaleRetail

Entire Group Retail Wholesale

Entire Group Retail Wholesale

Entire Group Retail Wholesale

21

As a group the respondents said that weather and market demand were the factors

that had the most impact on business results (Table 5.2). A total of 69 participants said that

weather had an important or very important impact on their business and 68 said that

market demand had an important or very important impact on their business. Land, water

supply and employee turnover were rated as having the least amount of impact on business

results. Thirty respondents said land had a minor or very minor impact on business results

and 21 said that water supply and employee turnover had a minor to very minor impact on

business results.

Table 5.2 Business Factor Impact Very Minor Minor Neutral Important Very Important Total Weather 0 2 2 15 54 73 Market Demand 0 2 3 19 49 73 Land 19 11 26 6 11 73 Labor 3 3 21 28 18 73 Water Supply 11 10 10 12 29 72 Capital 2 2 15 31 23 73 Competition 2 7 12 29 23 73 Environmental Regulations 7 7 21 25 13 73 Other Governmental Regulations 7 9 22 25 10 73 Employee Turnover 8 13 26 22 4 73 Own Managerial Expertise 3 5 10 24 30 72

5.2 Financial Introduction

Of the 73 respondents to the survey only 44 had sufficient financial information to

do a comprehensive financial analysis for fiscal year end 2003 data. The remaining 29

participants’ financial information was not complete because of their limited loan size.

Therefore, the financial data included in this study is only from the 44 respondents that had

sufficient information to complete the financial analysis.

22

Among the 44 respondents that had sufficient financial information to include in the

financial analysis, 37 of the respondents are categorized as wholesale greenhouse

operations and the remaining seven are classified as retail operations. The 44 operations

had total gross sales of $120,844,702, which equates to 27.64% of the total green industry

sales for Michigan in 2003. The majority of the 44 operations (37) sell primarily annual

bedding plant material with only two operations having sales of greater than 50% in

perennial plant material and four operations having greater than 50% of sales in nursery

stock. One operation had diversified sales in all three categories and therefore did not have

greater than 50% of sales in any given plant material category. Due to the limited number

of retail operations with detailed financial information, the data may not be a representative

sample of the retail greenhouse and nursery industry in Michigan.

Overall, the 44 operations included in the financial analysis had an average total

facility area including both growing and sales space of 367,003 ft2 and averaged $2,746,470

of annual gross sales (Table 5.3). Table 5.3 illustrates the overall size and scope of the

operations and provides a comparison between the retail and wholesale operations. The

retail greenhouses on average were larger than the wholesale greenhouses and also had

higher gross sales; however, the wholesale greenhouses had higher averages for gross,

operating and net profit margins. Typically one might expect that the wholesale

greenhouses would be larger than the retail businesses as this usually the case with most

operations in this industry. However, this study has significantly large retail operations that

responded and therefore, the average size and scope of the retail operations may not be

representative of the entire industry. In comparison to the size and scope of the operations

23

in the New York study, the operations in Michigan are significantly larger. The average

size of all operations in the New York study was 39,454 square feet and the retail and

wholesale only average operation sizes were 31,027 square feet and 50,473 square feet

respectively.

Table 5.3 Descriptive Statistics on the Size and Scope of Businesses

All Greenhouses

Retail Greenhouses

Wholesale Greenhouses

Number= 44 Number= 7 Number= 37 Total Facility Area Sq Ft

Average Standard Deviation

367,003 Ft2 585,719 Ft2

541,421 Ft2 996,800 Ft2

334,006 Ft2 486,969 Ft2

Gross Sales Average

Standard Deviation $2,746,470.50 $4,430,064.48

$4,701,582.71 $8,976,431.39

$2,376,584.41 $3,021,303.60

Gross Profit Margin

Average Standard Deviation

84.71% 23.37%

53.07% 30.88%

90.70% 16.18%

Operating Profit Margin

Average Standard Deviation

9.76% 15.30%

-4.76% 21.28%

12.51% 12.47%

Net Profit Margin

Average Standard Deviation

8.43% 13.41%

-4.49% 20.00%

10.88% 10.46%

5.3 Balance Sheet Analysis

The balance sheet analysis evaluates the value of all assets and liabilities at a point

in time and determines a relationship between the two. Figure 5.2 illustrates the average

balance sheet for all 44 greenhouses and nurseries that responded to the survey and had

sufficient financial data on file with GreenStone to complete the review. The balance sheet

analysis is for fiscal year 2003. Also presented are the average balance sheets for the 37

wholesale operations (Figure 5.3) and the average balance sheet for the 7 retail operations

(Figure 5.4). See Appendix B for the detailed balance sheets.

24

Figure 5.2 Michigan Greenhouse and Nursery Average Balance Sheet, Fiscal Year 2003

ASSETS LIABILITIES Current Assets Current Liabilities Cash $120,565 Accounts Payable $136,326

Marketable Bonds & Securities

$21,366 Operating Loan $179,100

Current Accounts Receivable

$205,554 Current Portion Long Term Debt

$77,480

Inventory $136,524 Accrued Interest $13,776 Growing Crops $95,187 Other Current Liabilities $88,571 Prepaids $102,826 Total Current Liabilities $495,253 Other Current Assets $30,176 Total Current Assets $712,198 Non Current Liabilities

Long Term Debt $628,763 Non Current Assets Other Non Current

Liabilities $24,750

Machinery & Equipment $607,452 Total Non Current Liabilities

$653,513

Vehicles $57,216 Non Current Accounts Receivable

-$3,604 TOTAL LIABILITIES $1,148,767

Not Readily Mkt Bonds & Securities

$86,474

Real Estate $1,726,795 Other Non Current Assets $133,782 TOTAL EQUITY $2,171,545 Total Non Current Assets $2,608,113

TOTAL ASSETS $3,320,311

n= 44 operations

Overall, the operations had a total asset value of $3,320,311 with liabilities of

$1,148,767 and owner equity of $2,171,545 (Figure 5.2). The majority of the asset base

resides in the value of the real estate. Meanwhile, the liabilities are more dispersed and a

greater percentage of the overall liabilities are found in the current portion than the

percentage of total assets that is found in current assets.

25

It is important to note that of the 44 operations in the financial study, 2 operations

had book value balance sheets while the remaining 42 operations had adjusted market value

balance sheets.

In this sample, the retail operations show greater variance in the balance sheet than

the wholesale operations do, as the average standard deviations are higher for the retail

operations than the wholesale operations.

A comparison of the New York operations and the Michigan operations balance

sheet is limited in value because the New York study analyzed the operations on a book

value basis whereas the operations in Michigan were analyzed using adjusted market

values.

26

Figure 5.3 Michigan Wholesale Greenhouse and Nursery Operations Average Balance Sheet, Fiscal Year 2003

ASSETS LIABILITIES Current Assets Current Liabilities Cash $124,567 Accounts Payable $116,159 Marketable Bonds &

Securities $19,301 Operating Loan $163,150

Current Accounts Receivable $217,338 Current Portion Long Term Debt

$79,421

Inventory $53,756 Accrued Interest $14,327 Growing Crops $109,141 Other Current Liabilities $1,143 Prepaids $118,448 Total Current Liabilities $374,200 Other Current Assets $26,431 Total Current Assets $668,983 Non Current Liabilities

Long Term Debt $592,656 Non Current Assets Other Non Current

Liabilities $0

Machinery & Equipment $362,023 Total Non Current Liabilities

$592,656

Vehicles $62,349 Non Current Accounts

Receivable -$4,435 TOTAL LIABILITIES $966,856

Not Readily Mkt Bonds & Securities

$99,968

Real Estate $1,650,970

Other Non Current Assets $142,414 TOTAL EQUITY $2,015,416 Total Non Current Assets $2,313,290

TOTAL ASSETS $2,982,272 n=37 operations

The 37 wholesale operations had total assets of $2,982,272 and total liabilities of

$966,856 for owner equity of $2,015,416 (Figure 5.3). The majority of this group’s asset

base was found in real estate. This group proportionately had a higher percentage of

current liabilities to total liabilities than it did current assets to total assets.

In this group, one firm had a book value balance sheet and the remaining 36

operations had adjusted market value balance sheets. The one book value balance sheet

27

accounted for 2.7% of the group total. The book value balance sheet does not take into

account the market value of appreciable assets (land), but rather is the original cost of the

asset minus accumulated depreciation. The importance of this is that the real estate value

for that greenhouse could be significantly less on a book value basis versus a market value

basis.

Figure 5.4 Michigan Retail Greenhouse and Nursery Operations Average Balance Sheet, Fiscal Year 2003

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash $99,413 Accounts Payable $242,919 Marketable Bonds & Securities $32,282 Operating Loan $263,409 Current Accounts Receivable

$143,269 Current Portion Long Term Debt

$67,223

Inventory $574,012 Accrued Interest $10,866 Growing Crops $21,429 Other Current Liabilities $550,689 Prepaids $20,248 Total Current Liabilities $1,135,105 Other Current Assets $49,971 Total Current Assets $940,624 Non Current Liabilities

Long Term Debt $819,616 Non Current Assets Non Current Liabilities $155,571 Machinery & Equipment $1,904,716 Total Non Current

Liabilities $975,187

Vehicles $30,083 Non Current Accounts Rec. $786 TOTAL LIABILITIES $2,110,292 Not Readily Mkt Bonds & Securities

$15,143

Real Estate $2,127,581

Other Non Current Assets $88,157 TOTAL EQUITY $2,996,797 Total Non Current Assets $4,166,466

TOTAL ASSETS $5,107,090

n=7 operation

The seven retail operations had total assets of $5,107,090 and total liabilities of

$2,110,292 for owner equity of $2.996,797 (Figure 5.4). Although this group had a

28

significant portion of its asset value in real estate, it also had a significant portion of its

asset base in machinery and equipment. Approximately, 37% of the total asset value for

this group was based in machinery and equipment. The retail operations also had more

current liabilities than current assets as a group; thus, indicating that they had negative

working capital. Another item to note is that even though this group had a significant

portion of its asset base, almost 82%, in non current assets, its non-current liabilities were

only 46% of its total liabilities.

This group had one firm that had a book value balance sheet with the remaining

having adjusted market value balance sheets. The one book value balance sheet accounted

for 14.3% of the group as a total. This firm that had the book value balance sheet is the

largest firm in this group. However, the quantifiable difference between the book value

balance sheet and the market value balance is not able to be determined.

Table 5.4 Average Balance Sheet Comparisons, Fiscal Year 2003

Group Wholesale

Operations Retail

Operations Current Assets $712,198 $668,983 $940,624 Non Current Assets $2,608,113 $2,313,290 $4,166,466 Total Assets $3,320,311 $2,982,272 $5,107,090 Current Liabilities $495,253 $374,200 $1,135,105 Non Current Liabilities $653,513 $592,656 $975,187 Total Liabilities $1,148,767 $966,856 $2,110,292 Total Equity $2,171,545 $2,015,416 $2,996,797 Current Assets as % of Total Assets 21.45% 22.43% 18.42% Non-Current Assets as a % of Total Assets 78.55% 77.57% 81.58% Current Liabilities as a % of Total Liabilities 43.11% 38.70% 53.79% Non-Current Liabilities as a % of Total Liabilities 56.89% 61.30% 46.21%

29

In comparison, the retail operations had higher values in all asset and liability

categories as well as equity than the wholesale operations (Table 5.4).

5.4 Ratio Analysis

An important part of the balance sheet analysis is examining the ratios. The

numbers themselves provide a means of asking questions and give detail regarding the

make up of the assets and liabilities of the operation, but it is the ratio analysis that details

the relationships of the financial position. Ratio analysis allows for a comparison between

two items that the balance sheet figures themselves simply do not provide. As stated

earlier, there are two main categories in financial position analysis: liquidity and solvency.

The liquidity ratios specifically relate the relationship between current assets and

liabilities. As a group, the 44 operations had average working capital or current assets

greater than current liabilities of $216,945 (Table 5.5). This means that after all current

assets are liquidated and all current liabilities are paid for there is $216,945 surplus.

Working capital to assets for the group was 6.53% and the current ratio or number of times

current assets cover current liabilities is 1.44 times.

The 37 wholesale operations have average working capital of $294,782, have

9.88% working capital to assets and a current ratio of 1.79 (Table 5.5). All three of these

numbers are higher than the averages of the retail operations.

The retail operations have a working capital position of negative $194,481, which

means that even with all current assets liquidated current liabilities could not be paid (Table

30

5.5). Working capital to assets is –3.81% and the current ratio is 0.83. This means for

every dollar of current liabilities there is only $0.83 of current asset value.

Table 5.5 Average Liquidity Comparisons, Fiscal Year 2003 Group Wholesale Retail Working Capital $216,945 $294,782 -$194,481 Working Capital/Assets 6.53% 9.88% -3.81% Current Ratio 1.44 1.79 0.83

The solvency ratios specifically explain the relationship of the overall total financial

position of the company including both current and non-current assets and liabilities.

Overall, equity is the portion of the operation that is owned by the company or individual

versus the portion that is funded by an outside source. The 44 operations have an equity

position of 65.4%. The wholesale group has a higher equity position than the retail group at

67.58% and 58.68% respectively (Figure 5.5).

Figure 5.5 Average Equity Comparisons, Fiscal Year 2003

65.40%67.58%

58.68%

50.00%52.00%54.00%56.00%58.00%60.00%62.00%64.00%66.00%68.00%70.00%

Group Wholesale Retail

Industry Segment

Perc

ent

31

Overall, both the retail and wholesale groups are solvent, but the wholesale group

does have a higher owner equity position even though total equity is lower than the average

total equity value held by the retail operations. Debt to assets and debt to equity on a

relationship basis are less for the wholesale segment as well as for the retail segment. The

wholesale operations are more liquid than the retail operations. The retail operations show

negative working capital and are carrying a higher debt load both on the current side and on

the non-current side than the wholesale operations.

The New York operations show similar results in that the wholesale operations

showed significantly more dollars of working capital than the retails operations. However,

the New York retail operations did show a positive working capital position of $69,393 and

the New York retail operations have a higher current ratio than did the wholesale

operations. It should be noted that the Michigan retail working capital is skewed

significantly by one operation of the seven showing a large negative working capital

position.

The New York wholesale operations show a significantly higher owner equity

position than did the New York retail operations. The equity percentages are lower for

both the retail and wholesale operations in New York compared to the Michigan

operations, but that is due to book valuation versus adjusted market value analysis. The

important take away is that both the Michigan and New York studies have results that show

the wholesale operations having more dollars of working capital and are more solvent as

evidenced by the owner equity percentage than the retail operations. However, one

32

difference is that based on the current ratio the New York operations are more liquid than

the wholesale operations which is not the case in the Michigan study.

5.5 Income and Expense Analysis

The 44 operations averaged total sales of $2,746,471 and had total net income of

$246,749 (Table 5.6). Total Sales range from a maximum of $24,985,846 to a minimum of

$209,402 while total net income ranges from $2,909,131 to -$140,827 (Appendix C). The

average total operating income is $309,860 and ranges from $144,937 to $8,860,855.

There is a wide variance in the income statement. The standard deviations for gross sales,

total farm expenses and total net income are respectively $4,430,064, $2,193,335 and

$511,835.

33

Table 5.6 Average Income Statement for Michigan Greenhouse and Nursery Operations, Fiscal Year 2003

Average Amount

Average % of Sales

Gross Operating Sales $2,746,471 100.00% Cost of Goods Sold $659,479 24.01% Gross Profit $2,086,992 75.99% Depreciation and Amortization $144,159 5.25% Labor Expense* $492,956 17.95% Rental Expense Land* $22,560 0.82% Supplies* $158,014 5.75% Utilities* $107,031 3.90% Other Farm Expense* $661,900 24.10% Total Farm Expenses $1,777,132 64.71% Total Operating Income $309,860 11.28% Non Operating Income $29,652 1.08% Interest Expense $53,880 1.96% Income Before Taxes $285,632 10.40% Income Taxes $38,884 1.42% Net Income After Taxes $246,749 8.98% Extraordinary Gain/Losses $0 0.00% Total Net Income $246,749 8.98% n = 44; * n = 42

The observations of labor, land, supplies and utilities were only 42 observations

because 2 of the units did not provide enough detail to allow the breakout of these

expenses. Thus, the sum of the averages of the expenses does not equal the average total

expense figure. The difference is a result of the two missing observations.

The 37 wholesale operations show average gross sales of $2,376,584, have average

total farm expenses of $1,747,929 and have an average total net income of $215,506 (Table

5.7). Overall, the wholesale operations have less gross sales and less total net income than

the entire group did as an average, but the wholesale group showed less variance. The

34

standard deviations are $3,021,304, $2,033,438 and $322,216 for gross sales, total farm

expenses and total net income respectively (Appendix C).

Table 5.7 Average Income Statement for Michigan Wholesale Greenhouse and Nursery Operations

Average Amount

Average % of Sales

Gross Operating Sales $2,376,584 100.00% Cost of Goods Sold $372,021 15.65% Gross Profit $2,004,563 84.35% Depreciation and Amortization $133,072 5.60% Labor Expense* $522,155 21.97% Rental Expense Land* $26,110 1.10% Supplies* $177,350 7.46% Utilities* $114,051 4.80% Other Farm Expense* $722,288 30.39% Total Farm Expenses $1,747,929 73.55% Total Operating Income $256,634 10.80% Non Operating Income $26,269 1.11% Interest Expense $50,176 2.11% Income Before Taxes $232,727 9.79% Income Taxes $17,222 0.72% Net Income After Taxes $215,505 9.07% Extraordinary Gain/Losses $1 0.00%

Total Net Income $215,506 9.07% n = 37; * n = 36

There were only 36 observations of the 37 total that had sufficient information to

break down labor, land rent, supplies, utilities and other farm expenses. Therefore, the sum

of these variables does not equal the total average farm expenses number.

35

Table 5.8 Average Income Statement for Michigan Retail Greenhouse and Nursery Operations

Average Amount

Average % of Sales

Gross Operating Sales $4,701,583 100.00% Cost of Goods Sold $2,178,897 46.34% Gross Profit $2,522,686 53.66% Depreciation and Amortization $202,760 4.31% Labor Expense* $317,765 6.76% Rental Expense Land* $1,255 0.03% Supplies* $42,002 0.89% Utilities* $64,910 1.38% Other Farm Expense* $299,571 6.37% Total Farm Expenses $1,931,489 41.08% Total Operating Income $591,197 12.57% Non Operating Income $47,531 1.01% Interest Expense $73,454 1.56% Income Before Taxes $565,274 12.02% Income Taxes $153,382 3.26% Net Income After Taxes $411,893 8.76% Extraordinary Gain/Losses $0 0.00%

Total Net Income $411,893 8.76% n = 7 ; * n = 6

There were only 6 observations of the 7 total that had sufficient information to

break down labor, land rent, supplies, utilities and other farm expenses. Therefore, the sum

of these variables does not equal the total average farm expenses number.

The retail operations show a significantly higher average gross sales amount than

the wholesale group did at $4,701,583 (Table 5.8). The retail operations also have higher

total expenses than the wholesale group does at $1,931,489. However, the retail operations

also have a higher total net income on average than the wholesale operations have at

36

$411,893. The retail operations average total net income is almost double of the wholesale

operations average total net income. The variance is higher for the retail operations than

for the wholesale operations. The standard deviation for gross sales, total farm expenses

and total net income for the retail operations are $8,976,431, $3,103,958 and $1,103,047

respectively (Appendix C).

5.6 Profitability Analysis

As a group, the operations are quite profitable. The average gross and net profit

margins are lower for the retail operations than the wholesale operations, but are still

acceptable at levels of 53.66%, and 8.76%, respectively (Table 5.9). The retail operations

have a higher average operating profit margin than the wholesale operations at 12.57%

versus 10.8% for the wholesale operations. The wholesale operations have gross,

operating, and net profit margins of 84.35% 10.8% and 9.07% respectively. The entire

group has an average gross profit margin of 75.99%, an operating profit margin of 11.28%

and a net profit margin of 8.98%.

The debt coverage is acceptable for both the retail and wholesale operations, but is

higher on average for the wholesale operations at 5.13 times versus 2.51 times for the retail

operations (Table 5.9).

The entire group has a return on assets (ROA) and return on equity (ROE) of 7.74%

and 12.57% respectively. These ratios are calculated as defined in chapter three. The

wholesale group has a higher ROA and ROE than the retail group does at 8.73% and

14.54%. The retail group’s ROA and ROE are 2.49% and 2.16% respectively (Table 5.9).

37

Overall, the retail operations have higher sales and higher total net income on

average than the wholesale operations. When you compare the two using ratio analysis, the

ratios are stronger for the wholesale operations and show that the wholesale group is

relatively more profitable than the retail group.

The New York study shows the same overall relationships for the wholesale and

retail operations, as did the Michigan operations. The New York retail operations also

show double the net income of the wholesale operations, but the net profit margins are

significantly lower for the retail operations versus the wholesale operations at 2.5% and

8.1% respectively.

Table 5.9 Profitability Ratio Analysis all Segments, Fiscal Year 2003

Table 5.10 illustrates the profitability ratios based on return on assets by quartile for

2003. The top 25% of the operations based on ROA had the highest operating profit

margin, net profit margin, ROA and ROE of all the quartiles. The 2nd quartile had the

strongest debt coverage ratio and the 3rd quartile had the highest gross profit margin. The

bottom quartile had the weakest profitability ratios across the board, and was the only

quartile to have negative values for net profit margin, ROA and ROE.

Entire Group Wholesale RetailGross Profit Margin 75.99% 84.35% 53.66%

Operating Profit Margin 11.28% 10.80% 12.57%Net Profit Margin 8.98% 9.07% 8.76%

ROA 7.74% 8.73% 2.49%ROE 12.57% 14.54% 2.16%

Debt Coverage 4.71 5.13 2.51

38

Table 5.10 Greenhouse and Nursery Profitability Comparisons, All Operations, by ROA Quartile, 2003

Business by ROA

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

ROA ROE Debt Coverage Ratio

Top 25% 87.64% 22.73% 18.91% 16.50% 29.79% 5.172nd 25% 83.82% 12.36% 12.82% 8.96% 15.42% 7.113rd 25% 92.73% 9.09% 6.27% 5.60% 6.80% 4.14

Bottom 25% 74.64% -4.91% -4.45% -0.11% -1.73% 2.44

5.7 Efficiency Analysis

Efficiency analysis attempts to identify how well an asset base is being utilized. In

this study, the asset turnover ratio and working capital/ sales are the main identifiers of

efficiency, but labor and facility efficiency ratios are also analyzed. All 44 of the

operations responded as to the size of their operation, but 11 of the 44 operations did not

provide the number of labor hours for their operation. Two of the eleven operations that

did not respond to labor hours were in the retail segment and nine were in the wholesale

segment.

As defined by Investor Words.com, asset turnover is “A measure of how well assets

are being used to produce revenue.” The higher the ratio the more the assets are being

utilized. Table 5.11 shows that wholesale operations are more efficiently using their asset

base than the retail operations as their ratios are 0.68 and 0.45 respectively. In other words,

the wholesale operations have $0.68 cents in sales for every dollar in assets while the retail

operations have $0.45 in sales for every dollar in assets.

The retail segment has 38% less working capital (WC) to sales than the wholesale

group (Table 5.11). Both groups have WC/sales less than 15%. Because of a steadier cash

39

flow, the retail operations may have less working capital and at the same time maintain

operations versus the wholesale operations.

Table 5.11 Average Asset Turnover and Working Capital/Sales Efficiency Ratios, 2003

Both sales and total net income to total facility area are higher for the wholesale

operations than the retail operations (Table 5.12). The standard deviation for both groups is

quite high. However, the difference in total net income to total facility area is $0.79 higher

per square foot for the wholesale operations than the retail operations. On a percentage

basis, net income per square foot of total facility area is 877% higher for the wholesale

operations than the retail operations.

Working Capital/Sales Asset Turnover Entire Group 12.05% 0.65 Wholesale 12.84% 0.68 Retail 7.92% 0.45

40

Table 5.12 Detailed Efficiency Analysis for Michigan Greenhouse and Nursery Operations, Fiscal Year 2003 Entire Group N Mean Std. Deviation

Sales/Total Facility Area ($) 44 9.24 7.87 Net Income/Total Facility Area ($) 44 0.76 0.97

Total Facility Area/ Labor Hour (Square Feet) 44 49.76 161.74 Sales/ Labor Hour ($) 33 295.24 629.44

Net Income/ Labor Hour ($) 33 19.60 50.34 Working Capital/Sales (%) 44 12.05 31.57

Asset Turnover Ratio 44 0.65 0.33

Retail Operations Only N Mean Std. Deviation

Sales/Total Facility Area ($) 7 9.12 5.39 Net Income/Total Facility Area ($) 7 0.10 0.67 Total Facility Area/ Labor Hour (Square Feet) 7 4.51 4.13 Sales/ Labor Hour ($) 5 48.01 14.21 Net Income/ Labor Hour ($) 5 1.97 3.61 Working Capital/Sales (%) 7 7.92 21.83

Asset Turnover Ratio 7 0.45 0.38

Wholesale Operations Only N Mean Std. Deviation

Sales/Total Facility Area ($) 37 9.26 8.31 Net Income/Total Facility Area ($) 37 0.89 0.97 Total Facility Area/ Labor Hour (Square Feet) 37 58.32 175.41 Sales/ Labor Hour ($) 28 339.38 675.42 Net Income/ Labor Hour ($) 28 22.75 54.16 Working Capital/Sales (%) 37 12.84 33.27

Asset Turnover Ratio 37 0.68 0.31

The wholesale operations are quite a bit more efficient than the retail operations

when it comes to utilizing labor in comparison to sales and net income. The wholesale

operations have a sales per labor hour that is 606% higher than the retail operations at

$339.38 of gross sales per labor hour (Table 5.12). The retail operations’ sales per hour of

labor is $48.01. The standard deviation is quite high for the wholesale group indicating

that there is a great degree of variance from one operation to the next. Net income per

41

labor hour is $22.75 for the wholesale operations versus $1.97 for the retail operations.

This means that the net income per labor hour is a 1055% higher for the wholesale

operations than the retail operations.

The total square foot of facility area that is covered per labor hour tells how

efficiently labor is being utilized. In other words, it tells how many square feet of facility

are being cared for per one hour of labor. The higher the number of square feet covered,

the more efficient the operation utilizes their labor resources. The wholesale operations

have an average square foot of total facility area per labor hour of 58.32 sq ft/hour (Table

5.12). The retail operations have an average square foot of total facility area of 4.51 square

feet per labor hour. This ratio was used as a measure of labor efficiency versus labor cost

as a percentage of net income because the dollar amount of labor expense can be reported

in either cost of goods sold or selling, general and administrative expenses. The

breakdown of total labor expense was not able to be discerned from the financial

information provided whereas the total number of labor hours was provided in the survey.

Therefore, even though the income and expenses shows that labor cost is more for the

wholesale operations, there may be a considerable amount of labor in the cost of good sold

number for both the retail and wholesale operations that can not be accounted for.

Overall, the wholesale operations exhibit quite a bit more efficiency than the retail

operations as evidenced by the ratios presented. This may result from the fact that the

wholesale operations utilize much more onsite technology to control the environmental

conditions and to track inventory than do the retail operations. Thus, the increase in

technology at the wholesale operations replaces the need for additional labor per square

42

foot of facility area and potential extra space for inventory that is needed at the retail

operations. The use of onsite-computerized technology for inventory tracking and

environmental controls was shown to be used by a greater percentage of the wholesale

operations than the retail operations as illustrated in table 5.1.

Comparatively, the New York study shows the same results as the Michigan study

with the wholesale operations having more square feet per labor hour covered than do the

retail operations.

Table 5.13 illustrates the average values for the defined efficiency ratios based on

return on assets (ROA) by quartile for 2003. Overall the top quartile based on ROA had

the largest average total facility area and had more than double the average sales amount

than the other quartiles. In addition to this, the top quartile showed the most efficient use of

each operation as demonstrated by sales and net income per total facility area and the

strongest sales and net income per labor hour.

The operations in the 3rd quartile had the highest asset turnover ratio and highest

percentage of working capital to sales (Table 5.13).

Table 5.13 Greenhouse Business Efficiency Comparisons: All operations, By Return On Assets Quartile, 2003

Business by ROA

Greenhouse Size

Sales Total Net Income

Sales/ Total

Facility Area

Net Income / Total Facility

Area

Total Facility Area/Labor

Hour

Sales/ Labor Hour

Net Income/ Labor Hour

Asset Turnover

Ratio

Working Capital /

Sales

Top 25% 542,538 ft2 $5,549,226 $692,689 $10.74 $1.62 45.94 ft2 $421.43 $42.46 0.76 13.55%2nd 25% 255,301ft2 $1,996,295 $201,214 $9.78 $1.04 27.65 ft2 $229.52 $13.52 0.64 4.48%3rd 25% 457,878 ft2 $2,068,287 $113,381 $9.48 $0.50 99.43 ft2 $215.38 $5.54 0.77 17.52%

Bottom 25% 212,297 ft2 $1,372,075 -$20,287 $6.96 -$0.11 26.01 ft2 $281.33 -$1.98 0.41 12.68%

43

5.8 Regression Analysis

As stated in the theory and methods sections, the regression analysis was

completed using return on asset (ROA) as the dependent variable with net profit margin

(NPM), owner equity and working capital to sales as the independent variables (Table

5.14). NPM was expected to have a positive coefficient as the larger the net income the

higher the return would be to the asset base. The working capital to sales coefficient did

not have an expected sign, as it is not known how working capital to sales affects ROA.

The coefficient for owner equity could be either positive or negative.

44

Table 5.14 Regression Analysis- ROA Dependent Variable: ROA Method: Least Squares Sample: 1 44 Included observations: 44

Variable Coefficient Std. Error t-Statistic Prob. C 0.074505 0.017086 4.360640 0.0001

NPM 0.434335 0.041170 10.54991 0.0000 WC_SALES01 0.013050 0.018057 0.722701 0.4741

OE -0.054318 0.024798 -2.190379 0.0344 R-squared 0.752403 Mean dependent var 0.077403 Adjusted R-squared 0.733833 S.E. of regression 0.035879

The adjusted R-squared figure in Table 5.14 indicates that over 73% of the

variability in ROA is explained by the independent variables. The average ROA based on

this output is 7.7%, and the standard error of regression in this scenario predicated that

ROA will range between 1.7% and 13.7% 95% of the time. As predicted, NPM has a

positive coefficient and is a strong predictor of ROA. The only variable that was not

statistically significant was working capital to sales. Owner equity is negative and is not

statistically significant. Hence, it does not explain a portion of the variability to ROA.

Therefore, solvency is an indicator of ROA, but liquidity is not.

5.9 Wholesale Segment Analysis

The 37 wholesale operations that had sufficient financial information to complete

the financial analysis sold their product to box stores, retail garden centers, other retail

centers, landscape companies and to re-wholesalers/brokers. Of these 37 firms, 2 sold a

majority of their product to landscape firms, 5 sold the principal amount of their product to

box stores, 6 sold to retail garden centers and 21 sold the majority of their product to

brokers. There were two operations that did not sell at least 50% of their product to any

45

one of these distribution outlets and therefore are not classified in any of these groups.

Although the wholesale operations did sell to other retail centers, none of the operations

sold at least 50% of their product through this distribution channel. Because of the limited

number of firms that sold a majority of their product to landscape firms, this segment is not

analyzed individually.

Table 5.l5 shows the average balance sheets for the operations that sold their

product to the respective distribution channels. On average, the balance sheets were

relatively similar for the operations no matter what distribution channel they used. Overall,

those operations that sold to box centers had a larger asset base than operations who sold a

majority of their product elsewhere (Table 5.16).

46

Table 5.15 Comparative Average Balance Sheet for Wholesale Operations by Distribution Channel, Fiscal Year 2003 Box Stores Retail Broker Cash 231793.00 88124.17 125508.57 Marketable Bonds & Securities .00 10833.33 23079.76 Current Accounts Receivable 566524.80 197753.50 158357.86 Inventory 29800.00 49033.33 37476.19 Growing Crops .00 43333.33 48196.67 Prepaids 190272.60 114049.17 116363.00 Other Current Assets 81201.20 .00 27235.19 Total Current Assets 1099591.60 503126.83 536217.24 Machinery & Equipment 553688.40 571198.83 277076.10 Vehicles 221580.00 11916.67 42047.62 Non Current Accounts Receivable .00 .00 47.62

Not Readily Mkt Bonds & Securities 152661.60 52563.83 122376.14

Real Estate 3475128.80 1365227.00 1339379.10 Other Non Current Assets 84060.00 8906.50 222884.14 Total Non Current Assets 4487118.80 2009812.83 2003810.71 Total Assets 5586710.40 2512939.67 2540027.95 Accounts Payable 237948.00 100404.50 104138.52 Operating Loan 365801.00 64029.33 102453.10 Current Portion Long Term Debt 130024.80 24342.17 89565.52 Accrued Interest 16651.80 3702.83 16849.38 Other Current Liabilities .00 1465.17 1057.71 Total Current Liabilities 750425.80 193944.00 314064.24 Long Term Debt 768380.60 454907.17 542673.43 Other Non Current Liabilities .00 .00 .00 Total Non Current Liabilities 768380.60 454907.17 542673.43 Total Liabilities 1518806.40 648851.17 856737.67 Total Equity 4067904.00 1864088.50 1683290.29

n = 5 n = 6 n = 21

47

Table 5.16 Average Asset Base Comparison by Distribution Channel Box Stores Retail Broker Total Current Assets $1,099,592 $503,127 $536,217 Total Non Current Assets $4,487,119 $2,009,813 $2,003,811 Total Assets $5,586,710 $2,512,940 $2,540,028 % of assets in Current portion 19.68% 20.02% 21.11% % of assets in non-current portion 80.32% 79.98% 78.89%

On average, gross sales and net income were highest for those operations that sold

their product to box stores (Table 5.17). The operations that sold their product to retail

garden centers and brokers had relatively similar gross sales and net income.

Table 5.17 Comparative Average Wholesale Income Statement by Distribution Channel, Fiscal Year 2003 Box Stores Retail Broker Gross Operating Sales 4395689.80 2271998.67 2016589.86 Cost of Goods Sold 1207558.80 83571.83 253981.81 Gross Profit 3188131.00 2188426.83 1762608.05 Depreciation and Amortization 221598.20 111312.83 132722.52

Labor Expense 613677.50 585414.67 489346.76 Rental Expense Land 21750.00 70448.67 16876.05 Supplies 184458.00 141563.17 191971.29 Utilities 207243.75 147462.67 91990.57 Other Farm Expense 1253751.50 984767.17 554992.48 Total Farm Expenses 2750182.80 2040968.33 1477898.24 Total Operating Income 437948.20 147458.50 284709.81 Non Operating Income 12997.00 35647.17 28253.05 Interest Expense 90087.80 31740.67 42868.81 Income Before Taxes 360857.40 151365.00 270094.05 Income Taxes 7148.40 9832.00 25484.52 Net Income After Taxes 353709.00 141533.00 244609.52 Extraordinary Gain/Losses .00 .00 .95

Total Net Income 353709.00 141533.00 244610.48

n = 5 n = 6 n = 21

48

Although the numbers are relatively similar on a value basis between the wholesale

segments by distribution channel, the ratios tell another story. Comparatively, net profit

margin is highest for the operations that sell the majority of their product to brokers

(13.71%) and the smallest profit margins are held by those operations that sell to box stores

(3.60) (Table 5.18). Return on asset and return on equity are highest for the operations that

sell to brokers at 10.18% and 17.12% respectively. The debt coverage ratio is highest for

the firms that sell to retail operations at 10.82. From a liquidity standpoint the operations

that sell to retails firms are the most liquid with a current ratio of 4.49. Owner equity is

highest for those operations that sell to box stores and retail centers at 77.72% and 74.65%

respectively. The firms that sell to brokers have the lowest average owner equity position

at 64.33%. The operations selling product to the retail firms have the highest asset turnover

and have the highest percentage of working capital to sales. Labor efficiency is strongest

for those operations that sell to the box stores and the operations that sell their product to

the retail firms has the lowest labor efficiency. The facility area based on sales and net

income per square foot of the total facility area is most efficiently used by those operations

that sell to retail garden centers and brokers.

49

Table 5.18 Comparative Ratio Analysis Wholesale Operations by Distribution Channel, Fiscal Year 2003 Box Stores Retail Broker Gross Profit Margin 86.87% 89.09% 93.47% Operating Profit Margin 4.61% 7.47% 15.74% Net Profit Margin 3.60% 8.86% 13.71% ROA 4.08% 7.77% 10.18% ROE 4.66% 8.95% 17.12% Debt Coverage Ratio 2.97 10.82 4.72 Working Capital $349,165 $309,182 $222,153 Working Capital/Sales 13.43% 14.89% 3.87% Working Capital/Assets 16.93% 12.713% 1.94% Current Ratio 1.85 4.49 1.71 Owner Equity 77.72% 74.65% 64.33% Asset Turnover Ratio .61 .74 .68 Sales/Work Hour $1234.66 $70.98 $219.31 Net Income/Work Hour $59.82 $6.82 $23.90 Total Greenhouse Area/WkHr 115.58 Ft2 8.05 Ft2 15.58 Ft2 Sales/Total Facility Area $7.49 $11.70 $10.33 NI/Total Facility Area $.34 $.99 $1.16

Table 5.19 shows the efficiency comparison on the wholesale operations only by quartile

based on return on assets (ROA). The table illustrates that the first quartile on average has

the third smallest facility area and at the same time has the highest dollar value of sales. In

addition, this first quartile exhibits the highest dollars in sales and net income per total

facility area, but shows the least amount of total facility area and gross sales per labor hour.

The bottom quartile has the largest average total facility area, lowest gross sales and net

income of all of the quartiles and has the highest working capital to sales percentage on

average of all of the quartiles.

50

Table 5.19 Greenhouse Business Efficiency Comparisons: Wholesale Operations, By Return On Assets Quartile, 2003

Business by ROA

Greenhouse Size

Sales Total Net Income

Sales/ Total

Facility Area

Net Income / Total Facility

Area

Total Facility Area/Labor

Hour

Sales/ Labor Hour

Net Income/ Labor Hour

Asset Turnover

Ratio

Working Capital / Sales

Top 25% 232,342 ft2 $2,893,979.78 $432,103.22 $11.11 $1.78 16.48 ft2 $116.83 $21.71 0.73 16.51%2nd 25% 334,284 ft2 $2,668,315.20 $252,368.80 $9.66 $1.03 53.68 ft2 $584.55 $31.21 0.64 4.11%3rd 25% 224,600 ft2 $2,314,887.22 $167,460.67 $10.44 $0.72 19.15 ft2 $345.92 $14.44 0.76 9.34%

Bottom 25% 544,766 ft2 $1,596,740.89 $5,994.44 $5.79 $0.01 144.48 ft2 $342.96 $0.85 0.60 22.35%

Table 5.20 illustrates that based on return on assets (ROA )the top quartile has the highest

operating and net profit margins, ROA and return on equity, but has a lower debt coverage

on average than the second quartile. The bottom quartile has the highest gross profit

margin but has the lowest values on average for the rest of the profitability measures.

Table 5.20 Greenhouse Business Profitability Comparisons: Wholesale Operations, By Return On Assets Quartile, 2003

Business by ROA

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

ROA ROE Debt Coverage

RatioTop 25% 95.67% 24.78% 20.89% 17.29% 32.25% 4.852nd 25% 77.60% 11.10% 12.90% 9.49% 16.84% 7.233rd 25% 92.89% 12.44% 8.00% 6.79% 8.40% 4.56

Bottom 25% 98.11% 1.44% 1.33% 1.27% 0.40% 3.64

5.10 Summary

The chapter presented the results of the financial and regression analysis for this

study including quartile analysis for all operations and the wholesale operations only.

Because of the small number of retail operations included in this analysis, there are

limitations on the conclusions that can be drawn from this study as the results may not be

representative of the industry.

51

CHAPTER 6: CONCLUSION

6.1 Overview

Financial analysis is necessary for improved management of greenhouse and

nursery operations in Michigan and across the country. As the industry continues to

change, this will become more vital. Limited research has been done in this area because

of the proprietary aspects of the financial information required to complete the analysis.

Many operations simply do not want to share their financial and production information

because of competition in the industry. However, to stay viable in a more competitive

setting, it is important to understand the financial position is of a company. To benchmark a

company against other similar operations leads to operations developing better practices to

become more efficient and gain financial strength.

This research was designed to provide producers within the industry as well as

service providers that deal with these operations, the information needed to understand the

variables that affect these firms. The goal was to provide accurate financial information

that could be used by producers and service providers within the industry as a means of

improving operations.

The results suggest that the wholesale segment was more financially sound in 2003

as well as more efficient than the retail segment. The wholesale operations showed a

stronger solvency position, exhibited more liquidity, and had a higher net profit margin and

return on assets than retail operations.

One may conclude that the wholesale operations are more efficient in both labor

and use of facilities as a result of an increased use in computerization to manage inventory

52

and environmental conditions when comparing the square feet of facility area per labor

hour and net income per square feet of facility area. This increased use in technology

allows the wholesale operations to reduce labor expenses and get more saleable product per

square foot of facility area.

There are multiple reasons that may explain why the wholesale operations have a

higher net profit margin in this study as compared to the retail operations. The gains in

labor and facility efficiencies are two possible reasons for the higher net profit margins on

the wholesale side. However, there may be some unexplained reasons in this report as to

why the retail side is showing lower net income. One of these unproven reasons is that

there are generally more cash transactions handled at a retail operation than a wholesale

operation. If the cash transactions are not reported by the retail operations and are slid

under the table then there could possibly be an under reporting of actual earnings by the

retail operations. The other area that was studied in this analysis was shrink. There could

possibly be a much higher shrink factor on the retail side that would lower sales, and at the

same time increase expenses. As previously discussed in the regression analysis section it

is difficult to explain the variability in net profit margin and this study provides a slim

margin of information that proves why the wholesale operations have a higher net profit

margin than the retail operations. Another item to again mention is that because of the

limited number of retail operations that participated in the survey, the results may not be

representative of the industry as a whole.

In the segmentation of the wholesale segment, those operations that sell the

majority of their product to brokers and retail garden centers are the most profitable, have

53

the highest debt coverage ratio and have the highest sales and net income per square feet of

facility area. The wholesale operations that sell the majority of their product to box stores

are the most solvent and utilize their labor resources most efficiently.

The regression analysis showed that it is difficult to predict the variability in

profitability, and that net profit margin and solvency are predictors of return on assets while

liquidity is not.

6.2 Limitations of the Research

Although the response rate was good for a survey at over 45%, the number of retail

operations that participated in the survey limited the scope of that portion of the research.

The data results for the sample consist of 27.3% of sales throughout the state of Michigan.

However, the conclusions about that segment of the industry are still limited.

6.3 Future Research

The regression analysis indicated that net profit margin and solvency were

indicators of ROA. However, it would be beneficial for future research to do a more robust

study that includes cost accounting and shrink numbers in order to determine what other

factors if any predict the variability in profitability. It would also be beneficial to analyze

more years in order to study the trends of the industry over time.

54

REFERENCES

American Nursery and Landscape Association Website, 2004 <http://www.anla.org/industry/indes.htm> (November 5, 2004).

Brumfield, R.G. Economic and Marketing Issues From a Grower’s Perspective. Washington DC: U.S. Department of Agriculture. 2003

Brumfield, R.G., E. K. Mafoua. “Risk Management for Greenhouse and Nursery Growers in the United States.” Department of Agricultural Economics. FS1001, The State University of New Jersey, Rutgers, 2002.

ERS at USDA, Floriculture and Nursery Crop Outlook Report, September 2004, <http:www.ers.usda.gov/publications/flo/sep04/FL003.pdf> (March 4, 2005).

Investor Words.com Website, 2005 <http://www.investorwords.com/2245/gross_margin.html> (January 6, 2005)

Investor Words.com Website, 2005 <http://www.investorwords.com/3260/net_profit_margin.html> (January 6, 2005)

Investor Words.com Website, 2005 <http://www.investorwords.com/5932/operating_profit_margin.html > (January 6, 2005).

Michigan Farm Bureau Website, 2005 <http://www.michiganfarmbureau.com/press/2005/20050519.php> (May 19, 2005).

NASS at USDA, Michigan 2003-2004 Highlights, October 2004, <http:www.nass.usda.gov/mi/templates/STHILGTS.pdf> (February 17, 2005).

Studenmund, A.H. Using Econometrics: A Practical Guide. Boston: Addison Wesley Longman, Inc., 2001

Uva, W. and S. Richards. “New York Greenhouse Business Summary and Financial Analysis.” Department of Applied Economics and Management. EB2003-12, Cornell University, 2003.

van Blokland, P.J. “Enhancing Profitability in Greenhouse Firms.” SCSB 401, Southern Cooperative Series Bulletin, 2002.

55

APPENDIX A: SURVEY

March 17, 2005 Dear «Proper_Name», Being involved in the green industry, you understand the value of obtaining greater efficiencies to increase profits. Your operation was identified as belonging to the greenhouse and/or nursery industry based on GreenStones’ records. As a Masters student and a GreenStone employee, I established a goal to develop a thesis project that will be beneficial to three interested parties: GreenStone customers, GreenStone as an organization, and myself as a lending professional. Enclosed with this letter is a survey and self-addressed return envelope pertaining to my thesis project. My project involves an efficiency and profitability study on various segments within the green industry. I am completing this project as part of the Masters in Agribusiness program at Kansas State University. This study will identify several characteristics of the nursery and greenhouse operations located throughout Michigan. The project analysis will help draw conclusions that will help improve the profitability and efficiency of operations in the green industry and will assist those who provide a multitude of services to those operations. I believe this project will provide a service to you, our customer, by helping you understand the factors that create the greatest efficiency and are highly correlated with profitability. The project will also help GreenStone and myself as a lending professional, by providing us with a greater understanding of your industry which will help us serve you better. As a GreenStone customer, your survey responses will be matched with your financial information on file. If you would like a condensed copy of the thesis results, check “yes” to the final question of the survey and a copy will be mailed to you at no charge. The survey will take about 20 minutes to complete. Your answers will be kept confidential and will be used only for the purposes of this study. Your name is needed so it can be matched with the financial information on file. The information you provide will not be seen on an individual basis by any GreenStone employee other than myself and will have no affect on your current relationship with GreenStone. The results will only be presented as a combined analysis with all other survey respondents. Please return the completed survey to me using the self-addressed stamped envelope by April 7, 2005. A similar study was completed at Cornell University and can be viewed via the following web address: http://aem.cornell.edu/outreach/extensionpdf/eb0312.pdf. Feel free to contact me if you have any comments, questions or concerns about the survey or the study. Thank you for your time and assistance with this project. Sincerely, Cindy M. Birchmeier Commercial Producer- FSO/Analyst cindy.birchmeier@greenstonefcs.com (517) 318-5361

56

PLEASE RETURN THE COMPLETED SURVEY BY APRIL 7, 2005. «Proper_Name» «Number»

Demographics

1. How many years has your operation been in business? _______________________ 2. Location(s) of operation (List City and County)? ____________________________

____________________________________________________________________________________________________________________________________

3. Does your business operate a nursery/greenhouse in another state? ____yes ____no If yes, where? _______________________________________________________

Ownership/Labor

4. Is your operation solely Family Owned and operated? _____________ 5. What is the ownership structure of your operation?

Partnership ______ Limited Liability Corporation ______ Incorporation ______ Limited Liability Partnership ______ Sole proprietorship ______ If other please explain _______________________________________________

6. Is your operation structured to have multiple entities? ___________________

If yes, please list the multiple entities and explain the purpose of each entity (Operating, real estate holding, etc.). _________________________________________________________________________________________________________________________________________________________________________________________________________

7. List the title of the individual that handles the following activities within your operation and state if the person with this title is a family member to the owner/manager of the operation.

Production ____________________________________________________________ Marketing _____________________________________________________________ Personnel Management __________________________________________________ Finance _______________________________________________________________

57

8. How many hours does your operation utilize contracting services for the following business activities?

_______ hours Tax consulting _______ hours Inventory _______ hours Business Planning _______ hours Financial Investing _______ hours Payroll _______ hours Accounting

_______ hours Marketing – Web page (Internet) 9. How many people does your firm employ at all locations?

Permanent employees ___________ Temporary employees ___________

10. How many labor hours are there in total for all employees in a year?

Permanent employees? _________ Temporary employees? _________

General Operations

11. How many acres or square feet are devoted to bedding plant production in your operation? _____________________

12. How many acres or square feet are devoted to nursery stock production in your

operation? _____________________ 13. How many acres or square feet are devoted to sales in your operation?

_________________________ 14. What percent of your total annual sales are: _______% Annuals _______% Perennials _______% Nursery Stock 100 % Total

15. What percent of your total annual sales are:

_______% Wholesale _______% Retail 100 % Total

16. If you sell wholesale, what percentage of you wholesales sales (from question 15) are to:

_______% Retail firms- mass merchandiser/home centers _______% Retail firms- garden centers _______% Retail firms- other (grocery, hardware, etc.) _______% Landscape firms- (in house- or external) _______% Re-wholesalers- (brokers, other growers, etc.) 100 % Total

58

17. What are your hours of operation for each month of the year? January ________ February ________ March _______

April ________ May ________ June _______ July ________ August ________ September _______ October ________ November ________ December _______ 18. What percentage of your operation’s total sales occurs during each month? ____ % January ____ % February ____ % March ____ % April ____ % May ____ % June ____ % July ____ % August ____ % September ____ % October ____ % November ____ % December 19. What functions of your operation are computerized? Function Check if computer is currently utilized for task Accounting _______________________ Inventory _______________________ Financial Investments _______________________ Banking (wires/ACH) _______________________ Marketing – Web page (Internet) _______________________ Communications – E-mail _______________________ Faxing _______________________ Landscape design _______________________ Production scheduling _______________________ Greenhouse production controls _______________________ Other (please specify) _______________________ 20. Please rate each of the factors listed below according to how much they impact your

business. Use a 1 to 5 scale, with 1=very minor; 2=minor; 3=neutral; 4=important; 5=very important.

Weather uncertainty ______ Competition ______

Land ______ Environmental regulations ______ Market demand ______ Other gov’t regulations ______ Labor ______ Employee turnover ______ Water Supply ______ Own managerial expertise ______ Capital ______

21. Would you like a condensed copy of the thesis report once the results are compiled? It is

at no cost to you. (Check yes or no) ___________ Yes ___________ No

59

APPENDIX B: BALANCE SHEETS

Michigan Greenhouse and Nursery Operations, Entire Group, 2003 Balance Sheet

N Mean Std. Deviation Cash 44 120,565.14 200,126.34 Marketable Bonds & Securities 44 21,366.48 53,414.54

Current Accounts Receivable 44 205,554.16 479,175.55

Inventory 44 136,524.14 426,775.86 Growing Crops 44 95,186.93 301,950.45 Prepaids 44 102,825.50 209,548.25 Other Current Assets 44 30,175.89 94,686.58 Total Current Assets 44 712,198.23 994,104.72 Machinery & Equipment 44 607,451.50 1,856,233.06 Vehicles 44 57,215.50 117,717.86 Non Current Accounts Receivable 44 -3604.09 24,923.66

Not Readily Mkt Bonds & Securities 44 86,473.50 113,363.29

Real Estate 44 1,726,794.86 1,783,354.20 Other Non Current Assets 44 133,781.95 427,203.05 Total Non Current Assets 44 2,608,113.23 3,222,680.70 Total Assets 44 3,320,311.45 4,070,166.49 Accounts Payable 44 136,325.66 292,077.30 Operating Loan 44 179,099.98 269,492.42 Current Portion Long Term Debt 44 77,480.23 142,601.04

Accrued Interest 44 13,776.41 35,619.78 Other Current Liabilities 44 88,570.91 572,830.00 Total Current Liabilities 44 495,253.20 981,282.88 Long Term Debt 44 628,763.41 889,651.05 Other Non Current Liabilities 44 24,750.00 164,172.92

Total Non Current Liabilities 44 653,513.41 946,060.17

Total Liabilities 44 1,148,766.59 1,783,270.10 Total Equity 44 2,171,544.86 2,534,539.30 Valid N (listwise) 44

60

Michigan Retail Greenhouse and Nursery Operations, 2003 Balance Sheet

N Mean Std. Deviation Cash 7 99,412.57 166,335.07 Marketable Bonds & Securities 7 32,282.29 52,329.17

Current Accounts Receivable 7 143,269.14 285,193.69

Inventory 7 574,012.29 946,717.06 Growing Crops 7 21,428.57 36,759.83 Prepaids 7 20,248.14 31,623.70 Other Current Assets 7 49,970.57 119,497.82 Total Current Assets 7 940,623.57 1,464,259.73 Machinery & Equipment 7 1,904,716.14 4,614,369.22 Vehicles 7 30,083.14 45,523.50 Non Current Accounts Receivable 7 785.71 2078.80

Not Readily Mkt Bonds & Securities 7 15,142.86 25,712.69

Real Estate 7 2,127,581.00 1,513,920.79 Other Non Current Assets 7 88,157.14 129,780.42 Total Non Current Assets 7 4,166,466.00 6,136,864.55 Total Assets 7 5,107,089.57 7,592,611.31 Accounts Payable 7 242,918.57 506,072.62 Operating Loan 7 263,409.43 246,257.87 Current Portion Long Term Debt 7 67,222.57 81,562.95

Accrued Interest 7 10,865.57 14,210.47 Other Current Liabilities 7 550,688.71 1,433,582.08 Total Current Liabilities 7 1,135,104.86 2,189,771.12 Long Term Debt 7 819,616.00 726,398.63 Other Non Current Liabilities 7 155,571.43 411,603.31

Total Non Current Liabilities 7 975,187.43 1,084,779.19

Total Liabilities 7 2,110,292.14 3,236,392.80 Total Equity 7 2,996,797.43 4,418,260.12 Valid N (listwise) 7

61

Michigan Wholesale Greenhouse and Nursery Operations, 2003 Balance Sheet

N Mean Std. Deviation Cash 37 124,566.97 207,661.92 Marketable Bonds & Securities 37 19,301.32 54,073.49

Current Accounts Receivable 37 217,337.81 509,708.24

Inventory 37 53,756.11 154,653.53 Growing Crops 37 109,141.22 327,748.67 Prepaids 37 118,448.24 225,178.08 Other Current Assets 37 26,430.95 90,765.03 Total Current Assets 37 668,982.62 900,552.51 Machinery & Equipment 37 362,023.05 421,553.42 Vehicles 37 62,348.65 126,634.84 Non Current Accounts Receivable 37 -4434.59 27,144.04

Not Readily Mkt Bonds & Securities 37 99,968.49 118,589.12

Real Estate 37 1,650,970.46 1,838,373.95 Other Non Current Assets 37 142,413.68 463,357.89 Total Non Current Assets 37 2,313,289.73 2,359,389.59 Total Assets 37 2,982,272.35 3,072,668.31 Accounts Payable 37 116,159.43 237,875.73 Operating Loan 37 163,149.54 273,856.08 Current Portion Long Term Debt 37 79,420.86 152,170.99

Accrued Interest 37 14,327.11 38,468.92 Other Current Liabilities 37 1143.22 5632.31 Total Current Liabilities 37 374,200.19 506,259.26 Long Term Debt 37 592,656.16 921,418.83 Other Non Current Liabilities 37 .00 .00

Total Non Current Liabilities 37 592,656.16 921,418.83

Total Liabilities 37 966,856.35 1,356,063.72 Total Equity 37 2,015,416.00 2,064,460.51 Valid N (listwise) 37

62

APPENDIX C: INCOME STATEMENTS All Michigan Greenhouse and Nursery Operations, Entire Group, 2003 Income Statement

N Mean Std. Deviation Gross Operating Sales 44 2,746,470.50 4,430,064.48 Cost of Goods Sold 44 659,478.75 1,992,871.66 Gross Profit 44 2,086,991.75 2,759,107.26 Depreciation and Amortization 44 144,158.77 272,,477.29

Labor Expense 42 492,956.45 742,795.07 Rental Expense Land 42 22,559.52 36,494.99 Supplies 42 158,014.17 257,536.15 Utilities 42 107,031.24 113,964.13 Other Farm Expense 42 661,899.52 930519.45 Total Farm Expenses 44 1,777,131.84 2,193,335.42 Total Operating Income 44 309,859.91 694,010.70 Non Operating Income 44 29,651.86 54,523.29 Interest Expense 44 53,879.61 74,672.00 Income Before Taxes 44 285,632.16 634,196.41 Income Taxes 44 38,883.50 149,155.78 Net Income After Taxes 44 246,748.66 511,835.11 Extraordinary Gain/Losses 44 .45 3.01

Total Net Income 44 246,749.11 511,834.96 Valid N (listwise) 42

63

Michigan Wholesale Greenhouse and Nursery Operations, 2003 Income Statement

N Mean Std. Deviation Gross Operating Sales 37 2,376,584.41 3,021,303.60 Cost of Goods Sold 37 372,021.30 1,039,165.70 Gross Profit 37 2,004,563.11 2,324,318.34 Depreciation and Amortization 37 133,072.11 ,246,780.92

Labor Expense 36 522,155.11 792,517.72 Rental Expense Land 36 26,110.28 38,320.17 Supplies 36 177,349.56 271,291.04 Utilities 36 114,051.47 119,550.91 Other Farm Expense 36 722,287.58 988,246.44 Total Farm Expenses 37 1,747,929.11 2,033,437.90 Total Operating Income 37 256,634.00 3,757,58.698 Non Operating Income 37 26,269.24 54,420.36 Interest Expense 37 50,176.35 70,628.90 Income Before Taxes 37 232,726.89 324,801.17 Income Taxes 37 17,221.68 42,744.72 Net Income After Taxes 37 215,505.22 322,216.14 Extraordinary Gain/Losses 37 .54 3.28

Total Net Income 37 215,505.76 322,215.91 Valid N (listwise) 36

64

Michigan Retail Greenhouse and Nursery Operations Only, 2003 Income Statement

N Mean Std. Deviation Gross Operating Sales 7 4701582.71 8,976,431.39 Cost of Goods Sold 7 2178896.71 4,333,650.61 Gross Profit 7 2522686.00 4,677,540.74 Depreciation and Amortization 7 202759.71 402,382.66

Labor Expense 6 317764.50 291,110.77 Rental Expense Land 6 1255.00 2639.23 Supplies 6 42001.83 99,144.85 Utilities 6 64909.83 63,002.47 Other Farm Expense 6 299571.17 282,653.82 Total Farm Expenses 7 1931489.14 3,103,957.84 Total Operating Income 7 591196.86 1,579,509.80 Non Operating Income 7 47531.43 55,605.91 Interest Expense 7 73454.00 97,459.95 Income Before Taxes 7 565274.29 1,463,216.21 Income Taxes 7 153381.71 360,955.59 Net Income After Taxes 7 411892.57 1,103,046.62 Extraordinary Gain/Losses 7 .00 .00

Total Net Income 7 411892.57 1,103,046.62 Valid N (listwise) 6