Getting Back to Basics in a Time of Uncertainty

The other day, I was talking with a client, Ian from Five Fig Farm about some of his worries about his business as he adapts during COVID-19. On the one hand, people will still need fresh vegetables. On the other hand, his normal distribution channels are no longer available. While he’s busy prepping fields, starting seeds and planting; he’s also thinking about who his customers are and how to get fresh product to them. His concerns fit into three broad categories:

Shifting Customer Base

Like many area farmers capitalizing on the “farm-to-table” trends in restaurant dining, Ian sold lots of product wholesale to restaurant clients.  While the end consumer (the diner) still wants local produce, they aren’t getting it from restaurants as much, but from markets and grocery stores.  Instead of selling wholesale to restaurants, he will be selling directly to a different intermediary – or perhaps to the end consumer. 

Shifting Sales and Distribution

Ian also sells his produce through a CSA and honor system farm-stand. His drop sites for the CSA had been office buildings. But with everyone working remotely now, he needs to find new drop sites.   He’s considering expanding his farm-stand but wonders if the investment is worthwhile. 

Shifting Labor Models

The challenges that Ian faces are two-fold. First, he no longer has childcare for his 5-year-old and 2-year-old. He and his wife were the primarily workers and now that they don’t have childcare, they only have one “primary” worker – at any given time, one of them will be taking care of the kids.

While not a concern for him, many of his Ian’s friends are thinking about the uncertainty around the H-2A visa program. Many farms rely on this program for labor and they aren’t sure how that will play out.

So many questions!

Digging into these questions and doing some number crunching to get answers can feel like going back to the beginning. When you first started farming, you didn’t know how many customers you’d have and what your yields would be like.  You put numbers on paper, but it felt like fairy dust – illusive and hardly real. 

And we are going back to the basics.

#1 Understand your costs

Your business model is changing. Your selling expenses are changing. Your marketing expenses are changing. And maybe your pricing structure is changing too. If, for example, you had been selling wholesale and now you’re selling retail and offering delivery, you may want to increase your prices. Maybe you decided to offer a pre-boxed CSA instead of a market style CSA, you will need to rethink your prices.

Take a look at your Profit & Loss from last year (and farther back if you have them). Divide your expenses into 4 categories:

• Production costs (including repairs and maintenance)
• Selling costs
• Labor
• Everything else

This breakdown is a little different than how I’ve always suggested setting up your chart of accounts. But this will allow us to do more of a “quick and dirty” analysis.

Think of it this way – the two biggest question marks are: how much will it cost to distribute and sell; and what will it cost to shift your labor model.  The “everything else” bucket is a sunk cost – expenses you will have regardless of sales, production and staffing. Certainly, you can work to controls these, but they are separate from selling and producing.

#2 Do some scenario planning

Ian is thinking about selling retail and wholesale. Presumably, his production costs will stay the same regardless of how he sells. 

CSA: We talked about finding new drop-sites for his CSA. What are the new expenses? Will he need to extend his delivery route and add more drop points? Or can he keep it the same? He can model out several scenarios to see the impact of the delivery expenses on his profitability; and consider if he needs to add a delivery fee.

Retail vs. Wholesale: Likewise, he’ll want to consider the expense of selling at a farmers’ market vs. making delivery runs to local grocery stores. Certainly, Ian can charge more selling at a farmers’ market. But it also requires a greater investment of labor (which is his biggest constraint). What do his selling costs look like for each scenario?

Labor: Ian is struggling right now with childcare since all daycare facilities temporarily closed. He’s concerned about meeting his production goals without his wife working as well. He doesn’t think he can afford to hire a new employee, but it might be worth exploring the cost of child-care vs. a new employee. Let’s say, for example, he paid $500 a week for childcare. He could afford a worker for about 30 hours a week.  Certainly, this worker would not be as efficient or charming as his wife – but it could be a good compromise to get the on-farm support he needs.

For H-2A workers, there are a lot of costs associated with hiring them beyond the payroll expense. There’s housing, transportation, plus agency fees.  What expenses will you save on without the H-2A workers. If you are to allocate those expenses to new employees, what would that look like?

#3 Do some breakeven analysis

Ian has several questions that can be explored through breakeven analysis.

First, does it make sense to invest $10,000 to expand the farm-stand. Given how rural his community is, he thinks his neighbors will appreciate being able to get fresh produce without having to deal with a supermarket.

If he knows his production costs, then he can calculate the level of sales need to cover the additional investment. Let’s say, last year his production costs (including labor) were $30,000. And his total sales were $100,000. His variable production costs are 30%. The incremental new cost of the farm-stand is $10,000. We can plug this into the break-even formula:

Breakeven Sales = (Fixed Costs + Desired Profit)/(1 – Variable costs)

Breakeven Sales = 10,000/(1-30%) = $14,286

In order to cover the costs of the farm-stand, Ian will need to sell an additional $14,286 worth of product. If the farm-stand is open 150 days in the season, he’ll need to sell an additional $95 worth of product each day.  Depending on average sales, that’s approximately 6 or 7 customers a day.  

It is still an unknown whether Ian can attract enough new customers, but now he has a benchmark to think about it. 

He can also do some breakeven analysis around his overall production. He’s wondering if he cuts back on his production (because he doesn’t have the labor) can he still achieve his profit goals.

He looks back over his budget for this year, and figures that his variable costs, without the additional labor is 25%. His fixed costs are $40,000. And his desired profit is $25,000.

He plugs in the numbers into his breakeven formula:

Breakeven Sales = (40,000 + 25,000)/(1 – .25)

Breakeven Sales = $86,667

This sales volume is lower than previous years… but his expenses are lower too. The question is – does he feel he can produce and sell this volume on his own? This is a question he can answer a little more easily.

These are unprecedented times. But getting back to the basics can help clarify some of the questions you have about how to move forward. If you need help crunching your numbers, drop me a line.