Nursery papers masthead Issue no. 2001/10

Knowing your business costs

Nursery operators have discussed, deliberated and debated for many years on how to best determine a price for their products and services. While universal agreement on the best process to use may never be achieved, there are some basic principles that all nursery operators should be aware of. In addition, two new costing courses are now available, one for production nurseries, the other for garden centres, which detail simple processes to help build business profitability.

The profitability of a nursery business cannot be known without accurately determining the expenses involved in production and/or sale of the product/service. Being in business is about gaining a fair return on the time (labour and entrepreneurial skill) and capital invested.

Customers believe that the selling price always includes some level of profit, even after goods have been heavily discounted. They have no real idea of the expense and effort involved in presenting them with a product.

The benefits of calculating business costs

Calculating the real business costs enable businesses to:

The basic message is that in order to run a business effectively, the managers need to know what is going on. For production nurseries, that includes knowing the costs of producing a particular batch of plants. For garden centres, it involves knowing the opportunity costs of allocating space to a particular product category. And if you cannot measure it, you cannot manage it.

How much is your time worth?

Determining the real cost of labour and entrepreneurial skill is probably the most difficult cost to determine within most businesses, including nurseries. The true profit of a business can only be calculated after all costs have been identified.

Major companies do not issue annual reports without including the salary of directors and other direct labour costs. Neither should any business neglect to calculate the costs of entrepreneurial skill as well as direct labour costs if they want to know their real profit (or loss).

To determine the real cost of labour, businesses need to know three pieces of information: ‘time’, ‘supervision’ and ‘money’.

‘Time’ is the actual time available to get the job done and takes into account things like public holidays, annual and long service leave.

‘Supervision’ takes into account the real cost involved in having to manage workers that are not capable of independently doing the job themselves.

For example, a less skilled employee requiring two days per week of supervision has a greater associated cost than a skilled employee requiring only one hour of supervision per week.

‘Money’ is the actual payable expense of employing staff. It includes on-costs such as wages, superannuation, leave loading, workers compensation, etc. By using simple formulas, businesses can calculate their real labour cost once they know their ‘time’, ‘supervision’ and ‘money’ figures.

Figure one shows an example of an individual costing sheet used in the costing workshops to help determine the real cost of labour in a nursery.

Costing workshops

Two different costing workshops, one for production nurseries, the other for garden centres, are now available. Both courses provide simple worksheets and examples of how to calculate direct or variable costs, overhead or fixed costs and how to proportion these costs (along with the real costs of labour) within a nursery business.

The bottom line

If you don’t know all your business expenses, including the ‘time’, ‘supervision’ and ‘money’ costs associated with the labour used in your business, you cannot accurately determine your profit (or loss).

For more information, contact one of the development officers for the nursery and garden industry in your state or the Nursery & Garden Industry Australia’s national training manager, Greg McPhee, phone: (02) 6622 7722.

Figure 1: A sample labour-costing sheet

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