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Archi-ponics: Commercial Crop Production, Part 2 – Business Planning

Get your hydroponics business up and running by planning effectively Get your hydroponics business up and running by planning effectively

Studies show that those who write their ideas and goals down are more likely to achieve them. That is one reason why, when starting a crop production business, it is imperative to create a business plan. Your business plan will ensure that you think of as much as possible prior to investment. It convinces you and others that, if investment is needed, your idea is a viable business. Included in the business plan are the executive summary, mission statement, marketing plan, operational summary and more. But arguably the most important parts of the business plan are the financials, with an emphasis on Profit and Loss (P&L) and cash flow projections.

P&L is basically a spreadsheet used to determine how much money the business truly made and how much money was spent on items directly related to the process of creating and selling your product. The expenses are categorized by fixed costs, variable cost, and controllable costs, which we’ll discuss more next week.

One of the most difficult things for people to understand about the P&L is that if you borrow money from a bank or an investor, neither receiving that money nor the cost of paying that money back is considered income or loss, therefore it is not shown in the P&L. The reason you do not show the loan in the P&L is simple – if I borrow money from the bank and I pay the bank back, did I make or lose any money? If I used that money wisely, I not only paid the loan back, but I created income, infrastructure, or products with it. However the money I paid back to my lender is not an expense because it was given to me, and I’m giving it back. It wasn’t out of my pocket. That said, all loaned money comes with interest, and certainly paying that fee is a cost to the borrower, and is shown as an expense in the P&L.

There is one more thing to consider in terms of borrowing money to build a hydroponics set-up, or a greenhouse, or something of that nature: those systems most likely will not be around forever. They may have a five-, ten-, or twenty-year life expectancy, after which time you will need to replace or rebuild that equipment. So, what you should do, if you have spent $100k on a hydroponic greenhouse and you anticipate that equipment lasting 20 years before it needs to be rebuilt, is divide the $100k by the 20 years (100,000÷20=5000) which equals $5000. This money is set aside, so that when it is time to rebuild you have the capital to do so. This is called “depreciation,” and it is important not only to ensure you’re ready for the repurchase of equipment, but it is also tax deductible. Depreciation is shown in the P&L as an expense.

Next week we’ll discuss different expense categories with the P&L. Stay tuned. Business planning is essential to getting your commercial hydroponics operation up and running.

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Colin and Karen Archipley operate a successful hydroponics business in California.
Last modified on Friday, 03 August 2012 17:55

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