For horticultural businesses in Australia, one of the most significant decisions is deciding what scale to operate at, as the size of your business can have a significant influence on your profitability, efficiency, and ability to meet demand for your product. Whilst it is commonly understood in agricultural farming systems that achieving economies of scale can lead to improved efficiency or streamlined operations within the business, this is not necessarily the right approach for all horticultural businesses. It is easy to look at the big players in your particular industry and assume that they must be doing well to be operating at that level, however, sometimes the most profitable businesses are actually those smaller ones that are effectively utilising their resources to generate income.
When determining what scale of operation is appropriate for your business is it important to take into account the following factors:
What you grow
What you grow can have a significant impact on the size of your business, due to the variation in the cost of production and revenue generated between different crops. Often labour-intensive crops are more costly and can be more difficult to scale than a crop that utilises automation and mechanical processes. Due to labour usually being the highest cost within these businesses, understanding your labour costs and labour use efficiency on a per hectare basis can help determine the optimal amount of staff members required to operate at any size of the business. Our benchmark data shows that while there may not necessarily be a significant difference between the labour units per hectare between more profitable and average businesses, it is how efficiently they convert that labour into income that makes their business successful. Conducting gross margin analyses on each enterprise or variety within your business can also give you an indication as to which crops are more cost-effective to grow, or which should be scaled back.
Your market
If you choose to scale, will there actually be enough market access and therefore income to justify it? This is one of the most important factors to consider, as there is no point in oversupplying your particular industry and driving your own price down. If you have a large and growing demand for your product, then it makes sense to consider scaling your business to meet this. If you are currently a small grower and have significant competition, then your ability to scale and have greater market access can be limited. In this case, it may make more sense for your business to focus on producing high-quality produce at a smaller scale, rather than trying to compete on price.
Your capital
Scaling your business costs money, especially buying land, equipment, and farm improvements. Understanding how much capital you have in your business through reviewing your balance sheet, can help determine the scale you can operate at and how well your business can withstand any potential shocks such as price fluctuations or labour shortages. A strong balance sheet is the foundation of a successful business and underpins how much money you can access if you choose to grow. It is important to remember that whatever you invest in the paddock or packing facilities, must be reflected in income generated through sales.
Your resources
Consider what you have available or access to already. Resources such as skilled labour, land and water, for example, are difficult to acquire, and can often limit a business’s capacity to expand. Consider looking at the efficiency of your business and work out how improving certain areas such as implementing new technologies or systems, can help increase yields without having to increase scale. If you are already highly efficient and choose to scale, it is essential that you maintain this as you grow.
The main goal of every business is to be profitable. If you are at the point in your business where you can’t possibly cut costs anymore without sacrificing the quality of your product, your other option is to generate more income. Whilst choosing the right variety/enterprise mix, improving yields, or achieving a higher price at the markets are all significant contributors to income, they are all only as good as the scale of your business.
After you have considered the above factors, there is one more thing that can influence the size of your business and that is your own goals and vision for yourself and the business. If you are considering retirement in the near future or want a better work-life balance, then you may consider operating at a smaller scale. Share farming or leasing your land for someone else to crop might be an option if you want to step back from the farm but are not ready to sell, and in some cases, might even be more cost-effective than cropping it yourself. If you are ambitious and want to see your business grow to pass on to the next generation or have greater market access or presence in your industry, then choosing to scale up might be the appropriate option.
In cases where you find your business stuck in an in-between stage where you are larger than most growers but too small to access the same markets as their bigger competitors, determining where you want to be and the direction you want the business to head will help you settle on a level of scale that suits your goals and is profitable. Commentary in the business world indicates that businesses that have goals and constantly review them are twice as likely to achieve them, and businesses that have strategic plans in place to achieve those goals grow 30% faster than their competitors who do not have solid growth plans.
To finish, picture your perfect business. You can grow as much as you want, demand will always exceed supply and your prices will be sustainable. While it is good to dream, it is also good to have a clear and realistic vision to aim for. If your business is not currently reflecting the type of business you want, it might be time to develop a shared vision within your business and talk to your Planfarm consultant as to how you can bring your vision to life.
