There are lots of challenges in revenue forecasting and understanding variable costs for hydroponics. Here is what I'm trying to flesh out in regards to the economics of this industry.
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There are many intricacies in developing a financial model for urban farming, specifically hydroponics.
Here are the main points:
- Background: I used to do live financial modeling (for two years), but now often build models off-stream and review them in videos.
- Purpose: Here, I'm trying to construct a financial model for urban farming, which uses hydroponics, where crops are grown in buildings, offering benefits like faster growth and no need for pesticides.
- Challenge: The main challenge is determining how to accurately model a financial forecast for such a business, especially concerning revenue generation, which needs to account for growth cycles that are measured in weeks.
- Revenue Logic: I believe I'm going to use yield per square foot per crop type and pricing based on price per volume or unit (not sure yet). I will then multiply that by the square foot assigned to each crop and the average number of growth cycles per month (which will be a decimal). For example, if a growth cycle takes 11 weeks, that is roughly 0.39 cycles per month (11 weeks = 77 days and if you assume an average month has 30.41 days (365/12) then that gets you 0.39 by dividing days in month by total days for a full cycle (30.41 / 77) The issue with this is that it will evenly spread out the correct amount of revenue, but in the first 12 months the cash needed will be understated since it is assuming revenue happens evenly rather than at the actual end of the cycle. The total revenue will be correct given the weekly assumption, but the timing will be normalized. For the purpose of the model, I think this is acceptable.
- Scaling: I am also considering how to scale the model, both in terms of square footage for farming and in terms of multiple locations for expansion. For scaling, the cost and revenue implications of increasing farmable square footage and adding new locations are key considerations. If this becomes popular, I may do a second version that is built for scaling to many locations, but the initial version is going to be for a single location with a starting defined square footage of available farming area.
In summary, Jay is deep into the complexities of building a hydroponics business financial model, juggling considerations about revenue, scaling, and the balance between simplicity and precision.
