The vast majority of drystock Farm Business Owners do not understand what drives farming profit. Unfortunately their results usually fall well below what they really want from their businesses.
All rural bank managers and the majority of farmers I have talked with and worked with over the years have confirmed this. So, why does this happen?
Reasons will abound and many of those will be related to the topics in the Personal Leadership article in this e-newsletter not being addressed. Regardless of the reasons, let’s get some awareness on what profit actually is and the basics of how it is received.
The Profit Equation is simple: P = I - E or Profit equals Income minus Expenses.
This is hardly earth shattering stuff but the keys to making it work for you lie in the subtle details. Measuring total figures over a financial year is easy and fine for giving the annual summary but the opportunities to receive and affect profit lie within a financial year. Understanding Individual animal types, different times of year and the opportunities that certain soil and pasture conditions provide are crucial. Calculating and forecasting profit accurately and therefore being able to affect it lies in understanding that profit or loss is made by animals converting the basic resource (Dry Matter or DM) into the final product (profit). The profit can be reported per hectare or per something else, but it cannot be affected using these measures.
What is Profit? Quite simply it is “spare cash”! Depending on the time frame measured, it may also mean “earned spare cash” (earned but not yet received). As you can see from the above equation, profit does not equal Income but rather the amount left over after Expenses are deducted.
What is Income? We all assume it is the money we receive when we sell something, right? It actually goes further than this to include a deduction for the “cost of goods sold” i.e. Net Income = sales – purchases, in the case of farmer owned animals. Another way to put it is the “Value Change” which allows for the net income whether or not the animal is purchased and sold. The Purchase amount is not the expense. For non - farmer owned animals, Income is the Liveweight Gain income, the Share of Value Change, the grazing income etc, depending on the deal involved.
What are the Expenses? This is where most come unstuck. The Farm Working Expenses or Operating Expenses in a farm business are those amounts spent to run the business. These must be allocated somehow against the Income of every animal to determine the profitability of running those animals. In short it is the cost of the feed that every animal eats at any time during the year.
In summary, Profit for drystock farm businesses is measured on how well all animals convert DM into profit. The profit / kg DM eaten for the same animal can vary from month to month, week to week or even day to day, depending on how the profit drivers vary during a particular time frame. Profit / kg DM eaten on any particular day is the major measurement used for decision making to generate profit, using the GrowFARM Online Business Analysis System (OBA). The profitability of different animals and different stock classes can be compared and run alongside other parameters (such as land type, pasture objectives and profit periods) when you decide well in advance which animals to profitably run at any time. These decisions (which are totally under your control as a Farm Business Owner) can have a huge impact on the final business result, and hence the spare cash that the Farm Business Owner receives. To put it simply, for profit to be received the Income (or Value Change in the case of farmer owned animals) must be more than the cost of the feed eaten, over a specific time frame. For a loss to be received, the Income must be less than the cost of the feed eaten, over the specific time frame. Simple? Yes! Obvious? Not usually!
This is all easily measured and forecasted at any time of the year using the GrowFARM OBA. Having a live online tool such as this allows instant answers to scenarios and profit questions well before the decisions need to be carried out.
In the next and subsequent e-newsletters I will discuss how to put this theory into practice and actually bank profit in your drystock farm business.
This article appears in the GrowFARM Connector (February 2010) - our monthly e-Newsletter. Click here to subscribe to the e-Newsletter