Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 50 views

    Improving Profitability : Why Farmers Need Farm Financial Management

    Uploaded by

    gildesenganio
    - Farmers can improve overall farm profitability by either increasing profit margins per unit or increasing total units sold. - Keeping accurate enterprise budgets and records of costs and returns is important for understanding profit margins. Some enterprises may have much higher margins than others. - Options to improve margins include reducing costs, increasing prices, or changing enterprises/production practices to increase yields while maintaining or improving margins per unit. Partial budgets can help analyze potential changes.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Improving Profitability : Why Farmers Need Farm Financial Management

    Uploaded by

    gildesenganio
    50 views42 pages
    - Farmers can improve overall farm profitability by either increasing profit margins per unit or increasing total units sold. - Keeping accurate enterprise budgets and records of costs and returns is important for understanding profit margins. Some enterprises may have much higher margins than others. - Options to improve margins include reducing costs, increasing prices, or changing enterprises/production practices to increase yields while maintaining or improving margins per unit. Partial budgets can help analyze potential changes.

    Original Description:

    Guide to farm profitability

    Original Title

    Improving Profitability Moses 2012

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    - Farmers can improve overall farm profitability by either increasing profit margins per unit or increasing total units sold. - Keeping accurate enterprise budgets and records of costs and returns is important for understanding profit margins. Some enterprises may have much higher margins than others. - Options to improve margins include reducing costs, increasing prices, or changing enterprises/production practices to increase yields while maintaining or improving margins per unit. Partial budgets can help analyze potential changes.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    50 views42 pages

    Improving Profitability : Why Farmers Need Farm Financial Management

    Uploaded by

    gildesenganio
    - Farmers can improve overall farm profitability by either increasing profit margins per unit or increasing total units sold. - Keeping accurate enterprise budgets and records of costs and returns is important for understanding profit margins. Some enterprises may have much higher margins than others. - Options to improve margins include reducing costs, increasing prices, or changing enterprises/production practices to increase yields while maintaining or improving margins per unit. Partial budgets can help analyze potential changes.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 42

    Improving Profitability

    Why Farmers Need Farm


    Financial Management

    Craig Chase, Field Specialist


    Farm & Ag Business
    Management

    Plan for today


    Two ways to improve profitability
    Increase profitability per unit (or margin) while
    selling the same number of units.
    Increase the number of units sold while keeping
    the same profitability per unit.

    So what is margin?
    Margin is the difference between what you
    sold your product for and what the cost of
    producing and marketing that product was.
    To get a better understanding of margins we
    need to keep enterprise records.

    Enterprise Budget
    An enterprise budget is an estimate of costs
    and returns to produce a product.
    For producers who grow a large number of
    different products.
    Develop budgets for those products that
    contribute the most to your business goals.
    Think of the 80/20 rule for most businesses
    80% of their profits (not revenue) are
    provided by 20% of their products.

    Example of 80/20
    You sell 5,000 chickens for $15.00 per
    chicken for a total of $75,000 in revenue.
    You also produce vegetables for a CSA; 60
    shares at $350 per share for a total of
    $21,000 in revenue.
    Poultry is approximately 78% of your
    revenue.

    Example of 80/20
    Your net profit margin for chickens is $2 per
    head; $10,000.
    Your net profit margin for vegetables is
    $7,000.
    Poultry is approximately 59% of your net
    profit margin. As an enterprise, poultry has a
    net profit margin of 13%.

    Example of 80/20
    How would you treat the vegetable
    enterprise (as a secondary or primary
    enterprise)?
    What should you do with the poultry
    enterprise?

    Enterprise Budget
    You can develop enterprise budgets for each
    major part of your business.
    Example, CSA with poultry/livestock. Complete a
    CSA and livestock budget.
    CSA with multiple seasons and use of high
    tunnels/greenhouses. Complete an enterprise
    budget for each season (spring, summer, fall) or
    production system (open ground, high tunnel,
    greenhouse).

    The process is the same for all scale of


    farming operations.

    Simplified Enterprise Budget


    Salad Greens (4x100 ft bed)
    Revenue: 30 lbs @ $5.00/lb
    Crop inputs: (Seed, fertilizer, etc.)
    Labor
    Supplies
    Ownership (machinery, land, irrigation)
    Total production cost
    Marketing costs
    Profit margin (%)

    $150.00
    7.00
    28.00
    1.00
    11.00
    $ 47.00
    $ 50.00
    $ 53.00 (35%)

    Simplified Enterprise Budget


    Green Beans (4x100 ft bed)
    Revenue: 120 lbs @ $3.00/lb
    Crop inputs: (Seed, fertilizer, etc.)
    Labor
    Supplies
    Ownership (machinery, land, irrigation)
    Total production cost
    Marketing costs
    Profit margin (%)

    $360.00
    25.00
    180.00
    4.00
    11.00
    $ 220.00
    $ 68.00
    $ 72.00 (20%)

    Profit Margin Analysis


    Your goal was to have a profit margin of
    25%; or $0.25 out of every $1.00 of sales to
    stay in your business.
    Profit margin is what is left over to pay for
    your general farm overhead, family living
    expenses, savings, and farm growth.

    Profit Margin Analysis


    You determine your profit margin analysis for
    each of your six major crops and put them in
    a table (that follows)these are the six
    major crops that contribute 80% or more of
    your whole-farm profit margins.

    Profit Margin Analysis


    Revenue

    Total Costs

    Profit Margin

    Carrots

    $ 136.00

    102.00

    $ 34.00 (26%)

    Specialty Green
    Beans

    $ 360.00

    288.00

    $ 72.00 (20%)

    Greens

    $ 150.00

    97.00

    $ 53.00 (35%)

    Heirloom
    Tomatoes

    $ 700.00

    443.00

    $ 257.00 (37%)

    Potatoes

    $ 150.00

    126.00

    $ 24.00 (16%)

    Snow Peas

    $ 175.00

    153.00

    $ 22.00 (13%)

    Profit Margin Analysis


    Three (half) of your crops have a profit
    margin below your goal of 25%; potatoes,
    snow peas, and specialty green beans.
    What do you do to increase their profit margins?

    Three (half) of your crops have a profit


    margin above your goal of 25%; greens,
    carrots, and heirloom tomatoes.
    Do you analyze these as well or are you happy
    with the numbers?

    Remember.
    There are two ways to improve profitability
    one of them is to increase your profit margin
    per unit produced.
    So you can either reduce your costs to
    produce and market your product or increase
    your price.
    Lets first look at reducing your costs

    Reducing Cost Enterprise Budget


    Use the budgets to calculate breakeven prices and yields.
    For example, cost per lb. of beans sold was
    $2.40 ($288/120 lbs).
    Compare this number to other producers or
    published budgets to determine where costs
    are different and why.

    Reducing Cost Enterprise Budget


    A second reason track key costs .
    Green bean example, $180 (or 82%) of the total
    production cost is labor. Most of the labor is
    weeding and harvesting.
    Question - can labor be lowered without
    reducing yields (i.e., can labor be more efficient)?
    Crop inputs is a small percentage (10%) of total
    production costs, a 10% reduction in costs
    wont affect total production costs significantly.
    Dont spend time on small items

    Partial Budget Another Tool


    A partial budget allows you to analyze a
    portion of your farm to determine if minor
    adjustments should be made.
    For example, should you:
    Purchase transplants or grow from seed
    Custom hire or purchase machinery
    Change marketing outlets

    Partial Budget
    Partial budgets allows you to compare two
    alternatives side-by-side.
    The analysis tells you one of the alternatives
    is comparatively better than the other.

    Partial Budget Components


    There are seven components to a partial
    budget: increased revenue, reduced cost,
    reduced revenue, increased cost, total
    positive effects, total negative effects, and
    net change.

    Partial Budget Example


    Purchase 1000 transplants rather than growing from seed
    Positive Effects
    Increases in revenue (1)

    Negative Effects
    Decreases in revenue (3)

    Decreases in cost (2)


    Increases in cost (4)
    Labor developing transplants
    $100 Transplants ($.25 ea)
    Crop inputs (soil mix, seed, etc.)
    50
    Total decrease in costs
    $150 Total increase in costs

    $250

    Total positive effects (5)

    $150 Total negative effects (6)

    $250

    Net change (7)

    -$100 (Doesnt make sense to buy transplants)

    $250

    Partial Budget Example


    Analyze the purchase of a new 1-row potato harvester ($2,000, 7-yr life)
    Positive Effects
    Increases in revenue (1)
    Decreases in cost (2)
    Labor (50 hrs)

    Negative Effects
    Decreases in revenue (3)
    Increases in cost (4)
    $500 Labor (1 hrs)
    Capital recovery cost
    Taxes, housing, insurance (1%)
    Repairs and maintenance (2%)
    $500 Total increase in costs

    $ 10
    180
    20
    40
    $250

    Total positive effects (5)

    $500 Total negative effects (6)

    $250

    Net change (7)

    $250 (per half acre) makes sense to purchase

    Total decrease in costs

    Partial Budget Example


    Change Marketing Outlet from Farmers Market to Institutional Market
    Positive Effects
    Increases in revenue (1)
    Institutional market sales

    Negative Effects
    Decreases in revenue (3)
    $3,600 Farmers market sales

    Decreases in cost (2)


    Farmers market labor costs
    $1,200
    Farmers mkt. supply, trans. costs 400
    Total decrease in costs
    $1,600
    Total positive effects (5)
    Net change (7)

    Increases in cost (4)


    Institutional market labor costs
    Instl mkt. supply, trans. cost
    Total increase in costs

    $5,200 Total negative effects (6)


    $0

    $4,500

    $600
    100
    $700
    $5,200

    Toss-up what are the non-economic


    factors?

    Pricing
    The second way of increasing profit
    margin per unit sold is increasing the
    price of the product.
    For an individual product, what does it
    cost me to produce and market that
    product?
    If snow peas cost me $3.06 per lb. to
    produce and market, what should my
    price be?

    Pricing
    So if your margin goal is 25% and your
    break-even cost is $3.06 per lb., your
    sales price would need to be $4.08 per
    lb. (3.06/.75; 25% of $4.08).
    Will your consumers and competition
    allow this price? If not, what price will
    they allow and what is your profit margin
    at that price? If you cant get to where
    you want, what do you do?

    Pricing
    Same process regardless of what you
    are producing
    Example CSA share cost you $240
    per share to produce and market, price
    it at $320 ($240/.75).
    Chickens cost you $2 per lb. to produce
    and market, price at $2.67 per lb.
    ($2/.75).

    Yes or No to Change - Enterprises


    Production change key question: can you
    either increase yields without increasing
    costs or decrease costs while maintaining
    yields?
    Product mix compare products based on
    your most limiting factor. If labor, determine
    which products return the most to you per
    hour. The ranking will likely be different on a
    per hour basis (e.g. green beans).

    Yes or No to Change- Enterprises


    Pricing you need to know your costs or
    otherwise you are shooting in the dark. Add a
    desired profit margin to your total cost of
    producing and marketing your product(s).
    Compare that price to customers willingness
    and competition.
    Market outlet compare outlets that are
    available to you. Dont focus on selling price
    (gross revenue), focus on net margins.

    Yes or No to Change - Enterprises


    Purchase new equipment the main reason
    to purchase equipment is to save labor.
    Compare the total cost of the new (used)
    piece of equipment to the labor savings.

    Increasing Profit by Increasing Yields


    Second way of increasing profits
    increasing the number of units sold without
    increasing the cost per unit.
    Can use partial budgets or enterprise
    budgets to note production level changes
    and determine if profit margins are
    increasing or decreasing.

    Increasing Profit by Increasing Production


    Most production changes made will lead to an
    increase in total costs.
    So make your decision based on whether your
    profit margin per unit stays the same or
    improves.
    For example you look at adding another 500
    chickens for next year. As long as the profit margin
    per bird does not go down, then it would make
    sense to increase production.

    Looking Beyond a Single Enterprise


    You should analyze profit margins for each of
    your major enterprises and if they fit into the
    80/20 rule should all be equal to or higher
    than your profit margin goal.
    But what about the non-major enterprises?
    To keep track of all your non-major
    enterprises you need to calculate your
    whole-farm profit margin and make sure you
    do not go below your overall profit goal.

    Whole-farm Profit Margins


    Whole-farm profitability can be illustrated by
    the income statement.
    You can use Quicken, QuickBooks, or other
    program to develop a qualified income
    statement. Remember that some programs
    Profit and Loss or Income Statements are
    not really Income Statements. You will
    probably need to make adjustments.

    Income Statement; Yr ending 12/31/2011


    Sale of products

    $140,000

    Car and truck, gas and oil


    13,200
    Depreciation, repairs and maintenance
    18,000
    Crop or livestock inputs
    19,800
    Insurance, interest, repairs, taxes
    18,400
    Labor
    24,600
    Supplies
    8,000
    Utilities
    8,000
    Total Expenses
    $110,000
    Net Income
    $ 30,000

    Questions
    What was the whole-farm profit margin?
    Answer : 21% ($30,000 / $140,000)

    What was your profit margin goal?


    Answer: 25%

    Was your own labor covered in the income


    statement?
    Your income statement is primarily for you so put
    it in the form that will help you make decisions.

    Discussion
    What do you do if your major products had
    an operating profit margin over your goal and
    yet your whole-farm operating profit margin
    was under?
    Were you consistent in how you accounted for
    revenue and expense items between your
    enterprise budgets and whole-farm records?
    Are your non-signature products heavily capital
    or labor-intensive?

    Discussion More questions


    Are you in the development stage of your
    business? In other words are you trying to
    promote a new marketing outlet and/or product
    that will take time to become profitable?
    Are you at the right scale of operation regarding
    all your products? Do you have a lot of
    machinery expense for a non-profitable
    enterprise? If yes, could this be accomplished in
    another manner.

    Summary
    Improving profitability can occur one of two
    ways:
    Increasing your profit margin per unit while
    maintaining sales levels
    Increasing your sales levels while maintaining
    your profit margins.

    Enterprise budgets can be used to determine


    current profit margins and determine where
    they can be improved.

    Summary
    Partial budgets can be used to determine
    how changes in your farming operation can
    improve profitability.
    All of your signature products should have
    profit margin equal to or greater than your
    profit margin goal (think of the 80/20 rule to
    determine your signature products).

    Summary
    If you are below your profit margin goal, what
    can you do to make it better?
    What are the opportunities for increasing your
    price do you have the right customers?
    What are the opportunities for changing
    production practices (to increase production
    levels or reduce expenses) or product mix?

    Summary Improving Your Profit


    So, how would you evaluate your
    business and improve your profits?
    How would you choose what to
    implement and what not to implement
    (what would the basis for your decision
    to be)?

    Questions..
    Any questions or comments?
    Thank You for This Opportunity!
    Craig A. Chase
    Marketing Food System Initiative Program Leader
    Iowa State Local Food and Farm Program Coordinator
    Farm Management Local Food Systems and Alternative Enterprises
    209 Curtiss Hall
    Iowa State University
    Ames, IA 50011
    (515) 294-1854
    cchase@iastate.edu

    http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html

    You might also like