Economics
Grazing BMP and Grains BMP require all enterprises to be both economically and ecologically sustainable. That simply means the business must have enough profit to pay for staff, investment and running costs as well as looking after the land for the future sustainability. All farming and grazing operations are independent businesses which need to be managed as a profitable business. The problem has always come from the fact that many families do not have a simple method to assess the profitability.
Instead many families will use cash balance at the bank as a guide to profitability. This may be accurate in some situations, but more often it is not accurate as a measure of success and can often lead to business failure. Often the enterprise may be operating for many years without assessing the cost structure of a business. Each enterprise needs to be profitable in its own right. All enterprise gross margins added together will pay for the running costs (overheads) of a business.
GM 1 + GM 2 + GM3 = total GM
Total GM - (overheads + opportunity interest) = profit.
The following link - Gross Margin template - will assist with basic analysis.
Three Secrets to Profitability
- Increase Gross Margin (profitability of each unit - reduce direct costs or increase price per unit)
- Decrease Overheads (reduce fixed costs)
- Increase Turnover (number of units or weight of units or sale price of units)
Benchmarking
This is an extremely important process for all businesses to undertake and will allow all family and business members to see clearly the potential benefits and pitfalls of a business. There are a number of organisations which conduct annual analysis of farming and grazing businesses that farmers and graziers can use as standards to achieve. Comparative analysis of the whole business taking account of all costs (direct, overhead and opportunity costs), that can impact on profitability.
There are a number of ratios and values that have been developed as a standard for farmers and graziers to aim to achieve. These include:
- GM ratio of 70-75% (GM/GP)
- Overhead ratio of 20-25% (OH/GP)
Gross Margins
Gross production minus direct costs = GM.
Gross Production - direct costs - opportunity interest = Gross Margin
This is the profitability of each enterprise
Direct or variable expenses include:
- costs directly associated to a specific enterprise -
- Fuel/ machinery costs to plant a crop
- Fuel / machinery costs to spray or fertilise
- Fertiliser, seed, chemicals
- Livestock costs for animal health, tags, transport to and from farm
- MLA fee, yard fees etc
Overhead costs
These are the cost for running the business such as
- rates
- rents
- vehicle costs
- fuel
- labour - needs to allow for owners labour
- maintenance costs
- office expenses
- accounting/ legal fees
Turnover
If a business is well structured, it will have a high gross margin profit (an enterprise profit). That simply means in a grazing business, each breeder or steer may have a high sale price and or low direct costs, enabling a high gross margin profit. Or in a farming business, the specific cropping enterprise may have a low costs structure or high sale price enabling a higher gross margin profit per tonne of crop sold.
If the business has a high gross margin per animal or per tonne of crop, then this business can increase the area of crop or number of animals being run to increase the overall profitability. High gross margin businesses are known as sound businesses and are always in demand from smart operators.
For more information and to undertake a benchmarking or economic analysis of your business, contact 0438 395 255 .