Generating more profit from your farm business

Page last updated: Tuesday, 18 September 2018 - 10:08am

Please note: This content may be out of date and is currently under review.

Managing costs to drive profit

Farm business managers must understand their cost structures, know breakeven production volumes required to cover all costs and have strategies in place to curb expenditure when it looks like production targets may not be met.

Costs can be fixed or variable. Fixed costs are expenses that the business will incur regardless of the season or volume produced. They include both fixed operating and non-operating costs such as permanent wages, overheads, depreciation and finance costs. Variable costs are direct input costs that vary with the season or volume produced such as fuel, repairs, fertiliser, livestock purchases, supplementary feed, animal health, seed, casual wages, freight costs, levies etcetera.

Given the variability in seasonal conditions, farm businesses need to have strategies in place to manage their cost structure. This provides for the flexibility to maximise production opportunity through additional expenditure in the favourable seasons and minimise costs in the poor seasons.

A farm business with a high proportion of fixed costs is at greater risk in areas of volatile seasonal production than a business with low fixed costs. Businesses with low fixed costs are able to buffer a series of low return years more easily. Farm business managers need to be acutely aware of this when considering additional land, machinery or other capital purchases as the interest and capital allowance expenses will be incurred regardless of how favourable future seasons are.

Assessing business decisions

Farm business managers should calculate the return on investment (ROI) for every option when considering an investment decision.

Return on investment (ROI) = profit / cost of investment

When considering an investment in a new technology or upgrade calculate the expected cost savings or increased production value first so you can work how much you can spend to justify the investment or the payback period of the investment.

Payback period = cost / annual net benefit

Contact information

Tamara Alexander