Categories: Farm Industry Trends, Farm Leadership, Farm Trends, Profit Center
Tags: farm income, farming operations, Fixed Cost Amortization
To maximize your profit for your farm, it is very important to determine what your annual fixed costs are and determine if you are maximizing your amortization of these costs on your farm. Fixed costs are those costs that do not materially change with production increases and decreases.
Some examples of fixed costs are:
- Depreciation on your equipment
- Insurance costs on equipment
- Your annual salary cost for providing services to the farm operation
- Office related costs
- Other annuals salaries for workers who are not at full capacity
These costs are mostly fixed and if you can increase your production to full capacity, these costs per unit of production will decrease substantially. The goal is to maximize your production to equal the full amortization of these fixed costs.
Lets say you have a farm with 1,000 acres of production and your total annual fixed costs are $100,000. This means your average fixed cost per acre is $100. If you have enough equipment and capacity to farm 2,000 acres and all of your variable costs will remain the same, you will reduce your fixed cost amortization from $100 to $50. This will result in additional profits to the farm operation of $50,000.
Try calculating these costs for your farm operation and see how it would effect your bottom line.
However, you also need to be careful that as you approach full capacity, you may have to make major investments to go slightly over full capacity. This can then put your back with higher fixed cost amortization.
Categories: Farm Leadership, Legacy Planning, Retirement
Tags: Family Business Meetings, farming operations, verbal and non verbal communication
As a CPA, I have been involved in many family meetings. Sometimes, I act as an advisor to the participants. At other times, I may actually be part of the family that is having the meeting.
I remember having a client several years ago that had several children that were actively involved in the business during their lifetime. We hada family meeting with several advisors and it became apparent very quickly that strains of the family dynamic and how it affected their relationships. Very quickly, the perceived problems of childhood, parenthood and other factors came out and you almost had a civil war on your hands. We were able to get it back on track, but it was touch and go for a while.
Dr. Donald Jonovic writes a monthly column in Successful Farming that I think is always worth reading. A recent column from the print version of the magazine dealt with Family Rules of Conduct for these meetings. Dr. Jonovic listed several rules for effective meetings. Some of the ones that I feel are especially relevant are:
- Always treat each other the way you would treat important friends or colleagues. – Too many times I find that family will treat each other worse than any other friend or acquaintance. We should really treat our family better than our friends. If we do, many of our family problems would be cured.
- Keep your business and personal disagreements confidential and within the family. – Disagreements should be handled in-house. Don’t put them in the “outhouse” so to speak.
- Keep meetings fun – Farming is fun and having meetings about farming and family should be fun. Have some type of family interactive game or other ice breaker to keep things loose.
- Do not equate difference of opinion with disloyalty – Remember that having people always agree with you means they go over the cliff with you when things go wrong. Encourage people to give you a different viewpoint. This is always the best way to learn.
- Leave your cell phones at the door – This may be tougher for our Gen X and Gen Y family members, but it is only for an hour. They can survive and will learn to enjoy it.
There are many other good points, but to make your meetings effective, implement as many as you can.
Categories: Profit Center
Tags: ag lender, farming operations, viable farming
David Kohl, ag lending consulting, divides target farmers and ranchers for future agricultural lending into four categories and percentages:
- 10 percent approaching $600,000 in annual revenues and planning to grow this toward $1.5 million in revenue
- 30 percent that will be scaling down to a rural “lifestylers” or those commonly living on five to twenty acres
- 30 percent that will be exiting farming
- 30 percent that are focusing on efficiency versus growth in maintaining viable farming operations
Kohl contends that ag lender’s most important customers will be the 30% that focus on efficiency and not just growth.
I tend to agree with Mr. Kohl since many farmers went bankrupt in the late 1970’s and early 1980’s from growing way too fast. Remember, the most important number on your profit and loss statement is the bottom line profit number, not the top line revenue number.