Pippa Piotrowicz (FCG WhiteAvon)

Do you know your gross margins for each of your farm enterprises? Are you using these to help make informed decisions? Over the last few months, this has been an area of concentration for a lot of my clients when reviewing what is the next best business decision to make.

Sometimes this has been to review costings of the business, evaluating which enterprise makes the most margin or even what the margin is! Other times, this has been to assess what area of the business they should expand in. Alternatively, it may be to look at the opportunity cost of undertaking one enterprise over the other.

For livestock ensuring you factor in a forage cost is crucial. Normally, you do not include an income for the forage but have it as a negative gross margin (GM). Here, you can add this negative figure to the relevant enterprises; dairy, beef, youngstock, livery, etc. Also, ensuring the data you are using is accurate and up to date is crucial in providing a base line.

A real-life interesting example of how an enterprise analysis can help, can be seen below:

A husband and wife run a dairy herd with a full livery. The husband primarily runs the dairy, and the wife primarily runs the livery. There have been a lot of conversations regarding expanding the livery with an unused building being converted into stables and putting an outside school in. With a lot of the livery costs not being split out of the business, at first glance this looked like a good option.

BUT….

There is no ‘rental’ figure for the livery using the fields or yard. This has also meant the dairy herd are short on forage so are buying in forage, due to a reduction in grazing and silage platform. In addition, the loan repayments required for setting up the livery in the first place are also being absorbed by the wider business. Costs specific to the livery, such as fuel from machinery transporting bales, repair costs, vet fees, water, electric etc., are all costs which were just being lost within the business.

From this the decision to instead increase the dairy herd and put dairy cattle in this shed has been made. Not only is the GM/hd higher, but you can fit more cows in the shed than horses, so on a GM overall basis it will be a larger GM. It also means no new loan needs to be taken out for a riding school! Without this analysis, the business would have not realised the costs the dairy is absorbing, which was impacting the GM of the dairy herd. A cherry on the top of the pie, was that the bank manager was greatly appreciative of this figure and has used these figures to help support the business.

To make any sure business decision regarding increasing enterprises, review of the business itself, or expanding into another enterprise, an analysis of your current performance needs to be undertaken.

If you would like to discuss anything further or are interested in having an enterprise analysis conducted on your business, please contact Pippa at pippa@fcgagric.com or your local FCG Office.