THE MAP TO LOST PROFITS
As farm incomes have increased over time, do you find that your profit has hardly changed at all? Increases in income can get lost in higher operating costs, interest and lease payments.
Before making a move to increase total income, draw a profit map to track the performance you need to achieve in all parts of your business so you can find the path to more profit.
Before you set out, have you ever thought about how much income is enough for your family to live on and build assets? Do you need to draw $200 a week or $2,000 a week to maintain the lifestyle you want? Do you have a target for building up your assets? Do you want to grow your assets by $5,000 each year or $50,000?
The best place to start your profit map is having some ideas about where you want to get to with lifestyle. The disposable income you use for living and building assets comes from three places - farm profit, off-farm wages and off-farm investments. Mapping out where income comes from shows how big your farm profit must be.
If we branch out the profit map into income and costs we can look at the farm performance in each part.
For example, if you want $30,000 to spend on living for a one-family business and want to invest $15,000 each year, you will need about $60,000 of disposable income (before tax). If this all comes from farm profit your profit map will lead you to a farm income of at least $200,000.
Mapping out an income path shows that total income comes from two places - productivity and size. If you are making $45/ha in productivity and your farm size is 4,000 hectares, you will fall $20,000 short of your farm income target. Check your local benchmarks for productivity and size. Is it easier to lift productivity by $5/ha or do you need 450 more hectares to meet your goals?
The cost-side of the map for this example shows costs can add to $140,000 to leave $60,000 in the pocket. Here you can check your performance on operating costs, debt level, and machinery investment.
After checking your performance across the business, think about the areas that are easiest to change. If you make a change to the income side, think how it will change the costs.
A profit map will show the costs to be controlled, so extra profit isn't lost from your business.
Contact: Rod Luke 03 5441 4821