Do you know what business you are in and is it achieving your profit goals?
Land ownership is a strong tradition in Australian agriculture. Land ownership makes the producer both landlord and lessee. Ownership gives the producer a feeling of control and helps reduce financial risk in poor seasons — but is it the best way for you to run your business?
Graingrowing is a profession—your skills and knowledge are used to combine land, labour and capital to produce grain. Owning land is also a business — investing capital in land to generate an income.
While practising their profession, most graingrowers also have an investment business in owning their own land.
Where growers own their own land, farm income needs to cover operating costs, depreciation, pay interest payments and owner's labour, and provide a reasonable return on their equity in land, livestock and machinery.
However, many growers accept low wages for their expertise and often make no return on their capital.
Operating costs and interest payments are easy to see and even depreciation is calculated for tax purposes. But how do you value your own labour and what level of income are you expecting from your farm investments?
Commercial farm managers' rates can be a starting point for setting your own wage level. Investment returns from bank deposits, shares and property provide readily available comparisons in deciding what income you could get for your capital if it wasn't tied up in land.
For example, a $50,000 full-time wage and $20,000 for your spouse's part-time work cover your salaries. $750,000 equity in your farm could yield 5 per cent with relative ease ($37,500). The business will need to make $108,000 profit to fully cover what you could expect to make using your time and capital in other areas.
The FAST analysis shows an $800,000 cropping business with mid-range performance in productivity, cost control, debt payments and depreciation to produce an income of $310,000 would make a profit to meet the levels set above.
Farm managers are looking at the income their capital could make if invested elsewhere. Together with a wage, this gives a target to aim at — which can be set a little lower than the market, allowing for the lifestyle they prefer.
Once the target becomes difficult to achieve, these managers will consider if they want to stay in the graingrowing business (or consider moving to a better location), the landlord business (lease out the property and work elsewhere), or look at a new business altogether (sell the farm and re-invest in new capital).
Contact: Mr Rod Luke 03 54414821