Many farm operations don't really treat management and labor as defined expenses—the owner "pays” himself whatever is left over. Roy Ferguson of the Ferguson Group, a financial consulting firm, suggests some guidelines to help you calculate where you stand:
1. Management Comp. This should be 4% to 6%, occasionally as high as 8%, of total sales. "If your farm generates $1 million or more, you should have no difficulty justifying $40,000 to $80,000 management compensation,” Ferguson says. "A $100,000 operation, on the other hand, needs to expand or get additional funds elsewhere.”
2. Total Labor Costs. These are about 8% to 9% of annual sales. "Payroll taxes, vacations, housing, bonuses and so on should be included. Operations with total sales of $500,000 should have no difficulty.” Labor includes any person who does not participate in ownership, planning or supervisory responsibilities, as well as custom hire payments.
3. Sales-to-Labor Ratios. Grain farms should have $12 to $14 in sales for each $1 of labor cost (7% to 8% of total sales) to ensure they are efficient in labor. Confinement livestock operations should have ratios in the $16 to $20 sales range (5% to 6.25% of total sales), Ferguson says. "Small operations might want to combine management and labor costs, in which case it should total 12% to 16% of total sales, providing a $6 to $8.50 ratio.”