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RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Determine the Profit Centers on Your Farm

Dec 19, 2011

After a busy harvest, most producers are now compiling, reviewing, and organizing the needed information to analyze this year's financial results. Structuring new operating lines for 2012, tax planning, and cash flow projections are at the top of the priority list for many producers.

As you begin to complete your analysis to the satisfaction of lenders and the CPA, consider another step for the benefit of your business. Breaking out “profit centers” and charting your trends is an effective way to paint a clear picture of your financial condition and future direction.
 
“Profit center” analysis involves breaking out individual income and expenses, which are specific to a particular division of your business. For example, every operation has several different divisions which need to be analyzed separately such as machinery and equipment, trucking, livestock, or any other internal source of income and expense.
 
By breaking each of these into separate profit centers, it will allow you to more effectively analyze the profitability of each portion of your business. This detailed information will then allow you to determine which areas may require better management.
 
Once you've identified each specific “profit center”, begin the process of assigning each profit center its income and expenses. Generally the income side is easy to identify and assign to a specific profit center. The challenge is breaking out the appropriate expenses for each profit center. For example, breaking out labor costs and assigning them the correct percentage takes some thought and/or recordkeeping.
 
Another challenge is with machinery. When particular pieces of machinery are used with both livestock and crops, there needs to be an allocation of expenses accurately split between the two different profit centers. Other areas that take particular attention to detail include parts, supplies, utilities, repairs, taxes, insurance, and other miscellaneous expenses. The easiest way to break these expenses out is by using a percentage of cost.
 
You know your business best, so by critical thinking through each individual line item you'll be able to come up with a relatively accurate percentage of expense. Obviously there are some estimates involved but going through this process requires you to take a much closer look at each individual expense. The more you work with this information over time, the more accurate your estimates will become. If you learn that the estimates are not accurate enough you'll probably begin keeping track of some things that you previously overlooked. The value of breaking information into specific enterprise “profit centers” comes from the detailed analysis of each specific component of your business.
 
Step two: “Charting your margins” this process simply involves taking the numbers you've assembled within each profit center and charting this information. By charting your margin you can begin to see the trend and direction you are headed. This also provides you a visual on performance; from one portion of your business to another. A chart for each profit center can give you a clearer picture of how your business structure really looks.
 
Here is an example chart used for measuring income and expense trends over time:
income and expense trends over time
 
 
This chart will allow you to analyze margin opportunities, draw trend lines, and paint a clear picture of performance. Having this type of chart for each profit center will help you to determine which areas of your business are truly generating the profits. Sometimes you may not like what you see, but if you can't see where you're going - how will you ever get to your destination?
 
If you're interested in these types of charts or have questions on breaking out your overall operation into specific profit centers, send me your questions: cbarron@cb-farms.com
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