Don’t let minor expenses take a big bite out of your profits
Small costs — if left unchecked — can add up to massive amounts. As the year winds down, take a hard look at your financials to make sure you’re only investing in areas of your operation that show a return.
“Cost creep” is business concept that can show up in many areas of your balance sheet, says Thomas Eatherly, principal with Kcoe Isom. A common area is labor.
“Operations with large land bases often create busy work for their employees,” he says. “To reach weekly hour goals in the slow times, you start having employees replace culverts, enhance fence lines, tear down old buildings, etc. These are all tasks that don’t have to be done. You spend $4,000 here and then $8,000 there, and all of the sudden at the end of the summer you’ve invested major cash in these non-essential projects.”
These costs, Eatherly reminds, all have to be paid back with bushels of row crops or head of livestock.
Another area Eatherly sees costs creep in is with inputs when farmers try to hit extreme yield goals. Perhaps you decide to invest in a higher-priced seed, do an additional chemical pass or try a new biological product.
“Many times, farmers deviate from their original plan and increase the amount of inputs on their crops only to produce their three-year average yield,” he says. “All they really did was kill their profit margin.”
Evaluate Opportunities
Costs can quickly creep in with new rented farms, says Nick Horob, product manager of Harvest Profit, a farm management technology company. You think, more acres spread out your fixed costs.
“Even if you don’t need to add any equipment or labor to take on a new opportunity, smaller increases in cost line items can creep into your financials,” he says. “There are hundreds of little things that can lead to cost creep on your farm.”
For example, Horob says, you may not be able to spray your crop when it needs it because of the additional acres. So, you hire someone to custom spray a couple of fields. The custom rate (plus potentially higher chemical prices) could easily cost you an extra $5 to $10 per acre versus doing it yourself.
As you evaluate a new farm to rent, analyze your labor, equipment and credit needs, Eatherly adds. Also look at the agronomic characteristics and plan for surprises.
“Costs can creep in if you didn’t realize a new farm had heavy erosion issues or it really needs lime applications,” he says. “Small increments of costs that start adding up to $50,000 to $100,000 and you not even realize it.”
Make a Plan, Stick to the Plan
To avoid cost creep on your farm, create a capital improvement budget, says Thomas Eatherly with Kcoe Isom. “Start with your Christmas list — don’t hold back. Write down everything you wish you had on the farm,” he says. “Rank them by what will contribute most to profit. Then look at profitability for the next two years. Carve out some money from the cash flow to assign to your list of capital improvement projects.”
