Linda H. Smith, Top Producer Executive Editor
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.”
You can e-mail Linda Smith at lsmith@farmjournal.com.
