| | In many senses, a farm is like a tractor. If all of the components are tuned and in good working order, you get good (fuel) efficiency, power when you need it, and long lasting performance.
Although you judge the tractor on its overall ability to do the jobs you have at hand, you still monitor and fine tune each of the components to ensure they’re operating up to acceptable standards, contributing to overall performance.
So what does this have to do with "profit centers"?
Like the tractor, you have expectations of your farm’s performance. These are judged on:
- ability to generate sufficient cash flow to meet your living needs,
- a longer term expectation of asset growth and return on assets comparable with non-farm investment options, and
- some degree of "certainty" in both of the above, ie. although there will be lean years, you try to have these balanced off, in the long haul, by good years.
Your judgement happens at the farm level, considering all of the commodities you produce. However, to meet your expectations, the "fine tuning" you do on your farm is on each of your component enterprises, or profit centers.
Simply defined, a profit center is a production activity focused on creating:
- a commodity for final sale, or
- a product for use in one of your other farm profit centers.
For example, as a cow/calf operator, you likely have in addition to your cow herd (selling weaned calves), a forage enterprise (raising feed for your herd and to sell) and a pasture profit center (raising grazing "dry matter" to support your herd).
So what do these profit centers have to do with managing your cow herd and your farm?
Many producers consider these three enterprises as one business. By taking the profit center approach, you can focus on ensuring each is performing at an "economic optimum" and making a positive contribution to your farm’s bottom line.
By managing each enterprise as a business within your farm, your analysis, planning and decision making is more focused. You’ll make better production and management decisions about each of your profit centers, and improve your farm’s ability to meet the three basic expectations noted earlier.
Grouping all of your activities together allows a poor economic performer to hide behind good performance elsewhere. Peter can rob Paul. By taking the profit center approach, you:
- get clarity of management information,
- can readily identify operational strengths and weaknesses,
- can plan and implement direct action to improve productivity and efficiency,
- can identify and cull "dead weight", inefficient activities that consistently draw on the farm’s bottom line, and
- can value activities that may only break even over time but reduce risk in input supply at an acceptable price or cost (eg. feed).
Every product you raise has a market value. If you use it in one of your other enterprises, cost it in at this value. When you build your farm income statement at the end of the day, all of these non-cash transfers are washed out but you’re left with the message as to how each of your profit centers has contributed to your overall profit.
Going back to our example, I’ll pose a couple of pointed questions:
- if you can’t make money raising and selling hay, should you ask your cows to essentially pay more than market value for feeds?
- if you can raise hay in a profitable manner, but your cows are "hay-burners", should you be "giving" the hay to the cows at cost and making them look better than they really are?
These questions may be simplistic but they do highlight the importance of assessing each of the building blocks on your farm.
We’d like your comments and questions about the articles featured in this newsletter. Suggestions for future issues are also welcome. Please contact me at:
. |
E-Mail:
Phone:
or, by mail, at: | Dale A. Kaliel
780-427-5390
302, 7000-113 Street, Edmonton, Alberta T6H 5T6 |
.
AgriProfit$ | .
If you’d like to learn more about and/or participate in our research program, please contact me at the above.
. |
| Cow Profit$ | If you’re interested in the CowProfit$ software, training or seminars, contact:
Ted Darling at 403-948-8524, or Jeff Millang at 403-556-4220. |
|
|