Are you estimating your overheads well?

1.5 min read

As a farm operator, you need to keep a close eye on overheads for an accurate picture of your profitability.

Alberta cattle rancher Ryan Copithorne suspects many cattle producers aren’t accurately measuring their overhead costs. And this likely translates to other types of farming operations as well.

“Most ranchers think they operate at $1 per day grass costs in the summer and $2.50 to $3.50 per day wintering costs, but if they properly valued their overheads, they would find it is much, much higher,” he says.

Overhead is another way of saying fixed costs, which when combined with variable costs, measures cost of production.

Fixed or overhead costs exist no matter what is produced on the farm. Rent is a good example.

“Cows can’t afford to pay rent – in most cases, it’s difficult to turn a profit on cows if you’re paying land rent,” says Copithorne, who also owns market analysis and risk management firm Cows in Control. “Land expense can be 20 per cent of the operating cost of a cow. You’re competing against older operators who own their land outright and don’t have this expense. This has been the challenge for young people.”

Fully account for overheads

Failing to fully account for overhead costs leads to inaccurate profit calculations.

Justin Shepherd, senior economist with FCC, says that failing to fully account for overhead costs leads to inaccurate profit calculations and a false sense of how your farm operation is performing.

“Future investments always have a degree of uncertainty, so starting with incorrect data magnifies the risk,” he says.

Get on top of it

Shepherd says financial literacy continues to grow among farm operators, who may even run into challenges from an overabundance of information when selecting systems that work best for their operations.

“Like all things in agriculture, there is a wide range of measurement and awareness of fixed costs. While there are slightly different methods used for calculating cost of production, the key is that a farmer has a consistent process so that they can compare current and future years’ cost of production against their historical records,” Shepherd says.

Overhead costs to watch:

Property taxes
Mortgage or rent
Insurance
Utilities
Maintenance
Depreciation
Property improvements
Licenses and permits
Farm vehicle expenses
Farm supplies
Property security
Farm administration
Farm management software and services
Membership dues and subscriptions
Financing costs

From an AgriSuccess article by Richard Kamchen.

Cost of production Cash flow