Production

RCS: Identifying your true ‘cost of business’

Tom Hungerford, RCS, 29/06/2011

Managing a livestock production enterprise is not easy, but there are ways and means of making sure it’s working in your favour.

The trick here is to calculate each animal’s contribution before determining how to take the business forward. The following questions must first be asked:

  • What is your cost of doing business?
  • How many animal units carry this cost?
  • How much does each animal unit contribute?

Knowing the answers will put you well on the way to addressing the profitability in your business.

Those with a cost of business below $150 per large stock unit (LSU) are generally profitable. Therefore, if your gross margin per LSU is greater than $150 you will be profitable. Interestingly, agistment at $3 per LSU each week ($3 x 52 = $156) is similar to the cost of business.

Several points are important to consider:-

1. The cost of doing business (CoB) for a year includes those expenses that do not change much in relation to the number of animals which produce income. CoB is the sum of:-

  • Overheads (rates, electricity, R & M, accountant, permanent wages etc.)
  • Interest on loans and leases
  • Income tax
  • Capital expenditure (an allowance for property development and plant replacement)
  • Unpaid labour (must be able to pay all people working in the business).
  • All of these costs are necessary for the business to continue. If the business runs an enterprise other than livestock, then a percentage of the CoB needs to be allocated away from livestock.

2. The number of animal units (AU), usually dry sheep equivalents or large stock units, is the actual stocking rate or carrying capacity converted into a single standardised number, run over a one year period.
3. Gross Margin (GM) is what is left after deducting the direct costs of production (freight, selling, supplements, animal health, fodder, etc. and opportunity cost) from the gross animal production (which includes changes in inventory).

By dividing CoB by the number of animal units, you will find how much each AU must provide to maintain the business. By dividing GM by the number of AU, you will find how much each AU contributes to the CoB.
Is your GM per AU greater than your CoB per AU?

At Resource Consulting Services (RCS), we train and facilitate our clients to measure and address these areas of enterprise. The business is there to work for you, to fulfil your dream or create a legacy for you and your family.

Tom Hungerford
RCS Consultant / Facilitator

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