How to do a cost-benefit analysis for your farm- A guide
A cost-best analysis (CBA) is a must for all commercial farmers. It is necessary if you are starting or expanding your farm. You will use it to determine the expected total costs and benefits. Compare the two to get the profits by raising the intended plant or animal.
How to use the CBA on your farm
CBA is an important planning and decision-making tool. You will use it to;
- Objectively decide between two or more plants or animals to grow. Invest in the one with the most profit to achieve your goals.
- Setting the right Prices for your farm commodities to know the best selling price you can negotiate with buyers. If it cannot cover your costs, do not raise the animal or plant.
- Make the right investment decision whether to invest in buying or leasing a farm. Invest your money and efforts in a worthy project that has positive returns.
How to do a profit analysis for your farm
It is easy to carry out a CBA for your farm. Subtract the total costs from your target earnings. Whether you look into running a commercial ranch, a chicken farm or a vegetable greenhouse, this guide is yours. Follow the following three steps;
- Identify and value the total farm costs that you will incur from land preparation to marketing your goods.
- Get the expected total benefits; (earnings) you will get for selling all your harvests.
- Compare your costs and benefits; to figure the aggregate or marginal profits you will get.
Identify Total Costs
Your farm will incur many costs that are fixed or flexible. Others may be indirect or tangible. For simplicity we have categorized the typical farm expenses into and into following types;
Land preparation costs
- Land acquisition These are the costs you will incur to buy or lease your farming land. You may have to rezone or convert it from a commercial or industrial farm to an agricultural one. To make it suitable for setting a farm or ranch, get professional help for site planning. If you own the farm, some costs are not applicable.
- Land preparation These are costs to convert your virgin or abandoned land to a productive farm. To do it, budget for fencing, signage and testing for soil and water quality. Other costs are tilling, making drainage and laying down the irrigation kits.
- Infrastructure Your modern farm requires the latest structures for efficient production and preservation of fresh produce. Depending on the crop you will grow and the scale of production, you may have to erect greenhouses, tunnels, cold rooms and cooler shades. Sometimes, you may lease, or cost-share these with neighbours.
These are the total salaries, wages and benefits you will pay from land preparation to harvesting. Figure the total man-days or hours you need to till, plant, or spray crops. Find the labour cost by getting the product of the worker needs and the price of one man per day.
Growing and selling costs
You can group the expenses you need to grow and sell a product into three;
- Tools; Cost of buying or hiring tools and machinery like tractors and water pumps. Poultry and dairy farmers will need feeders, water troughs and cages.
- Growing supplies; These are costs to get Seeds, seedlings, fertilizer and pesticides to grow your crops. As a herder, you will pay for vaccines, animal feeds and fodder. Other supplies are packaging bags to weigh, store and transport your products to the market.
- Utility costs; During your growing and marketing phase, you will incur costs for water and electricity. The other utility bill on your farm is insurance cost for crops, animals and assets.
These are internet printing and calls expenses for communicating with your buyers. If you have a farm website, spend its costs of hosting, upkeep and design.
Outsource some farm operations to an outsider. It will give you more time to concentrate on efficient farming. In your CBA, identify and value for the costs to pay to consultants like marketers, lawyers and vets. Others are agronomists and auditors.
Each project has unexpected expenses. Once you have the total cost for running your farm for a year, determine a certain percentage (e.g. 10%) of the total as a cushion from any expected risk.
Determine your Benefits
To get the total returns from your farm; get the product of farm yields by the average selling price per unit like a kilogram, litre or tray.
For instance, if the average selling price for a 90 kilograms bag of maize is Ksh. 2500. Your earnings from 20 of them would be Ksh. 50,000.
To determine your farm profits; get the difference in total costs from your earnings using the following formula.
Net Profits (losses) = Total revenue – Total Costs
If your balance is positive, your farm will make a net profit. If it’s negative, you will make a loss by growing the intended crop or animal.
You should not invest in a crop or animal that will make a loss.
For accurate estimates, do a sensitivity analysis. You will have CBA for 3 case scenarios: best, typical and worst. You assume the highest yields (e.g. 110%) and earnings in the best-case and vice versa.
How to assign Monetary value
Accessing the right data is crucial for accurate estimates. The information on prices and costs is inaccessible to most farmers. You can gather it from supplier catalogues, the farms’ records, or use your experience to determine it. Besides, enquire from the markets and published information on websites.
Other farm profitability analysis methods
The CBA method in this guide is un-discounted. Though it is straightforward, it should not be the only decision criteria. Other investment and budget analysis methods for your farm include;
- Break-even analysis; A profit analysis for the number of products you must sell to at least cover your costs.
- Payback period; the number of years (or seasons) your farm will take to recover costs. A crop or livestock with a shorter period is more desirable.
- Return on investment (ROI); It is the ratio or percentage of your benefits or returns from an investment.
- Net present value (NPV); the real cash value of all your future cash flows discounted for time value for money and inflation and. You should avoid a project with a negative NPV.
Agcenture provides services budgeting, cash flow projections, financial and investment analysis. We offer this for small, medium and large-scale firms like flower farms, ranches or milk processors. Use our services for informed investment decisions. Get a quote today.