The first question in commercial farming for profits is how much money you will make? While it looks a complicated process, it is easy to determine farm profits using a cost-best analysis (CBA) method. This farming profit formula can help you determine the total costs, returns and profits for any type of crop or livestock you raise like mushrooms, snails or bamboo. A gross margin analysis can help to do low level analysis for instance 1 ha, acre or square meter.
In this post, we explore how to determine farm profits, benefits and other formulae of determining farmer profits.
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.
CBA is an important planning and decision-making tool. You will use it to;
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;
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 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 farm assets 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 neighbors.
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.
You can group the expenses you need to grow and sell a product into three;
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.
To get the total returns from your farm; multiply the expected or actual farm yields by the average selling price per unit like a kilogram, liter 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. The actual yields will give you actual revenues while the expected yields will help you determine the expected benefits.
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.
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.
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;
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Read Next The following are five examples of calculating farm profits using the cost benefit formula.