By Wayne Knight
For any business keeping costs low is a critical management function. For an agricultural business, this is especially important. At HMI, we recommend analyzing costs based on a reallocation of your expenses list.
Consider dividing your costs into the following categories because not all expenses are equal:
- Top Priority Investments (also known as wealth-generating expenses)
- Inescapable expenses (liabilities, contractual agreements, taxes, etc)
- Maintenance expenses
This cost allocation assumes you are clear on which enterprise contributes to covering most of the overheads of your business. It also assumes you have considered risk in enterprise selection.
Wealth-generating expenses are those that will add to your ability to generate wealth (profit in monetary or land health terms). These include investments in things like water infrastructure to achieve your grazing and herd expansion goals or a hoop house for season extension.
Inescapable expenses are the expenses you are legally or morally obligated to pay.
Maintenance expenses are those expenses that maintain your production level where they are. These expenses are anything that doesn’t fall into the first two categories of top priority investment or inescapable. Hay expenses might be a way to reduce risk, a way to maintain the production of your animals, and an expensive habit. Or it could be a way to improve soil fertility if fed out in the field as bale grazing.
Being clear about what the expense is for and if it is really needed will help you free up money for investing in expenses that will address an operation-wide logjam or a weak link within a key enterprise that can take your farm or ranch to the next level.
Are their maintenance expenses you can simply eliminate from the budget through improved management practices?
Look hard at maintenance expenses. Don’t cut these if that will lead to a drop in profitability. Are they really maintenance expenses? In an animal-based operation, this may include genetics expenses, feed expenses, or forage growing expenses. Holistic Management’s Financial Weak Link test and Comparing Options tests would be very useful in helping you decide where they fit in your current production situation.
When allocating time to spend on cost reduction and category allocation, spend the most time on the big-ticket items. Spend the most time where you will get the most return on your time. Don’t sweat the small stuff – the insignificant expenses in the budget. By spending more time on the biggest expense items you will be getting the biggest bang for your buck.
Are you interested in learning more? Our training programs provide integrated management tools that help create healthier ranch and farm businesses.