HOW TO EVALUATE FARM PROFITABILITY

 A farmer invests time, money and labor in his farm with the aim of making profit and personal satisfaction.

His assumption is, if the weather is conducive and pests don’t destroy his crops or diseases kill his animals he will recover his input and make profit.

He has a basket of options to choose from— crops or animals that he will plant or keep so as to minimize his risk and maximize his profit.

He must undertake a detailed examination of the profitability of individual enterprises and of the farm system as a whole in the evaluation process.

‘There are no quick fixes available to improved farm profitability every item must be carefully considered if it’s worth keeping’

This process of evaluation involves the under mentioned process

1. BENCHMARKING

It is not easy to assess the efficiency and profitability of an enterprise without comparing it to available standards.

Since extension services unavailable in Kenya, the only starting point for comparison of is the best practice norms or benchmarks.

As you compare your farms enterprises with those from other farms you will know whether you are utilizing the full potential of your farm or not.

For example, if you own dairy cattle, you may compare their productivity those from a research center.

2. OPPORTUNITY COST OR PRODUCTION COST?

The prices of farm produce are unpredictable resulting to uncertainty about the correct price to use for most produce.

During accounting, items are valued at production cost. A milk producer will therefore record the price of fuel, fertilizer and seed as being a maize production cost in his accounting system.

If he wants to determine the profitability of his dairy enterprise he will use the price he can get for the maize less marketing cost.

In other words, the maize enterprise sells maize to the dairy enterprise at market related price.

This principle widely used where related companies sell services to each other at market related values.

3. LOOKING AT THE BOTTOM LINE

A good financial record keeping system is a pre-requisite for profitability.

A profitable farm system should be evaluated by looking at the bottom line or net disposable income which is the amount of money a farmer can put in his pocket.

To increase the net disposable income, first step is to increase the gross margin, that achieved by looking at all the enterprises to save on variable expenses.

Variable expenses are those that vary with the quantity produced such as seed and fertilizer, however, reducing them normally results in lower production and earnings.

Secondly, a farmer should increase his technical efficiency. His decisions will be important in the efficient and correct use of variable inputs to result in the maximum gross margin.

Finally, prices vary between suppliers so, efficient purchasing management is necessary.

4. LOWERING OVERHEAD COSTS

Re-evaluate all overhead costs and get new quotations for services.

Labor should therefore be managed efficiently as possible. It is possible to save by negotiating interest rates with credit suppliers.

Careful management of creditor accounts can also save interest and ensure you use the full interest free period provided by suppliers.

The purchase of capital equipment should be limit to what you can afford.

5. NONFARM INCOME AND TAXES

Nonfarm income plays an important role in balancing the books. During good years, invest money off the farm and build a sizable investment portfolio that will provide necessary income especially during bad farming.

Always keep household expenses under control. Improved fiscal performance is the result of detailed analysis of farm business both on the level of a single enterprise and the farms overall performance.