How to sell at a price that covers all your costs
Routine financial management is essential to the long-term sustainability of every farm, but making marketing decisions unique to your operation isn’t always so simple.
For example, you may ask yourself questions like: When should I sell? Are my input costs too high? At what price can I turn a profit?
By tracking your costs and analyzing your true breakeven, you can develop a deeper understanding of the factors influencing your profitability. Find out how you can sell at price that covers all your costs by following these five tips for calculating your breakeven point.
1. Determine your cost of production
Many factors affect your breakeven. You must consider all the expenses incurred that enable you to grow and sell your product at a determined sales price.
A typical production summary might account for an operation’s fixed costs and a few variable costs such as seed, feed or fertilizer. While this approach provides a feel for your cost of production, it doesn’t necessarily give you the full picture needed to analyze your breakeven point.
Using financial management tools, you can consistently track your fixed and variable costs and understand what factors are affecting your operation on a more detailed level.
2. Avoid overlooking costs
First, let’s walk through this simple scenario.
What inputs came to mind? You likely thought about:
• Seed
• Fertilizer
• Herbicide or pesticide
Did you consider fuel or labor in your cost of production? What about planter parts or equipment maintenance completed during the year?
In order to get an accurate assessment of your breakeven, it’s important to account for every expense – even hidden costs such as depreciation and interest on related loans.
With financial management tools, you can avoid overlooking these costs. You can easily enter transactions and track expenses, which translate into automated, real-time reports to help your decision-making. This knowledge is what leads you to a more accurate selling price.
A true breakeven allows you to better assess your expenses and cut where you can. Additional costs might include health and liability insurance, rent, supplies, meals, utilities and other living expenses.
3. Track expenses by production cycle
Let's take a look at this common scenario.
Because expenses and income can be spread over several calendar years, it can be difficult to account for the entire production cycle to determine your breakeven. That’s why it pays to get in the habit of managing the financial side of your farm on a daily basis and to try financial management tools that make it easier to track financials.
4. Adjust your marketing strategy
Although tracking costs can be a time-consuming process, the progress and updates you make in subsequent years will reveal insights about your operation in greater depth and detail.
Having a better handle on your transactions year-over-year will allow you to pinpoint your breakeven, adjust your marketing strategy and focus on profit. This knowledge will lead you toward sound decision-making and a more accurate selling price.
5. Ask the experts
Still have questions about calculating your breakeven point? Schedule F of your tax return is a great place to start when gathering numbers for your projection. There are also various resources and experts available to help.
When in doubt, turn to your trusted advisors, like your agronomist, grain marketer, or lender for detailed information on crop inputs and help fine-tuning numbers.
