Dear Forconers—
A pricing plan allows you to recapture your production costs and calculate profit or loss. It can help you determine accurate production costs for each of your products, set selling prices that cover your costs and make you a profit, convince your customers to pay that price, expand your customer base, and increase your peace of mind. Collecting the information you need to formulate a fair product price can be a little time consuming. But the records you create the first time around ca be used over and over again with a little updating along the way.
In order to develop your pricing plan, you will need to:
Identify and calculate the major components of your production costs.
Develop systems to record cost information as a regular part of your daily operations.
Use basic math to turn cost information into prices that give you a reasonable return.
Find ways to add value to your products to capture a larger share of the food rand (money).
Determine the premiums you can charge for your value-added products
Assess the relative profitability of your products.
Identify resources for further ideas and assistance.
Farmers who have taken the time to figure out their own pricing plans will tell you that the benefits are well worth the effort. Identify the different channels through which you intend to market products; each has different costs and most likely different price points. The right mix of channels and prices can help you be profitable.
CREATING A BUDGET THAT WORKS
Once you know your different types of costs and have created a system to capture them, you need to decide how you want to use your cost numbers. There are four distinct kinds of budget you can plug your cost and income data into: an enterprise budget, a whole farm budget, a partial budget analysis, or a cash flow budget.
Enterprise Budget
This budget records the costs and income from the production of one type of farm product during one cycle of production. For example, if your farm produces poultry, beef, hay, maize and soybeans, you could create an individual enterprise budget for each of these five products, covering a single crop growing season, or one animal life cycle. These budgets are usually developed on a per-hectare or per-head basis.
Enterprise budgets are the foundation on which all the other types of budgets are built. They also provide hard-nosed economic information you can use right away. Accurate enterprise budgets tell you what’s making money and what’s not. From there, you can decide whether other factors make a marginal or breakeven enterprise worth keeping.
An enterprise budget can help you to:
Set reasonable production goals for each of your farm products.
Accurately calculate your costs of production for each product.
Estimate the break-even price and net return you need from each product in order to cover all your costs and make a profit.
Choose management strategies that help you achieve your production and price goals.
Identify problems that can cause you to miss your production and price goals.
Compare returns across enterprises as a factor in overall profitability.
Quickly gather important information for business planning and loan applications
Whole Farm Budget
This budget adds the costs and income from each enterprise budget, along with other miscellaneous income and expenses, to determine total expenses and income for the farm as a whole. This budget includes off-farm income and other small-scale miscellaneous work, expenses and income.
Partial Budget Analysis
This budget measures the effects of small changes in a farm operation, leaving out unaffected parts of the overall farm budget. This approach provides quick information to help guide smaller-scale decisions, such as changes in a production practice, or choosing between hired custom harvesting and an equipment purchase.
Cash Flow Budget
This budget tallies the cash receipts and expenses of the farm over a fixed time period (usually a year). It shows whether expected total cash income will be adequate to cover cash expenses, which is useful in assessing major purchases and in planning for loan requirements.
Of course, the value and usefulness of any budget depends on the type and quality of numbers you plug into it. A good recordkeeping system can help ensure that your budget numbers are as accurate as possible and identify which numbers are spot on and which are less than perfect.
ACCOUNTING STYLES
The numbers you use in your budget will depend on the budget accounting style you choose. Any budget can be presented in one of two different accounting styles:
Economic accounting includes rand values for all inputs and outputs, including operations and transactions that aren’t cash-based, such as use of farm-raised feeds for livestock, or use of livestock manure as an ingredient in compost. Economic accounting works best for enterprise and whole farm budgets and is often useful for partial budgets.
Financial accounting lists only inputs and outputs that require actual cash transactions. Financial accounting works best for cash flow budgets and sometimes for partial budgets.
In most cases, economic accounting creates a better, more complete budget, especially if you’re developing an enterprise budget. Also, if you start with economic accounting, it’s very easy to pull out the basic financial accounting numbers when you need them.
Don’t get discouraged if you’re not able to fill in all the blanks in an economic accounting budget. To reiterate the most important point of budgeting and cost calculations, a few numbers are better than no numbers at all. It’s good enough to plug in the numbers you have, to get started. Just be sure to make an effort to fill in the blanks as time goes on.
PULLING IT ALL TOGETHER
Your profit is determined by three factors: yield, market price, and production costs. The graph above shows how yield, costs and revenue work together to generate a profit or loss, depending on where your numbers land.
Profit = (Yield x Market Price) – Production Costs
You probably already know that you can calculate your profit or loss per unit by subtracting your production costs from your price:
(Profit [or Loss] = Price – Cost)
But look at this equation again. The key idea is that your costs and your prices have equal power to influence your revenue and profits, either negatively or positively. Notice that the “break-even point” on the graph above is not a single fixed location. It can move left and right or up and down, depending on adjustments you make to your prices (revenue) and/or costs.