13 October 2000

Make savings by calculating overall costs

MANY potato growers would do well to sit down and calculate their precise cost of production, says agricultural business consultant Laurence Gould.

Despite the difficulties of such an exercise, the process will prove well worthwhile, says the firms Newmarket-based consultant John Hartwright.

"Many still dont perform the calculation, perhaps because it is too complicated, they fear the answer, or because they feel the volatility of the market makes a mockery of it," he says.

Regardless of the end figure achieved, the in-depth look at costs and work routines required will highlight areas of weakness or inefficiency in the business (see box). Before launching into calculating costs, Mr Hartwright recommends growers decide what they are trying to achieve.

"Are you trying to establish a minimum price at which you will cover your costs and prevent the overdraft increasing, or is the figure to gauge your business against others? Or are you aiming to measure the long-term value of the enterprise by including capital investment such as storage?"

Getting to grips with variable costs is relatively easy, he says. But it is the fixed costs that are more difficult and arguably more important.

"Fixed costs should be split into crop specific fixed costs – those that would disappear if the potato enterprise was wound up – and non-specific fixed costs, such as private drawings, store depreciation, office costs."

Rents are a problem because they can be included as actual values, actual values weighted to output of land, or imputed values to reflect market rates or return on capital aims. "There is no correct answer. It depends on what you want to prove."

But whatever the method of calculating the costs used, one rule must be followed, says Mr Hartwright: "Be honest with yourself and consistent with how you treat key cost items." &#42

COST CALCULATION HELPS

COST CALCULATION HELPS

&#8226 Variety and market selection.

&#8226 Expansion/contraction planning.

&#8226 Benchmark own operations v alternatives.

&#8226 Assess forward contracts.