Set your sights on fixed costs to increase profits

18 July 1997




Set your sights on fixed costs to increase profits

Reviewing fixed cost levels could lead to significant savings for beef producers. Jonathan Riley reports

BEEF producers should target fixed costs in an effort to improve profits, according to Sentry Farmings managing director, Andrew Mason.

"Many beef producers use only variable costs and gross margins when calculating an enterprises financial performance, but this alone does not reflect true profit," says Mr Mason.

Labour, machinery and finance charges must also be accounted for and a true break-even price for producing a kg of meat calculated to establish profit levels and financial stability.

"Of these costs, finance charges and machinery could offer the best scope to make significant savings. Financial consultants could help adjust finance arrangements while many beef producers feeding silage carry an excess of machinery. "For example, with silage wrappers, purchase costs can only be recovered if a minimum of 2000 bales are made a year," says Mr Mason.

"Beef producers should, therefore, consider hiring out machinery, joining machinery rings or selling machinery and using contractors to cut fixed costs."

At 55ha (135-acre) Wylds Farm, Stroud, Hants, much of the machinery and equipment used in grassland production, such as balers, ploughs, fertiliser spreaders and rollers has been sold.

The farm supports 150 Holstein cross Simmental or Aberdeen-Angus steers finished at 18 months at 300kg deadweight off grass. The unit is managed by Sentry Farmings Oliver Howe, who employs contractors to carry out all operations at a cost of £100 a steer reared for labour and contractor charges.

"We account for all fixed costs, right down to polythene sheeting for silage clamps, to arrive at a break-even price of 160p/kg deadweight for the unit," says Mr Howe. Most of the machinery has been sold with only one yard tractor and a second-hand trailer remaining.

"As an illustration of the costs incurred this yard tractor alone has a depreciation charge of £2000 or 5p/kg of beef produced.

"Units carrying a full complement of silage making equipment, must be finding it difficult to survive," says Mr Howe.

He also suggests that before buying new machinery producers should assess whether that machinery will reduce running costs. "Sentry has found, that if machinery is maintained correctly, reliability improves in the third year after purchase," he says.

Across the group costs associated with each piece of equipment are recorded including costs of repair and time out of commission. These records have highlighted that machinery costs are consistently highest in the second year.

"In the third year reliability improves and machinery spends less time under repair. Our statistics have shown that this level of reliability is sustained at least until the seventh year for some equipment. Therefore, before buying machinery assess the depreciation and maintenance costs as well as the initial purchase cost." &#42

Oliver Howe… Accounts for all fixed costs to arrive at a break-even price of 160p/kg dw.

CUTTING COSTS

&#8226 Review all costs.

&#8226 Establish a breakeven price.

&#8226 Reduce machinery costs.


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