Profits hinge on attention to detail

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PROFITABLE sheep enterprises have simple, robust, resilient production systems and make effective use of proven research and technology.

PROFITABLE sheep enterprises have simple, robust, resilient production systems and make effective use of proven research and technology.

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That was the message from Keith farmer and Pro Advice consultant Rodney Lush, who challenged sheep producers at the recent Profitable Lamb Marketing Day at Coonalpyn to put their "business glasses" on.

"At business level, the three secrets to profitability are to increase turnover, increase gross margins or reduce overheads," he said. "Understand and differentiate between the direct and overhead costs in your business and harness the drivers of turnover within your resource base."

He said things were not always what they seemed to be, and a better understanding of the components of profit within a business could help producers to identify the areas that required the most urgent attention.

Decisions about nutrition, genetics, flock composition, stocking rate, animal health and marketing were all contributors to the profitability of lamb enterprises.

He said maximum production did not always translate to maximum profit and for every $1 invested in direct costs, producers should be looking at $3 income. Couple this with disciplined overhead cost control and good production a hectare/100 millimitres rainfall, and growers should achieve a competitive cost of production.

He said well-balanced businesses were spending no more than 35 per cent of their total turnover on overheads, no more than 35pc on direct costs and up to 15pc on interest repayments.

"This leaves you with 15pc of turnover retained as profit which can pay tax, reduce debt, repay livestock mortgage and put in that new kitchen," he said.

Benchmarking was a valuable way to look at this "big picture" especially analysing both physical and financial benchmarks for a farm business from year-to-year.

"If your business is cruising you might not need to benchmark but if not, benchmarking identifies strengths and weaknesses of your business and allows you to plan and monitor change," he said. "It also helps you track the changes in your business net worth."

He said data from Holmes & Sackett's 2014 Ag Insights showed the cost of production of benchmarked dual-purpose lamb enterprises varied widely from about $2.29 a kilogram for the top 20pc to an average of $3.92/kg.

The cost of production of the bottom 20pc was $7.10/kg, making it difficult for them to ever make a profit.

He said the three main areas which made a difference to the bottomline were labour, sheep trading (maintaining the base ewe flock) and fodder costs.

The story Profits hinge on attention to detail first appeared on Farm Online.

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