Michael Wellington and Ian McLean, Bush AgriBusiness Pty Ltd
How much income does a business need to generate to provide for the needs of its owners?
Operating scale, or the size of a business, is an important issue in agriculture, and what scale a successful business needs to have is a question many producers have.
One way we have looked at scale is to ask how much income a business needs to generate to be profitable.
Analysis of data from the Australian Beef Report found that to generate a positive EBIT (to cover operating expenses and owner wages, but not cover interest or financial provisioning), a business in southern Australia would need a minimum (break-even) Gross Profit of around $230,000. So the income required for the business to pay interest, tax, provisioning and to provide an adequate return on capital will be more than this figure. How much more will depend on the circumstance of the individual business and the needs of the family.
Lack of scale means it may not be possible for a particular business to generate sufficient income to be profitable as a standalone business. Expansion may then be the best strategy for the business, but the sums need to be done very carefully. It may also mean the business may be best treated as a part time job. The analysis suggests that off-farm work and off-farm income have a double benefit for the business: the income not only helps pay the bills, the reduced time spent on property lowers the cost base of the business.
What the bottom line of a business needs to be to provide for the needs of the family and be sustainable in the long term, and what the top line needs to be to generate that is important information for any business to know. The Business EDGE workshop gives producers the knowledge and skills to ask this and other questions of their business.
While it may be daunting at first, improving financial literacy allows you to understand where your business is and isn’t performing well, and helps you get the best information out of people like your accountant and bank manager. A recent Business EDGE workshop attendee commented that attaining financial literacy as the most valuable learning, because you “can’t do the rest without it”.
Meat and Livestock Australia’s Business EDGE workshop is the primary industry-owned business skills and financial literacy training package for red meat producers in Australia. It provides attendees with core business skills to better understand and manage their business performance. There are two upcoming workshops in October planned for Victoria:
|Sep 30-Oct 1||Melbourne VIC||Meridian Ag*||www.meridian-ag.com.au/businessedge|
|Oct 3-4||Hamilton VIC||Meridian Ag*||www.meridian-ag.com.au/businessedge|
*in cooperation with Bush AgriBusiness Pty Ltd
Michael Wellington and Ian McLean deliver the Business EDGE workshop across northern Australia. The above analysis was drawn from Bush AgriBusiness’ data set, and the Australian Beef Report.