Farming is a business and you either make a loss or a profit. Whether you are doing it for home consumption or for sale cost is a factor that must be considered. The number one aim of a profitable farming business is to make the maximum profit possible. Unfortunately, most farmers are in a dilution that they are making a huge profit but if a deeper analysis is done? They are running on losses only that they don’t know.
The inability to calculate actual total costs incurred in producing a certain product from planting until it gets to the market has to wrong figures which farmers often take as ”profit”.
What is cost, revenue and profit in the farming business?
Cost is the amount incurred for producing a product and run from consultancy and planning costs to marketing and distribution costs. They are either fixed costs or variable costs.
Fixed costs are costs that don’t change with the level of production and their returns are long term. Some of these costs are costs of land lease, drilling a borehole, installing electricity, driplines and water pumps, knapsacks, car and other farm machinery and the list is long. The costs are distributed in subsequent seasons. If your fixed costs are KES 200,000; you can allocate each season 10% of the cost which means for each season the fixed cost will be KES 20,000. What this means is that it will take ten seasons to cover the total costs.
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Variable costs are costs that change with production. That is; the higher the production the higher the variable costs. Some of these costs are; costs of raw materials, labour, fuel and electricity, service of machinery, fertilizer and transport and the list continues. Keeping clear records and documenting every activity helps in accounting for the variable costs.
There is this other type of variable cost which we call “associated costs“. Often than not we forget to account for them simply because they are small or even don’t recognize them. Take these two scenarios. One is where a farmer sells his products at the farm and another is who sells his produce in the market. The variance between farm gate price and retail price at the market is often less than 20% in most cases.
However, when selling directly at the market the farmers pays maybe cess during transport, pays for the transport, pays some tax at the market and his time not forgetting that some products are destroyed in the process which is a costa. All these costs are even more than the 20% variance he intended to get in the first place.
What is the difference between revenue and profit?
Revenue is the amount you get after selling your products. it’s the selling price multiplied by the number of units sold. While profit is the total revenue less all costs incurred in production.
This is where we go wrong as farmers?
Ignorant to seek knowledge and quality information especially in this era of misinformation. Often we think we know it well and do not need to pay the cost of seeking professional information. This is has caused most farmers to face losses due to unnecessary costs they could have avoided.
Lack of farm planning and budgeting. Planning helps a farmer to know if the undertaking is viable or not. It helps the farmer to avoid unnecessary costs and stick to the budget.
Before investing in any project; seek information, plan and budget; always.
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