Many beginning farmers initially believe volume is everything when it comes to selling produce. Unfortunately, the reality is not so simple. It doesnâ€™t matter how many bunches of beets you sell, for instance, if you sell them for less than what they cost you to produce.
This is where an enterprise analysis helps. Running one on your most popular vegetables can help you better understand the finances of selling them. An enterprise analysis shows you how much it costs to produce those vegetables as well as how much money you bring in selling themâ€”and whether they’re profitable.
Hereâ€™s how to run your own enterprise analysis.
Select the Crops to Analyze
You could run an enterprise analysis on every crop you grow. Yet that would take a substantial amount of time and would provide you with a lot of data that’s not very helpful. To begin with, analyze the crops that you sell the most.
Determine the Costs of Growing the Crop
The next step: Collect records that will let you determine how much it costs to grow the crop. Throughout this process, itâ€™s helpful to focus on a single bed of the crop. Taking carrots as an example, the object is to determine how much it costs you to produce a single bed of carrots.
Two kinds of costs are associated with growing this bed of carrots: direct and indirect costs. Direct costs are things you bought specifically for that bed of carrots, whereas indirect costs are expenses that can be attributed to more than one bed of vegetables.
Although it varies based on the crop youâ€™re analyzing, direct costs typically include seeds, fertilizer, packing materials and labor. Some farmers simply make a rough estimate of how many hours of labor it takes them to produce a crop. Others log the time their crews spend working in particular beds.
Next, determine the indirect costs of growing the same bed of carrots. Here, the idea is to account for the larger expenses that are only partially attributable to one crop. A tractor is a great example. Let’s say you recently bought a tractor that youâ€™re paying off in annual installments of $1,500. Each crop that requires tractor work would be responsible for a percentage of this $1,500. It would be equal to the percentage of time over the course of the season that the tractor is used for that crop. If 15 percent of your tractor-hours during a season were spent cultivating potatoes, for instance, 15 percent of the $1,500 ($225) would be an indirect cost of growing those potatoes.
After youâ€™ve determined the indirect cost of producing the carrots, add it to the direct cost to determine the total cost of growing that bed.
Determine the Cropâ€™s Value
Now that we know how much it costs to produce the bed of carrots, we next determine how much it’s worth. To do this, we need to know the average yield of the bed. Calculate this by measuring your harvest the next time you pick from the bed. Let’s say you harvest 20 bunches of carrots from the first 5 feet of the bed, for instance, and you know that the entire bed is 100 feet long. So if you get 20 bunches per 5 feet, and there are 20 5-foot sections of the bed, 20 times 20 is 400. You can then predict that the bed yields a total of 400 bunches of carrots. Multiplying this yield by your price for a bunch of carrots provides the value of the bed of carrots.
Once you know how much it costs you to grow the bed of carrots and how much the bed is worth, you can assess the profitability of your carrot operation. Do you currently make money by selling carrots? If not, how much would you need to increase the price in order to do so?