Control expenses

As many agricultural ventures have limited control over price, keeping expenses sensible and as low as possible is a critical factor for success.  Expenses are required to operate and grow a business. Expense decisions however, can very often make or break a new venture.   

The key term in controlling expenses is “control”.  It is about more than just being frugal or principled.  Control comes from being able to effectively evaluate purchases, comparing different options, assessing impacts on profitability and efficiency, establishing clear rules and relating purchases back to your original goals.

It can be useful to group expenses into different categories.  This practice can make it easier to prioritize and evaluate.

            Fixed Costs:           
Fixed costs remain the same regardless of the amount of  production.  For example, the depreciation of a barn is the same regardless of whether the building is occupied by 5 or 500 chickens.

            Avoidable Fixed Costs
Avoidable fixed costs are costs you are not required to incur.  In other words, you will stay in business if you don’t incur the cost.  For example, a farm market may spend $2500 on advertising in the local paper.  Not advertising may reduce sales, but the business will function without/reducing it.

            Unavoidable Fixed Costs
Unavoidable fixed costs are costs you have to incur if you want to stay in business.  For example, purchasing vegetable seed required if you want to grow and sell vegetables.  If interest is owed on debt, paying that interest is unavoidable. 

            Sunk Costs
Sunk costs are costs that have already been paid.  Because the cost has already been paid, it is a fixed cost.  Avoidable fixed costs become unavoidable fixed costs once the cost has been paid.  Likewise, a variable cost becomes a sunk cost once it has been paid.  Purchasing several years worth of firewood to heat the greenhouse is an example of a sunk cost.

            Variable Costs:      
A cost is a variable cost if it increases as the volume or production levels increase.  For example, the amount of a feed used in a livestock operation increases as more animals are produced)

Tips for Controlling Expenses:

Establish Rules for purchase decisions  
Sometimes the cumulative effect of many small purchases can be significant.  Determine When, Why and by Whom purchases can be made.

Consider the Alternatives
As Joel Salatin says, “think function over form”.   If you need fieldwork done, don’t automatically assume you need to buy a tractor.  Can an animal do the same work?  Can hired labour? Is the labour available?  How long or how often will you need this activity performed?  What is the smallest piece of equipment you need?  Can you hire or rent equipment instead?  How much are the interest payments? 

Prioritize
Which purchases will have the greatest impact on your yields, profitability, back or time commitment?  Which items can you turn into revenues through rental or custom work?

Recognize all the costs
Few expenses exist in isolation.  Consider the time, trips for purchases and ongoing maintenance and repairs.  Can you reduce the associated costs?

Maximize Fixed Costs
Look for ways to spread fixed costs over a greater number of units or activities.

Be Creative
Look for opportunities to barter and exchange services with other farmers and customers.  Assess when it is most advantageous to pay staff hourly wages and when to switch to piecework. 

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