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Planning for Profit

Plan for Profit

Profit doesn’t just happen. You have to plan for it and actively make it happen by increasing revenue and decreasing costs. All too often in farming, the familiar profit formula looks like this:

Income – Expenses = Zero Profit (or the “Profit” might even be negative)

Increasingly, farmers are seizing the reins and building profit into their farms. There are two excellent resources to help you do this:

1) Holistic Management (HM) is a framework that helps you make better decisions when managing complexity. There are several planning processes that are part of HM; one of these is Holistic Financial Planning. It is one of the few financial planning processes that helps you plan for profit, and it turns the profitability equation around so that it reads: Income – Profit = Expenses (in other words, plan your income, set aside the profit you want from that, and what’s left over has to cover expenses) Look through their website to find trainings and consultants who may be able to help you.

2) The Organic Farmers’ Business Handbook by Richard Wiswall. Although the author is an organic vegetable farmer, any farmer can get great ideas and lessons from this comprehensive guide to recordkeeping and planning for profitability. It even comes with a CD of spreadsheets to help with developing enterprise budgets. Search online or at your local library to find this handy reference.

A Word of Caution: Don’t Drop Prices!

You need to be aware of your local competitors and what they are charging. Be prepared to explain why your prices are higher. If you have never sold this product before, it is better to start higher and be able to lower your price than to have to raise the price.

How much is too much? Or too little? What if you have corn at $3.50 per dozen according to your calculations, and your neighbor is charging $3.00? Can you still make a profit by lowering your price? Sometimes it is better to sell fewer at the higher price than to sell more at the lower price. For example, suppose your margin on the $3.50 per dozen is $0.50 towards profit. If you sell 300 dozen, that will give you $150 in profit. If you dropped your price to even $3.25, you would have to sell 600 dozen to get the same profit. Is doubling your production AND your number of sales feasible? For a 7% decrease in price, you would have to sell twice as much.

You can stick with your higher price by differentiating your product. Use techniques like: signage, layout, local label, baker’s dozen, recipes or add some other value to keep your price point and make the extra $0.25/dozen.

As your customers get to know you, you will build your reputation for quality and honesty. 60% of sales come from repeat customers. Yet, many people concentrate their advertising and promotion on the 40% that are single service sales. Satisfied customers will likely tell their friends and neighbors. The most effective advertising is word of mouth- and repeat sales are key to your success. It is much more difficult (and expensive) to secure a new customer than to get a current customer to buy more. Make your repeat customers feel special and keep them coming back for more.

Go on to the final tutorial, Understanding Taxes & Regulations>>