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Defining Profitability

Profit is the amount of revenue left over after the cost of goods sold has been deducted and overhead expenses have been paid. Your profit must cover such expenses as: family living expenses, bank principal payments, income taxes and retained earnings.

Know your Costs, and Price for Profit:

Price is the dollar amount that you ask for sales of a product or a service. It is one of the four P’s of marketing: Price, Product, Placement and Promotion. Price is critically important to the profit on the farm, but the other P’s of marketing contribute substantially to the price that you can get. Profit is the 5th P- the one that keeps you in business. There are various factors that go into deciding what price you will charge for your product:

  1. Start with the input costs. These are also called Variable Costs (VC). Input costs include such things as: fertilizer, seed, gas, labor. If you don’t cover these costs, your farm will not last long!
  2. Add in the ownership costs. These are also called Fixed Costs (FC). These include: depreciation, interest, repairs and taxes (DIRTI).

If you cover these first two costs, you will meet your break-even cost to the business but have nothing left to live on! Every item should contribute to ownership costs. If the ownership costs are not covered, you will not remain in business for long.

  1. Add in a return to you. This is called the Profitable Price. This is the price you will need to survive in the long run.
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