Profit drivers

Key points:

  • Increasing profit starts with you  -  the decision maker
  • Know your profit margin
  • Focus on performance per hectare not per head
  • Focus on the drivers that you can influence

The ability to increase profits in your sheep enterprise starts with you - the decision maker. You need to have a good knowledge and understanding of the factors driving profit in the production system and be able to make informed and cost-effective decisions for the business. The first step is, know your profit margin. You can then identify where improvements can be made and target the required drivers. Focus should be on performance per hectare and on the drivers which you have the greatest level of influence.

Informed decision making

The decision making process can be enhanced by knowing how your enterprise is actually performing. If you do not know your current performance how do you know where improvements can be made? Decisions should be focussed towards achieving an overarching vision and set of gaols. Where decisions are not based on a clear direction, actions may actually counteract each other resulting in no real progress. Forward planning will also enable better decision making, particularly under stressful times. Do not be afraid to seek help through training and advice to improve your skills and technical knowledge. It is also important to look after yourself, your frame of mind and well being as these will influence your ability to clearly weigh up the situation and information available to make informed decisions.

Profit margin

The most important piece of information to know is your profit margin per hectare.

Profit margin/ha = Yield (kg/ha) x Price ($/kg) – Costs ($/ha)

This figure gives a true picture of performance. If you only look at yield or price or cost in isolation it only tells you part of the story and can be deceiving.

It can be pleasing to get the top price at the market and you often hear producers comparing prices, but at the end of the day, if you spent more money than you received to produce the product (resulting in a negative profit margin) you have not achieved anything!

Similarly, if you are able to achieve high production from individual animals but have to reduce the number of animals run per hectare which in turn results in a negative profit margin, where is the value?

The key is to maximise your margin per hectare and then look to multiply it as many times as you can.

Areas of influence

Focus should be placed on improving the components that you have the greatest influence on   – increasing yield and reducing cost of production. You have minimal control over price.

Yield is the combined result of stocking rate, the number of lambs weaned and the amount of wool or meat produced.

Yield (kg/ha) = Stocking rate (hd/ha) x Weaning percentage (%) x  wool or meat produced (kg/hd)

Any increase in yield must be economical i.e. returns from the additional yield is greater than the costs to generate the extra yield.

Stocking rate has the greatest impact on yield. Optimum stocking rates will be dependent on feed availability compared with feed demand, sustainability and lambing time. Other areas to consider when increasing yield include genetics which sets your production potential, plus nutrition (feed quality/quantity and stock condition) and heath (your management) which determines what you actually produce.

The biggest reductions in cost of production are likely to be made through improved efficiency. Spread labour and overhead costs across more animals. Plan ahead and where possible try to combine multiple management activities to reduce yardings and labour. Be proactive and prevent issues from arising rather than being reactive and incurring significant expenses to fix the problem.

Where to start?

  • If you do not know your margin – find out!
  • Monitor your current performance and identify where cost effective improvements can be made
  • Identify strategies to improve your margin
  • Start implementing your strategies – take small steps, don’t try to do too much at once
  • Continue to monitor and benchmark your performance

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