The Cost of Cheap - Is the Focus on Direct Cost Strangling Business?

When it comes to looking at business, it is important to look at culture.

For a lot of farming families, their culture is embedded in the generations before them, decades earlier.

In the days after the Great Depression, there was the belief that things couldn’t be afforded. Perhaps they couldn’t back then.

Funnily enough, that still resonates today. I find when I visit some farm businesses, I hear that word “can’t” more than I think it is helpful, as in “we can’t afford that” when they should be thinking about what they need to do to be able to afford ‘that’.

That perception of unaffordability hinders change and leads to a focus on reducing direct costs as a method to be able to afford whatever it is they want.

The most common conversation farmers have, apart from how much rain they got, is their focus on direct costs and driving them down, in the hope of improving profit margins.

It’s always about costs, while looking at increasing turnover never seems to be the go-to thing. 

Chasing down costs is even simpler nowadays days with the internet and mobile phones. People will price things and think they are doing well for their bottom line by cutting a few cents a litre from their diesel cost, etc. 

But when push comes to shove, how often do you hear that someone made small changes that created huge increases in turnover?

For every $1 million in sales in the livestock industry, it usually costs $300,000 in direct costs to create that $1 million in sales, which is 70% gross margin.

If someone gets out of bed on July 1 – a new financial year - and says they are going to smash direct costs by 10% in that year, what does that add up to?

 A 10% saving on $300,000 is $30,000, and what does that buy you? My answer to that is bugger all! Maybe a brand-new Pioneer 1000 side-by-side bike, fully kitted out. But does that really create any ongoing change in your life? The answer is no.

But if that same person gets out of bed on July 1 and says they are going to increase turnover by 10%, what does that mean?

For every $1 million in sales, that adds up to another $100,000 in income.

So, if you increase turnover by 10%, and that means an extra $100,000 in income, what does that buy you? Does $100,000 change your life? And my answer to that is, yes it does.

With that $100,000 you can buy a first-class labour unit. In turn, what does that extra labour unit deliver? It allows the chief executive officer/boss cocky to get up in the helicopter and look down on the business and go searching for more of the low hanging fruit, which will increase turnover even more.

A lot of farm businesses are that busy being busy that they actually don’t have enough time to make money.

As an example, one of the easiest ways to increase turnover is to lift lambing percentages by 20-40%. It may sound like that kind of lift in your business will require a lot of extra effort, but it can be done simply enough through having the time to manage the ewe flock to best practice. 

That increased lambing percentage does not come at much extra cost – for every 1000 ewes, if you increase lambing percentage by 25%, that generates another 250 lambs. If those 250 lambs sell at $150, there is another $37,500 straight up.

Time and time again, you will hear that “this is as good as it gets round here” when it comes to lambing percentages, but I challenge that.

I know for a fact that all it takes is a focused approach and a bit of hand holding to make major changes in weaning percentages. It’s about making sure the “one percenters” are done on time and ahead of time, and that eventually adds to huge improvements.

An example we have is of a client who joined 3000 ewe lambs and got 32% in lamb last year. This year, the same client joined the same number and got 85% in lamb.

What was so different that he was able to get such a spike in scanning percentages? The difference was he actually had the time to implement best management practices, from when that ewe lamb was conceived to the day she was joined. Where was the time created from? It was having the staff to do that and the time to manage the operation. 

Labour might be expensive but the cost of not having it is greater.

The culture that came from the Depression era was to run things lean and tight. 

But a highly successful agricultural family business owner once told me, “The more people I employ, the more choice/freedom/ money I have,” and that’s because it allowed him to be the CEO and take that helicopter view of the business.

The added benefit of really concentrating on turnover is that it creates an exciting/abundant head space with regards to Australian agriculture. That’s a hell of a lot more exciting that screwing down someone on price. 

I’m happy to chew the fat about this with anyone who’d like to.