Press Release (for immediate release) March 1, 2005
Contact: Tom Hanson, Farm Bus. Management Instructor, 701-838-0545 email: Tom.Hanson@sendit.nodak.edu
How
can we manage Overhead Expenses?
Tom Hanson, North Dakota Farm Business Management
MINOT, N.D. - Every farm or ranch unit has capital investments such as farm land, buildings, equipment and breeding stock. All of these have expenses associated with them which are referred to as overhead expenses. They are an important part of the cost of doing business and are often given very little consideration when evaluating profitability of various enterprises. Every enterprise on the farm must pay their fair share of these costs. If enterprises fail to generate enough money to cover these costs, off farm income may be needed to make up the difference.
Overhead expenses are an important consideration when evaluating the long-range viability of an enterprise or profit center on the farm. We need to consider that:
1. Allocating overhead expenses to various enterprises is not exact but we need to find which enterprises are using which major overhead expense item.
- Overhead expenses always exist even when there is no production.
- Overhead expenses have less effect on management decisions in the short term than in the long term planning.
Overhead expenses vary from farm to farm and typically include:
- Hired labor
- Machinery and building leases
- Farm insurance
- Dues and professional fees
- All farm term debt interest
- Real estate tax
- Depreciation on machinery, buildings and breeding stock
- Farm Utilities
How much does it cost? The North Dakota Farm & Ranch Management Annual Averages report for 2003 (excluding the Red River Valley) shows the overhead costs for hard red spring wheat (HRSW) on owned land to be $34 per acre with the average sized farm being 1733 crop acres. Cash rented HRSW averaged $20 per acre, due to land cost being part of direct costs instead of overhead. A farmer using the same facilities and line of machinery to farm 2500 acres could cut his costs per acre by $11 and $6 respectively.
A farmer who chooses to add
a $150,000 piece of machinery to cover the same 2500 acres would add $6 per acre
annually for ten years in additional overhead costs. Interest paid on this additional investment would also add to
the overhead costs. Knowing the cost
of production and profitability of all enterprises will assist farmers in making
wise management decisions in investing in overheads that will potentially lead to
more profit.
To further evaluate your farm versus other regional or state average farms or for further information on the NDFBM program please visit our website at www.ndfarmmanagement.com or contact Steve Zimmerman, State Supervisor for Agricultural Education at the state capitol, at 701-328-3162. The Farm Business Management program is sponsored by the State Department of Career and Technical Education.
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