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Accounting For Labor

Why would an agribusiness want to increase its labor cost? Many family-owned operations essentially donate their time to their agribusiness.

Labor costs may be working over your bottom line.

Labor cost is one of the most common management challenges I see. Labor costs are too high in some operations. In others, ownership doesn't even pay themselves a salary. Either way it's not a win-win situation.

Why would an agribusiness want to increase its labor cost? Many family-owned operations essentially donate their time to their agribusiness. If proceeds from the agribusiness are left (profit) at the end of the year, they're then distributed to participating family members.

This is fine if the payoff is in addition to a set and planned salary for the employees. But, you won't see many, if any, CEOs of major corporations donating their time in hopes of a portion of the profits at the end of the year. They may take less in exchange for partial ownership or stock options (sweat equity), but it's not likely they will work for free.

Increasing your labor costs intelligently is fairly simple. Do it by decreasing other expenses and/or increasing gross revenues by a similar amount.

While that may sound too simplistic, it really isn't. It may entail revamping your operation so that you specialize in the area most suited to your likes and ability, then do that particular job as a custom service for others in your area. Heifer improvement is one example.

Figure A Reasonable Salary An increase in salary should accompany an added enterprise and increased responsibilities. There may be tax advantages to paying you and/or family members. Consult your accountant or a financial advisor. But build it into your business plan. Don't do it as an afterthought.

Though inflation has slowed in recent years, just covering your living expenses and having a little spending money each month is not going to help you expand your business. Plans must be made to provide for additional family members if you have children that would like to come back to the agribusiness or if you would just like to improve your lifestyle.

The basis for these decisions is a sound Integrated Business Management Plan (IBMP). It will help you analyze and concentrate on the enterprise or enterprises that are most profitable and will provide for salaries and expansion. Conversely, the IBMP will also help you weed out the enterprise or enterprises that are least profitable or operating at a loss.

Theoretically, the most profitable agribusiness is single enterprise, concentrating on that enterprise which is the most profitable. In reality, however, diversity in the volatile environment of agribusiness is often more healthy. Diversity for the sake of diversity, however, is not healthy.

Often, one of the keys to long-term viability is to consolidate operations and reduce labor costs as well as many other variable costs.

How To Reduce Labor Costs First, use enterprise analysis to determine which enterprise or enterprises best fit you and/or your management team and produce the greatest amount of return on investment (ROI). Don't forget to explore the possibilities of new, or variations of your current, enterprises.

You may want to consider outside advice. Often, producers are so close to their operations that it's difficult to see the agribusiness operating any other way.

Secondly, develop an organizational chart for each enterprise. The organizational chart will help you graphically analyze not only who will be responsible for the overall enterprise, but also who answers to whom and what responsibilities must be assigned to each person.

Immediately following completion of the organizational chart, begin developing job expectations for each position within the chart. These are different than job descriptions, as job expectations include some specific numbers with results.

>From the job expectations, work schedules can be developed to help you be more efficient and thereby reduce labor costs. Whether you have 50 employees or two on your organizational chart, an organized work force and well-planned agenda can reduce labor costs 15-50%. In one operation I recently worked with, we reduced payroll by over $50/exposed female.

Outsourcing Is Another Avenue Expanding the operation can spread labor costs over more cows or more enterprises. But if expansion isn't feasible, consider outsourcing to reduce full-time labor. By outsourcing many of the duties (i.e., bringing in day help to process cows, or outsourcing the development, breeding and calving of your first-calf heifers), you reduce more than just direct labor expenses. You may also reduce insurance, eliminate a pickup, worker's comp, maybe even a house.

In a cow-calf enterprise it's difficult to justify more than $30/exposed female in labor costs. For a haying enterprise to remain profitable, labor expense must normally fall below $3-7/ton of hay for grass/prairie hay and alfalfa, respectively.

Next month, we'll begin our series on opportunities. The next six articles will describe the five most commonly missed opportunities I've seen in agribusiness operations and what can be done to take advantage of them. Some of the greatest opportunities in agribusiness are not in marketing! l

Tom Hogan owns and operates AGRI-PLAN Corp., an operational efficiency and financial management consulting firm. For more information or his 100+ page manual, "Planning Your Way To Profit," which guides you through the development of an Integrated Business Management Plan (IBMP), call 800/793-1671 or e-mail: [email protected]