In my ceaseless quest to help more farms thrive and become profitable AND stay in business, this week I had the privilege of interviewing Kevin Fort of Regenerative Business Institute, a tax accounting, and business strategist firm where several of his clients are farmers.
Kevin lives in Gilbert, Arizona, with his wife and kids and in addition to his business finance work, he feeds about 10 families off their 1/8th-acre urban farm so he has first-hand experience with our unique challenges.
With a heart for farming and a background in the accounting and finance fields, Kevin recognized that his passion is to be the link between the farming/Ag community and the business/finance side of the industry which is why he agreed to help us out here today!
So many business strategists I talk with don’t understand the farming industry at all, so I never walk away feeling really heard or helped.
But Kevin gets us! He knows the challenges we farmers face, the limiting beliefs we might hold, and the objections we might be thinking.
In our talk today, we cover the important foundational concept of markup vs. margins and boy were my eyes opened!
Markup vs. Margin – the What and Why
In the business development world, we focus on three things:
- Controlling costs
- Monitoring pricing
- Increasing sales
Now, Kevin’s going to assume you and I look at our costs regularly and are controlling them as well as we can. I know I obsess over my costs and always try to keep them under control and prepare for emergencies.
So then, the mistake he sees most farmers make is they jump straight to #3, focusing on increasing sales, and skip right over #2, monitoring pricing.
They think, “Now I’ve got my costs under control, let’s get more customers!” (I’m guilty of this. How about you?)
But this #2, monitoring pricing, is a cyclical process that needs to go on throughout the life of the business. I got it now!! Pricing is not a once and done!!
The difference between margin & markup is how you calculate the price, and unfortunately, here’s where we often go wrong, myself included!
How to Correctly Calculate Margin
Most people take this approach: i.e. you have a chicken and you’ve calculated your costs at $10 to grow and get to market. So the business takes a 30% margin and adds that to the cost to create the price. Your chicken that cost $10 to grow is priced at $13 chicken.
So far I’m following, sounds right to me!
But Kevin’s here to report that’s wrong. Because if you want a 30% margin, then the chicken needs to represent 70% of the cost.
Now have $13 price and $10 cost, but divide the $3 margin by the $13 price and you’ll see the profit margin is actually 23%!
So the farmer thinks they’re padding their price by 30% but they’re actually eroding away at that margin because once the math is done they’re only making 23%.
A lot of businesses (not just farmers) think this way and are undermarking their margin rate and that’s a fast track to bankruptcy, which might explain the 80% failure rate in the first couple years.
The proper way to keep that 30% margin is to look at the percentage of cost that we need our chicken to have in order to realize the 30% profit margin.
So $10 chicken divided by 70% = $14.20 Now this is a true profit margin of 30%.
Got that? Take your final cost, or $10/.7=$14.20.
Let’s Talk Dollars
Let’s say you’re a farmer raising 500-1000 birds at a time, and you thought you were at 30% but you’re really only at 23%, that $1.20 difference that you’re missing out on is really a big deal – that’s $600-$1200 of profit you’re missing out on each batch of 500-1000 birds.
In order to be around long term, you’ll want to shoot for that 30%. The industry standard for our gross margin is in between 30-38%, so feel free to work up to that 38, too!
If you’re not there yet, start sharing your product’s value with your client base so they understand why your pricing is what it is. (I teach all about how to communicate value to your customers here.)
Most Important Way to Prepare for Tax Season
In the video interview, Kevin and I discuss several topics, including the #1 thing you want to be focusing on to prepare for next tax season. Click below to watch the video, then be sure you’re products are priced correctly by using our Pricing Calculator inside our free pricing course.
For more info on Kevin’s business, click this link: Regenerative Business Institute