Oh where oh where should my overheads go?

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Overhead Overview

Understanding where you are making and losing money on an enterprise level is critical to maintaining the overall health of your operation. To get these insights, producers must allocate income and expenses to their enterprises. It seems fairly straightforward. Seeds go to my hay. Branding goes to my cattle. But often folks get tripped up by overheads: “Wait, where does my farm truck fit in?”

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Cut Your Truck in Half

We tell our customers that an overhead cost is an expense that does not reduce if an enterprise sharing it is eliminated. For example: If you use a farm truck to produce hay and raise cattle, the farm truck payment will not shrink if you stop producing hay (in other words, you can’t sell half of your truck!).

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To Split or Not to Split

This is why Ranching for Profit strongly recommends that producers not split overheads across the enterprises that share them, because the allocations can lead to false conclusions (watch their video ). In the above example, the potential savings from eliminating the hay enterprise would be skewed since not all the expenses would go away with it.

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Our Advice

Our recommendation, like RFP, is to separate out these overhead costs to get a true picture of each enterprise’s individual profitability, while keeping tabs on what it costs to keep the lights on. Customers on Ambrook create a separate “Overheads” enterprise to identify opportunities to reduce costs, while making strategic decisions based on the profitability of each individual enterprise.