Simpli Business Advisory facilitated a Farmers’ Financial Management Workshop for Agribank clients, which was sponsored and organised by the National Mentorship & Coaching Programme of the Development Bank of Namibia (DBN), in partnership with AgriBank, from 19-20 July 2024.

One of the topics of emphasis was the importance of understanding your overall farming enterprise costs and, more importantly, separating your production costs (direct and indirect) from operational costs and selling costs.

1. Production Cost Per Unit: These are direct costs associated with producing a unit of product, such as seeds, fertilisers, labour, water and other inputs, ie, the cost of producing one cow, from the point of calving until it becomes ready for sale. Understanding these costs will help a farmer determine the minimum price at which the product should be sold to cover production expenses after adding your gross profit, as the intent of any business is to be profitable. You have to consider the different production cycles of different farming products or enterprises, e.g. production cycle of cattle is different from that of goats or maize per hectare.

2. Operational Costs: These costs include the ongoing expenses necessary to run the farm, such as administrative costs, maintenance of equipment, salaries for permanent staff, utilities and marketing. Knowing these costs is critical for overall financial management and long-term planning.

These costs become the base of setting your farming enterprise budget. Therefore, differentiating between production and operational costs will ensure that your budgeting and financial forecasting are more precise, as underbudgeting has a negative impact on your farming cash flow. 

Additionally, this allows farmers to allocate resources more efficiently, plan for future investments to avoid what we call missed opportunities, and ensure that they develop contingency plans for financial challenges.

There is a saying stating “You can’t control what you can’t measure”. Thus, monitoring and controlling production costs per unit will ensure more efficient use of inputs and resources. Equally, managing operational costs can help in identifying areas where expenses can be reduced without compromising productivity. 

In the Financial Management Workshop, some farmers could already pick up that they spend more money on operational costs vs production costs through some practical exercises that were done during the training.

With emphasis, separating these costs will ensure that farmers can better examine which products or crops are the most profitable and which are costlier and perhaps may need to be discontinued.

Finally, they can identify high production costs that may be driving up overall expenses and assess if operational efficiencies can be improved and if processes can be streamlined to boost profitability. 

As we all know farming costs in general are one of our biggest challenges in farming enterprises. If we can manage and control them, perhaps we can improve the chances of profitability.

*Mekupi Kambatuku is a Managing Consultant at Simpli Business Advisory, and can be reached at admin@simpliadvisory.com.