Kevin Dhuyvetter would like to see more custom operators put a dollar value on the hours they spend working and managing their businesses.
“Many sole proprietors fail to do that, whether they’re running a mom-and-pop grocery store, farm or ranch,” says Dhuyvetter, Kansas State University Extension ag economist. “Their thinking is, ‘Since I’m the owner and principal operator, I don’t pay myself a wage because whatever I make is just what I make.’ ”
He says custom operators need to know how much profit – or loss – they’re incurring and challenges them to pay themselves for the labor and management they provide.
“At the end of the year, whatever a custom harvester makes is the return on two things: labor/management and the assets they have in the business. But most of them don’t separate those two. Breaking it down doesn’t create more money, but it can help harvesters understand their businesses better.”
Harvesters often ask why they need to separate their labor costs. His answer: “If you consistently say, ‘I’m making a 10% return on my investment,’ but that’s only after paying yourself a very low wage, for example, $6/hour, you might start asking yourself, ‘Why am I doing this?’ ”
Harvesters should know what makes them their money. “Is it the labor? Is it the investment in assets? It’s not really that complicated, but it’s typically not how owner-operators think about their businesses.”
They also shouldn’t undervalue their labor and skills, he says. “One harvester said to me, ‘I should probably pay myself $20,000 to live off of.’ I replied, ‘Okay, if I owned a harvesting business, could I hire you to come and manage it for me for $20,000?’ The operator’s response was, ‘Are you crazy?’ So I asked him, ‘Then why are you working for yourself for just $20,000?’ ”
He encourages custom operators to keep track of production information, such as fuel consumption per hour, acres per hour, etc. “Doing that can help them identify areas where they can possibly improve efficiencies and, ultimately, profitability.”
The economist also wants harvesters to understand the difference between market depreciation, which is the amount that equipment changes in value over time, and tax depreciation or loan payments. “Understanding tax depreciation is important for managing income taxes, but understanding market depreciation is important for analyzing the profitability of your business.”
In the mid-1990s, Dhuyvetter and Terry Kastens, a fellow ag economist, developed a financial analysis program with U.S. Custom Harvesters, Inc. (USCHI). It’s called Custom Harvesters Analysis and Management Program (CHAMP).
Participants supply data on expenses, revenue, employees, etc. After completing an analysis, the economists send each harvester a detailed report, then meet with each individually during the USCHI annual convention. The program details what harvesters are doing right or need to improve upon, yearly trends and how their operations compare to their peers’ businesses.