Custom harvesters should monitor their labor costs and may need to send workers home for a day or two during slow periods. They may even need to lay somebody off if business slows down too much, John Mortier told members of Wisconsin Custom Operators at their January conference.

Managing labor is one of the only ways that businesses can drive down their operating cost, said Mortier, vice president of BMO Harris Bank, Appleton, WI.

The operating costs of custom operators he works with typically total 52% of their annual revenue, and 32-40% of those expenses are labor and labor-related benefits.

“Labor is a huge, huge portion of your bills,” he told the harvesters. “You always need to be really cognizant of what is happening to your labor costs.”

He urged them to plan their labor needs ahead of the season based on the amount of work and the number of hours required to do it, using the past year’s figures as a guide. Start with an initial plan, then manage it on a weekly basis.

Labor and benefits, plus repairs and fuel, usually account for 85% of total operating costs, so Mortier said to focus on those areas when looking to reduce expenses.

“You can spend a lot of time trying to manage and control costs on other items. But when it’s all said and done, you can do as much as you want to on those and it isn’t going to move the bottom line.”

He also advised harvesters to build equity into equipment and be aggressive at collecting on overdue bills.

Depreciate equipment based on its realistic life, and pay off loans as quickly as possible, said Mortier. Bankers typically want high-wear equipment like forage harvesters paid off in five or six years. But he likes to set up payments so they’re paid for in three and a half to four years to build equity. That value can then be used as a down payment on the next piece and provide retirement income when you leave the business.

Custom harvesters’ client lists aren’t worth much; the value of their businesses lies almost entirely in their share of ownership in the equipment, he said. Full-time custom harvesters typically have $1.5-2 million worth of equipment. If they can get it three-fourths paid off, they have more than $1 million saved up.

“What we’re trying to do is create your own savings account in the value of equipment,” he said.

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Profit margins of custom harvesters usually run 3-5% of sales, which is typical of many types of businesses. So if you gross $1 million annually, you’ll probably end up with about $50,000 in profit. One unpaid bill can wipe it out, so Mortier told the harvesters to work hard to collect payments and be cautious about taking on new clients.

“Every once in a while, you’re going to get stung,” he said. “But you need to know your customers, and if there are guys who are slow-paying, continue to talk to them.”

Some dairies are struggling, so be wary if a producer from 100 miles away asks you to do his work.

“If he’s calling you and going past a couple other harvesters, why is he doing that?” the banker asked. “A lot of times, he’s burned his bridge with other people.”

Ask for a bank credit reference before taking on a new, unknown client. Bankers give positive references for creditworthy clients, but are reluctant to give negative ones. So if a banker is slow to respond to a credit-reference request, or the response is lukewarm, the potential client may not be worth the risk, Mortier advised.

For more custom harvesting stories, read:

Looking For New Custom Clients? Scrutinize First

Financial Analysis Program Could Help Custom Forage Harvesters

Bigger Forage Harvesters Aren't Always Better