Fixed vs Variable Inputs for Commercial Farms
Running a successful commercial farm is a balancing act. The money you invest in supplies and labor must create a profit in order to continue moving your business forward each year. Spending too much at one time can upset the delicate balance required to remain profitable, and spending too little can reduce the quantity or quality of your final product.
Understanding the role of fixed and variable commercial farm inputs can help simplify your planning and create a balanced system. At BTC Bank, we help local farmers and ranchers realize their dreams of running successful commercial farm operations. This article will help explain the importance of identifying your fixed and variable inputs and managing each input for financial success.
What are Farming Inputs?
In agricultural terms, farming inputs are identified as any resources used to support the production of a final product. Physical inputs such as soil, sunlight, heat, and rain are provided by your environment and require no financial management. Common human inputs include:
Outputs, on the other hand, consist of the final products that your business creates. With the help of your inputs, you can produce animals for sale, animal products, produce, grain, feed, seed, and other farm products that are either used by your business or sold for profit.
Understanding Fixed vs Variable Costs
For many business owners, financial recordkeeping tends to fall by the wayside. After all, you didn’t start a family ranch in order to sit in front of accounting software all day. If you think your ag business could use a financial tune-up, check out our article 7 Tips for Better Farm Financial Management.
Take the time to track your income and expenses as they happen each season. If you’re the type who waits to settle your books at the end of the year, you are missing the opportunity to spot trends, challenges, and opportunities as they arise. As you begin to track your business expenses, divide your costs into fixed and variable categories.
Fixed inputs don’t change based on your production scale. Salaried employees, rent or mortgage payments, property tax, insurance premiums, and interest payments fall into the category of fixed expenses. No matter how many acres of corn you plant this season, those fixed costs will remain the same.
Variable inputs change as you increase or decrease your production. The amount of hourly labor, fuel, seed, crop insurance, fertilizer, herbicide, and pesticide you will need is directly related to how much acreage you have planted. If you increase your production, you will have an increase in your variable expenses. If you are looking for ways to reduce your variable expenses, explore our recent article on precision farming technologies. New Ag Tech is helping farmers decrease their variable expenses by taking the guesswork out of field planning.
Farm machinery and equipment can fall into both variable and fixed expenses categories. If you have an equipment loan on your tractor, those payments fall under your fixed expenses. The costs associated with how often you use your tractor are variable expenses. The more you use your tractor, the more maintenance it may require and the more it may depreciate in value due to the increase in engine hours. Because determining the true cost of your equipment usage can be tricky, Iowa State University has developed tools to help you understand and calculate your expenses. If you are considering adding to your tractor fleet in order to increase production, our comprehensive tractor financing guide can help.
Create a Budget to Help Determine Financing Needs
Detailed bookkeeping allows you to understand how much each acre of crop or each head of cattle is costing you. If you choose to expand your business, you can accurately calculate the amount by which your expenses will rise. Having cash on hand or obtaining a loan to cover these additional expenses is much easier when you can produce accurate cost projections. If you don’t currently utilize a detailed budgeting system, the University of Missouri offers sample budget tools for specific farming needs in Missouri and Iowa.
Smart Financial Management
The biggest reason to understand the difference between fixed and variable inputs is to make smart financial decisions for your agriculture business. The frequency of the purchases and the lifespan of the products are important factors to consider when you need to determine financing. Depleting your working capital to make cash purchases leaves your farm vulnerable to unforeseen events and emergencies. BTC Bank can help you find the right financial tool to afford the inputs you need without sacrificing the financial security of your family business.
Paying for variable inputs
Fertilizer, fuel, and hourly labor are just a few of the variable expenses found in agriculture. These short-term inputs produce results for one season and then reset for the next season. For many ag products, your business will realize profits from these inputs in a matter of months. A revolving line of credit can provide the funds you need to cover your variable expenses without a hefty interest rate or long-term loan commitment.
A revolving commercial line of credit operates much like a credit card, but with better interest rates than business credit cards. Like all loan products, the interest rate is determined by the strength of the borrower’s credit and financial health of the business. With a revolving line of credit, you borrow only the funds you need, as you need them. The line of credit can cover seeds and fertilizer at the beginning of the season and extra packaging materials at harvest.
Your business will be approved for a maximum dollar amount, but you only pay interest on the withdrawal amounts that you make. You can repay parts of the loan when you make a profit and borrow again when you need it. With a one-time application process, a commercial line of credit is the easiest way to cover the seasonal costs of your variable inputs. Interest on a business line of credit may be tax-deductible, consult your tax advisor to determine your eligibility.
Paying for fixed inputs
Fixed inputs don’t change in relation to your production scale unless you add long-term assets like acreage, storage sheds, and equipment. If you do need to grow your fixed inputs to adapt to increased production, you will want to secure a long-term financing product.
At BTC Bank, we offer customized ag financing for your unique business needs. For tractor and equipment financing, our local lenders’ knowledge of current farm equipment values helps streamline your loan process. We can help you afford the new harvester or expanded irrigation system you need to increase production.
If you need additional acreage for livestock or cropland, farm real estate financing is the right tool. A long-term loan will allow you to spread your loan payments over 10 to 20 years. Agricultural real estate loans can also be used to add additional structures to your land or make improvements to existing buildings.
Whether you are interested in growing your herd or diversifying into livestock, BTC Bank offers special livestock financing. Bundle a livestock loan with a real estate or equipment loan to ensure you have the purchasing power you need to start or expand your dairy cow operation.
Meet with a BTC Bank Ag Lender
As a longtime community bank, all of our branches (Bethany, Gallatin, Albany, Pattonsburg, Chillicothe, Carrollton, Boonville, Beaman, Gilman City, Cameron, Jamesport, Oregon, Trenton, Maysville, Osborn and Buffalo in Missouri, and Lamoni, Iowa) are staffed with loan officers who possess a deep and localized knowledge of the agricultural community and its needs.
Our lenders are available to discuss your ag business needs whether you are just starting to consider financing or already have a detailed expansion plan for your farm. If you are ready to meet with a lender, plan to bring the following items for review:
- Recent tax return
- Business plan
- Balance sheet
- Estimated budget
Our Ag Lenders are proud to support the family farms and ranches throughout Missouri and Iowa. We take the time to explore all our agricultural lending products with you and work to find the best solution for your business. Stop into your nearest branch or call us toll free at 1-877-BTC-BANK so our team can provide your business with agricultural banking solutions. We’re committed to your farm’s success because at BTC Bank we’re Community Minded...Just Like You.