KARONGA DIOCESE

Development Desk Emphasizes the Importance of Gross Margin Analysis in Farming Business

Development Desk Emphasizes the Importance of Gross Margin Analysis in Farming Business
Participants calculating sample gross margins during the training

By Harold Mwale

One most
important aspect that entrepreneurs overlook in starting and managing a farm
business is that of gross margin. Thanks to Development Desk’s ACCES Plus (A+)
Project which facilitated a training in gross margin analysis for farmers in
Traditional Authority Mwalweni which is under Saint Francis De Sales Parish of
Karonga Diocese in Rumphi district.

Gross Margin is the remaining income from an
enterprise after the variable costs are deducted. This is an extremely important number for every new
and small farm business to manage, as it impacts both the possibility of
reaching breakeven (the product price needed to recover all variable costs
incurred in production at a given output level and cost of input) and the
amount of profit that a farmer can earn beyond breakeven. In other words, it
directly impacts risk and return.

Gross
margin affects breakeven and profit. As a simple example of how it affects,
during the training a farmer was considered starting-up with MK300, 000 in
fixed overhead. If this farm business gross margin as a percent of sales is 50%
(which means fifty tambala out of each kwacha in sales is retained for the
farmer to cover fixed costs), it would need to reach sales of MK600, 000 to
cover its overhead.

If that
same start-up were able to achieve a gross margin of 52% instead, breakeven
would decrease by MK23,000, or approximately 4%. The farmer would then begin
earning a before-tax profit of fifty-two tambala on each kwacha in sales after
revenues reach MK577, 000 rather than fifty tambala on the kwacha after MK600,
000.

Managing
gross margin helps farmers avoid problems with prices that are too low and
direct costs that are too high, and hence problems with breakeven and profit.
When farmers generate adequate sales but gross margins are low, it signals an
issue in one or both of these areas.

Most
farmers surrounding the area did not know what gross margin on sales was for different
crops and involving them in calculation of gross margins for different crops
such as maize, groundnuts and soya beans will help them identify the right crop
to produce and therefore address the problems they were experiencing. Each
participant simply knew that some of the crops they were producing was losing
money and did not know where to begin to remedy the situation. The training,
therefore, assisted them to address the gaps.

Farmers’
lack of understanding in gross margin analysis often leads to decisions that
only worsen the farmer’s position, such as attempting to increase sales via
lower prices, leading to even smaller gross margins.

Gross
margin analysis does not get the attention it deserves. Farmers should be aware
of the factors that will impact their margins and pay close attention to them. The
participants were encouraged to find a benchmark for gross margin using data
from their nearest competitors to give themselves a target to manage and be
aware that the factors impacting gross margins may change over time.

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