In this post, I’m going to show you how to calculate your poultry farming profit.
Actually, this process has helped me publish some of the most detailed poultry farming profit calculations and income analyses in the industry – read by 5,626 email subscribers in 190+ countries.
Plus: it helped me program poultry farm financial planning software, write dozens of email newsletters, produce in-depth ‘country by country’ poultry industry reports, and more.
And in today’s post, I’ll show you exactly how I calculate poultry farm profitability.
[Note: although the title says, ‘poultry’ – this post will be focused only on layer and broiler chicken farming models.]
First, Fredrick’s Story: A Poultry Farm Profit Calculation
Meet our start-up Kenyan poultry farmer – Fredrick.
A qualified engineer, seeking a change of career.
He and his wife are keen agriculturalists by hobby.
He wants to set up a layer poultry farm selling eggs using KARI Kienyiji breed chicken.
He has a little over 8,000 sq. ft. (about a 10th of the size of a professional football pitch – a modest size) of available land on a smallholding home in Kisumu and wants to run his layer farm from this site.
Together, Fredrick and his wife have plans to visit model Kenyan poultry farms to learn ‘first hand’ what it will take to run a successful layer farm.
Where did Fredrick begin?
As part of his desk research, he decided to pin down some precise profit estimates to guide their expectations for earnings – should they decide to run this full time and give up their jobs.
Having conducted some research online, Frederick comes across my article:
He found it useful (…I hope you do too!)
So much so, that he feels confident to write his own report (with a little help from my project reporting software, Poultry Project Reporter)…
Although he’s not looking for public funding or private investment for this start-up, he does want his business projections modelled professionally on paper.
This will give him peace of mind vs. the risk he takes on giving up his engineering career.
Fredrick wants to write up a profit projection for his layer farm…
Having studied my example 10,000 bird layer farm project report – he feels he knows enough to extrapolate a model to suit his 8,000 sq. ft. layer farm.
Fredrick later subscribes to receive my premium email newsletters.
For my blueprint poultry profit method and cost model for modelling your own multi-flock earnings – Download my exclusive PDF poultry income analysis series (for paying subscribers only).
And now, back to Fredrick’s profit story 🙂
Step #1 – Draft up the capital start-up costs
We begin with the capital start-up costs of the project.
Although, Fredrick and his wife will fund the start-up process entirely by themselves using savings from the previous 5 years of employment.
We will still need to account for these costs within the model.
Because Fredrick and his wife will expect the farm enterprise to pay them back for the equivalent value of employed labour lost in savings to start the farm.
These are his findings…
Fredrick chooses a 1+2 layer farm rearing model.
He aims for a laying capacity of 2,000 layer birds (adopting this layer rearing model of 1+2, simultaneously he will also keep 1 batch of 1,000 brooder/growers alongside the mature layers.)
This gives an overall headcount of 3,000 birds at any one interval.
This means he will have 1x brooder cum grower house and 2x layers houses.
The minimum recommended floor space for the brooder cum grower house according to the FAO (Food and Agriculture Organization of The United Nations) is 1.36 sq. ft. per bird x 1,000 birds = 1,360 sq. ft.
The minimum recommended floor space for each layer house according to the FAO is 1.94 sq. ft. per bird x 1,000 = 1,940 sq. ft.
…multiplied by (2x) for 2 layer houses, and you have a total layer floor space (albeit divided across 2 layer sheds/houses) of: 3,880 sq.ft.
…plus the brooder cum grower house that equals:
5,240 sq. ft. minimum floor space of housing
Fredrick has friends in the building trade and plenty of raw materials at his home from previous improvement projects.
This will bring down his building costs drastically.
His total cost of building poultry housing will be: 52,000 KSh.
The site has a good supply of drinking water being a functional smallholding.
Fredrick is going tap into his existing supply.
The expected supply required for consumption for a total flock size of 3,000 birds is as follows, according to the FAO guidelines:
Peak water intake projected for 2,000 mature layers is: 640 litres per day
Peak water intake projected for 1,000 grower birds is: 160 litres per day
Add these together…
And you get: 800 litres of fresh drinking water required per day, to refresh your flock of 3,000 birds.
Fredrick will buy a water storage tank from which he will fill his drinkers to place in his hen houses.
The storage take will cost him: 26,000 KSh.
Fredrick’s onsite electric hook-up is insufficient to reach the poultry houses once built.
He decided to buy a gasoline generator with extensions for supplying power to his poultry houses.
This will suffice the need for lighting and heating, especially for the young chicks/brooders.
The generator cost is 40,000 KSh.
Egg Store Room
Frederick will utilise a disused double garage as an egg storeroom.
He’ll need to clear it out as he uses it for domestic storage currently.
Once clear, it will suffice to store eggs in preparation for market delivery.
There is no cost associated with this preparatory work.
With a batch size of 1,000 in this 1+2 layer rearing system and a laying capacity of 2,000 birds…
Fredrick can expect to produce around 12,460 eggs per week on average at peak laying capacity.
He has found a durable plastic egg tray to present his eggs on for his wholesale buyers.
Each tray holds exactly 42 eggs at once.
12,460 eggs divided by 42 eggs per tray = 297 trays.
He buys twice as many trays to be able to deliver filled trays and collect used trays once a week.
Fredrick will buy 600 trays from an online vendor for 46,000 KSh.
Kenya Bureau of Standards (Kebs) in Nairobi require every poultry farmer to hold a valid license in order to legally trade eggs.
The permit has a fee of 11,300 KSh.
Before issuing they take samples of eggs and test for Salmonella etc.
Fredrick finds out that in order to keep his chicks well heated in the brooder house, he will need 2x 250 Watt bulbs.
Together with lampshades suspended from the ceiling of the brooder house, his cost will be: 6,500 KSh.
Fredrick’s research led him to find out that he would require (105 units) 6ft. long linear feeders per 3,000 birds.
He finds a supplier selling plastic feeders with adjustable height to accommodate the growth of bird for:
1,200 KSh. per feeder…
Therefore the total cost of feeders for this project is: 126,000 KSh.
As calculated by Fredrick, according to FAO guidelines, his flock of 3,000 birds should take on about 800 litres of fresh drinking water per day.
He finds a supplier selling 8 litre drinkers for 300 KSh. each
He plans on buying 100 units, in total costing him 30,000 KSh.
Other associated costs for equipment
Fredrick’s estimations are that he will require the following items also for his poultry farm:
- A few shell grit boxes
- Ventilation fans for his layer houses
- Egg washers and one or two miscellaneous purchases
The total costs of the said equipment will be approximately:
Marketing & Branding
Fredrick enjoys computer software and design.
He’ll design his own logo and promotional materials for marketing and sales of eggs.
He has a home office, full-colour printer scanner which will do the job of printing what they need to get going.
No cost here.
Fredrick needs a van to fulfil his wholesale egg deliveries.
He currently has a used car for domestic travel which he would happily trade-in for the right van.
Its resale value is 300,000 KSh.
A van of the approximate specification necessary has been located for: 930,000 KSh.
If part exchanged, Fredrick and his wife could land themselves the van for only
TOTAL CAPITAL COSTS OF START-UP:
Savings and recouping investment
Fredrick and his wife have 2,400,000 KSh. in savings from the last 5 years of employed work.
They would happily use 1,034,800 KSh. of it to fund the 1 off capital purchases to start their chicken farm
They would expect, however, that their Kienyiji chicken layer farming business to replenish their savings within 6 years of labour.
How much, per month, on average would they need to make above their earnings to replace the start-up capital used for one-off purchases – over the 1st 6 years of trade?
Simply – 1,034,800 KSh. divided by 72 months (6 years)
= 14,372.22 KSh. per month
That is, of course, in addition to supplying them with a working household wage.
In addition to this, Fredrick will seek to replace his capital assets within 6 years of use because of wear & tear or obsolescence.
Fredrick continues with this profit projection exercise to test his idea’s earnings viability.
Step #2 – Tally up the recurring overheads of the poultry farm
The overheads for running a poultry farm of this type are as follows (this does not include the direct cost of sale like feed for example):
1st Year Overheads
Insurance (Buildings & Flock) – the cost of one year’s premium to cover livestock loss or building theft/damage
Deep Litter – this litter is what is used to cover the floor of the poultry houses, this is replaced once per year
Medicines – Fredrick and his wife are opting for natural health supplements in place of vaccines
6,400 KSh. (for 2 batches per year using 1+2 layer rearing system)
Electricity – it is estimated that the electricity bill for the poultry houses per annum, particularly for the brooders heating will be:
84,000 KSh. (roughly 7,000 KSh, per month)
Transport – getting eggs to local hospitality customers like hotels and catering businesses weekly will run the following annual costs:
Miscellaneous – other costs such as printing flyers, phone bill, internet etc. will approximate the following:
TOTAL OVERHEADS PER ANNUM:
The figure above is therefore the recurring cost for running the poultry farm outside of direct costs of sale.
Fredrick and his wife would have to stump up the cash to cover the first year of overhead costs also from their savings.
This would allow the business to grow without the immediate pressure of having to sustain its costs itself…
A sort of brooder phase for the farm – being in need of some financial nurture.
Step #3 – Now to identify the direct costs of sale
The direct costs of sale for the layer poultry farm will are simple enough to identify.
Here are Fredrick’s workings out…
Buying day old chicks
With an expected mortality rate of 5%, Fredrick buys 1,050 chicks in each batch.
He does this in order to maintain the feasibility of his earnings expectations, in the event of average bird mortality.
Fredrick finds a hatchery selling 1 day old Kienyiji chicks for 85 KSh. per chick.
His cost therefore to buy his first batch would be: 89,250 KSh.
In the first year, according to the 1+2 layer rearing model, he intends to buy 2 batches.
This makes his year 1 cost for purchasing 2 batches of Kienyiji chicks: 178,500 Ksh.
Buying bird feed
Fredrick discovers in his desk research FAO estimates for layer feed consumption.
He calculates that his 1st-year layer feed consumption using:
- 1+2 layer rearing system with a batch size of 1,000 (1,050 including expected bird mortality)…
will equal: 41,669.25 kg (…for first-year feed to get his first two batches of birds on the road to maturity for year 2)
He finds a supplier of maize germ and other mash ingredients which will sell at 38 KSh. per kilo
Fredrick’s 1st year cost of bird feed therefore would be: 1,583,431.50 KSh.
TOTAL FIRST YEAR COST OF SALE: 1,761,931.50 KSh.
Step#4 – What about revenue? Calculating the expected sales revenue of the poultry farm
So we’ve tallied up the components of costs.
But now we need to make some sense of the potential sales revenues on offer within this proposed poultry farm of Fredrick’s.
Now we clearly understand thus far that the primary output of layer farm production is eggs.
But before we get into calculating sales revenue from eggs, we ask…
“Are there any other revenue streams which layer poultry farms typically make?”
In a word:
According to optimal commercial viability, as quoted by the FAO, layer birds become unprofitable at age 72 weeks.
After this age, their productivity as a percentage of peak output reaches approximately 70%.
This by general yardstick becomes a loss-making exercise.
So, what happens to layer chicken that reach 72 weeks of age?
They are sold as ‘spent hens’ at market.
Spent hens – not bearing the fuller-bodied characteristics of their broiler counterparts – are by comparison lighter in weight and generally tougher in texture.
‘Spent hens’ therefore fetch a lower price at the meat market and are usually sold as cheaper domestic meat alternative.
Are there any other sources of income that a layer farmer can expect to make?
Crop farmers are continually looking for cheaper and more natural alternatives to fertiliser.
Packed down deep litter over the course of a year of rearing can be prepared as crop fertiliser and sold to neighbouring crop farms.
Any income made this way is profit only.
Let’s see what Fredrick makes of his income calculations…
Having done a little research he finds out that a tray of 30 eggs is sold to retailers for about 280KSh.
This works out at just under: 10 KSh. per egg
But just how many eggs should Fredrick expect to produce within his first year?
Take a look…
Dependent upon the rearing system chosen by Fredrick (1+2), FAO guidelines estimate his poultry farm to produce:
[That number is set to fluctuate year on year as the overlap of batches and the relative ages of the birds, and therefore production, is not identical every year.]
1st-year egg revenue is therefore estimated to be:
1,936,900 KSh. (193,690 eggs x 10 KSh.)
What about spent hens?
In his region, Fredrick found the price fetched for a spent hen to be: 200 KSh.
In year one (1st 52 weeks) he will not have produced any spent hens, being 72 weeks old by definition.
So, therefore, Fredrick will not earn any revenue in year one from spent hen sales.
According to research published by the University of Hawaii, the average layer hen produces 130 lbs. of manure each year.
According to Fredrick’s adopted layer rearing system of 1+2, his first batch of 1,000 chicks (1,050 chicks including his addition for expected bird mortality) is purchased on day one.
By the end of the first year, they are 52 weeks old.
At week 28, Fredrick buys another batch of 1,000 chicks (1,050 actual number).
One average, because his chicks will produce much less manure than mature hens, he averages out his calculation of manure production in year one to be extrapolated from an equivalent flock size of 1,000 mature birds…
…as such he estimates 130,000 lbs. (just over 58 tonnes) of manure to be produced in year one of operation.
Fredrick intends to re-use old feed bags to package up his chicken manure for selling as fertiliser.
Average prices online for selling chicken manure are on average about 2 KSh. per kilogram…
130,000 lbs. = 58,967 kg
58,967 (kg of manure) x 2 (Ksh. per kg)
= 117,934 KSh. potential income from manure sales in year 1
So, where does all this leave us with our poultry farm profit calculation?
Well, all this preparation gives us the necessary inputs to make some well-grounded projections of Fredricks potential profit.
Not just in year 1, but also across the first 6 years of trade.
Let’s start calculating profit!
Step#5 – The breakdown – Fredrick’s poultry farming profit calculation
Let’s take this opportunity to re-list the various types of poultry farm profit:
- Profit margin multiplied by volume of sales = gross profit
- Gross profit minus running expenses (without depreciation & amortisation) = EBITDA
- EBITDA minus expense of depreciation & amortisation = operating profit
- Operating profit minus expense of tax & interest payments = net profit
- Net profit = earnings or reinvestment
Having reminded ourselves of the fact that profit is a general term that requires pretext to give accurate meaning…
We now breakdown Fredrick’s poultry farm situation on paper – one definition of profit, at a time:
Our adopted pricing model was market-based and cost-based combined.
In other words, we begin by taking a mid-market rate as defined by research, then…
simply measure the feasibility of making a profit at this price against the calculated costs.
Fredrick’s researched market rate for egg price (wholesale) is 9 Ksh. per egg…a conservative estimate.
But is this a feasible price for Fredrick to charge for his eggs, given his cost scenario?
Let’s find out…
Sale price per egg = 9 KSh.
The average bird in the flock produces 295 eggs per year under optimal conditions.
The average feed consumption of a layer bird over the 72 week commercial batch cycle is 45kg (per bird).
The price per kilogram of layer mash on average is 38 Ksh.
The total cost of feed therefore per bird for an entire batch cycle of 72 weeks is
= 1,710 KSh.
…divide this feed cost, by the number of eggs produced per layer bird on average, throughout the same 72 week batch cycle and you get:
= 5.80 KSh. (1,720 KSh. / 295 eggs) of equivalent cost of feed to produce a single egg
Next, take the cost of each chick bought from the hatchery which for Fredrick was 85 KSh.
Then, divide this number by the number of eggs produced during the commercial laying cycle of 72 weeks…
= 0.29 KSh. (85 KSh. / 295 eggs)
Now, add the two proportional costs together…
5.80 KSh. + 0.29 KSh.
= 6.09 KSh.
Against the price of egg quoted above of 9 KSh.
this leaves (9 KSh. – 6.09 KSh. =) 2.91 KSh. profit per egg sold or 32% profit margin per sale.
Making 9 KSh. per egg a feasible and valid price indeed – at this stage.
This profit margin, however, does not represent in any way ‘take home pay…or earnings’ because it doesn’t take into account start-up costs, overheads or depreciation (nor indeed tax).
NOTE: the following profit calculations are based on egg revenue only – not including revenue derived from manure sales or spent hen sales.
We want you to appreciate that revenue in those secondary and tertiary areas of sales are additional.
To make the profit analysis clear & traceable, we wanted you to relate the profits below on a ‘per egg’ basis. Hence the omission of manure & spent hen sales.
Gross Profit – Running Costs = EBITDA
Let’s absorb those running costs…
Fredrick works out that using his 1+2 layer rearing system his farm would produce at full capacity approximately 550,000 eggs per year.
Divide his estimated running costs of 106,300 KSh. by the number of eggs produced (550,000 eggs) and you get:
= 0.19 KSh. of overheads absorbed per egg produced/sold
The calculation for EBITDA per egg sold, taking into account the running costs above is as follows:
= 2.91 KSh. – 0.19 KSh. (for running costs)
= 2.72 KSh. EBITDA per egg sold (this is now 30.22% gross margin)
EBITDA – Depreciation/Amortisation = Operating Profit
Now, Fredrick wants the egg revenue to absorb the cost of replacing capital equipment or buildings in 6 years time should they wear out of become obsolete.
The cost of capital equipment above including poultry housing totalled:
= 408,500 KSh. one off capital cost
To divide this across 6 years of trade…
Simply multiply the number of eggs estimated for 1 year (550,000 eggs) to be multiplied by ‘5’ to represent 5 full-years of production…
Plus, 1 year sub-optimal production, being the first year of rearing when your first 2 batches are maturing and there are no mature hens to output as yet.
Fredrick’s sums look like this:
(550,000 x 5) + 193,690
= 2,943,690 eggs produced in the first 6 years of running his layer farm
…now, we divide the total start-up equipment cost by the number of eggs to be produced over the first 6 years of production to get the start-up equipment proportion absorbed per egg produced/sold:
= 408,500 KSh. (capital equipment/building cost) / 2,943,690 eggs
= 0.14 KSh. of start-up equipment costs absorbed by each egg sold over the first 6 years of trade
…take this away from our EBITDA per egg and we get…
= 2.72 KSh. – 0.14 KSh. (for capital start-up equipment)
= 2.58 KSh. operating profit per egg sold (28.67% margin per egg sold)
Replenishing the savings pot!
Fredrick and his wife also want to replenish the savings pot remember.
That 1,034,800 KSh. they spent to get started needs to go back into the bank.
They agree to task the poultry farm with paying this back over 6 years.
In order to have the available margin proportionally absorb this figure also, we simply divide the start-up capital figure of 1,034,800 KSh. by his 6 year egg production figure…
= 0.35 KSh. of savings replenishment absorbed by each egg sold over the first 6 years of trade
…take this away from our operating profit per egg and we get…
= 2.58 KSh. – 0.35 KSh. (for savings replenishment)
= 2.23 KSh. of available earnings per egg sold (24.77% margin per egg sold)
Operating Profit – Tax & Interest = Actual Earnings
Whilst Fredrick took no loan (debt) to start-up, he figured he ought to remove from the profit of each sale the cost of interest which he would have otherwise gained on his and his wife’s savings had they kept their money with the bank.
They both had a KCB Goal Savings account offering 8.5% annual interest rate.
Before we deduct lost interest from invested savings, let’s take a look at the tax situation…
NOTE: We are neither tax advisors nor claim to be offering this type of service.
We simply wanted to present an outline scenario – again – completely fictitious to guide you in understanding the implications of poultry farming profit.
According to ‘proposed’ Kenyan tax law changes Fredrick could be liable to pay the following tax rates depending of course on farm earnings:
- 11,181.50 KSh. per month will attract taxes at 10 per cent
- 32,249 KSh. will be taxed at 20 per cent
- 25 per cent on incomes up to 42,782.30 KSh. per month
- 42,782.30 KSh. falls in the upper-most band that will attract the top tax rate of 30 per cent
Fredrick figures out that if his available earnings per egg is 2.23 KSh…
And he is expected to sell approximately 550,000 eggs per annum (including breakages etc.)…
His poultry farm will produce annual available earnings of:
= 1,226,500 KSh. per annum
= 102,208.33 KSh. per month
He figures he will therefore enter into the upper band of tax liability should he decide to draw down the entire surplus figure as earnings.
At 30%, his tax liability would be approximately:
= 367,950 KSh. income tax payable per annum
= 30,662.50 KSh. income tax payable per month
…subtract the figures above to arrive at the earnings after tax figure, and we get…
= 1,226,500 KSh. available pre-tax earnings – 367,950 KSh. income tax
= 858,550 KSh. after tax earnings per annum
= 71,545.83 after tax earnings per month
…if we also absorb the potential interest on savings he would have gained should he and his wife have left their savings in the bank…
the figures look like this:
their total original savings account balance was: 2,400,000 KSh….
…if they kept the whole balance of their savings in the bank at 8.5%, they would have earned the following figure in compounded interest (over 6 years):
= 1,589,520.20 KSh. compounded interest earned over 6 years (assuming the rates remained the same and no withdrawals were made)
…having deducted 1,034,800 KSh. from their savings to fund the start-up they leaves their new savings account balance as: 1,365,200 KSh.
Keeping this reduced balance figure in the savings account instead produces the following number as the 6 year interest yield:
= 904,172.07 KSh. compounded interest earned over 6 years (assuming the rates remained the same and no withdrawals were made)
But what would be the ‘actual cost of interest yield lost’ by Fredrick and his wife over the 6 years of waiting to replenish their potential lost savings interest, having plough their capital to self-funding their poultry farming project:
= 1,589,520.20 KSh. – 904,172.07 KSh.
= 685,347.93 KSh. of lost compounded savings interest over 6 years
…divide this figure by 6 (to spread it evenly over 6 years worth of earnings)…
= 114,224.66 KSh. (which is to be deducted from the after tax annual earning figure, in order to replace the lost benefit of savings interest)
…let’s do that…
= 858,550 KSh. in after-tax earnings – 114,224.66 KSh. of lost savings interest
= 744,325.34 actual earnings per anuum average within the first 6 years of trade.
That does it…
Oh, one more thing…
Want to see what subsequent years actual earnings look like for Fredrick:
Take his operating profit per egg sold:
2.58 KSh. per egg sold…
Multiply this by 550,000 eggs produced per annum to get…
= 1,419,000 KSh. annual available earnings
Deduct 30% income tax from this…
= 1,419,000 KSh. x 0.70
= 993,300 KSh. annual after tax earnings…
Compared with 858,550 KSh.
That’s an increase of (993,300 KSh. – 858,550 KSh.)…
= 134,750 KSh. increase in after-tax earnings (16% increase)
This business case study just wouldn’t be complete without stating some obvious (…as well as, not so obvious) assumptions upon which the enclosed calculations are based:
- mortality rate
- production rate
- market demand
…all should remain consistent.
Step#6 – What next?
We highly recommend you go back through the detail of this example and apply your own situational conditions, currency, prices, costings and all other parameters to see how things might look for your project.
We must stress: the example above is entirely fictitious, although based on realistic-ish figures from our own research.
The details above are not be ‘relied on’ for your own start-up planning – rather our intention was to provide a detailed illustration to help you see how you could look at calculating poultry farming profit.
Our methods are based on our 10+ years of experience in professional business & financial management.
Our approach is not the only way to look at this kind of project…
But we would recommend that it is a prudent approach to poultry farm profit calculation.
Thanks for reading – happy profit planning!
How To Calculate Your Own Poultry Farming Profit
Step #1: Define EXACTLY What You Mean By ‘Profit’
I used to think of profit quite simply as money left over after paying the bills,
And that if you had some surplus – you were doing well,
And if you had none leftover – so long as you had some cash coming in:
“You’d be alright.”
But as my ‘real world’ financial management experience grew,
I began to see that the term profit in itself is at best is incomplete,
And less so – pretty useless – in terms of telling us anything purposeful about your business.
So where does that leave us?
Redefine with profit ‘+…..’
With a little bit of ‘context’ to add.
There are typically 2 ways to add context to profit:
Pretext: We need to add a word or some letters to the beginning of the word profit,
And from this we can pinpoint EXACTLY what aspect of your business were talking about.
‘Gross’ Profit – refers to the surplus money remaining after you have deducted the direct cost of rearing your birds (a.k.a. cost of goods sold) from the sales revenue generated.
In other words,
Gross Profit = Sales revenue minus Cost of goods sold
In poultry farming, some typical items of cost of goods sold are:
- Day-old chicks or point of lay birds
- Feed + supplements
- Anything medically administered by a veterinarian
- Delivery of meat or eggs to market
- Husbandry labour
Basically, any input that goes directly into helping the birds survive, grow and get to market.
You can usually point out such costs by whether you can directly allocate them accurately to each bird.
…I can literally account for up to 5.235kg of feed being consumed by each broiler during a 49 days period (that 7 weeks).
‘Operating’ Profit – is the money left over from subtracting your indirect costs (otherwise known as overheads) from your gross profit.
The equation would be:
Operating Profit = Gross Profit – Overheads (Indirect Costs)
Unlike direct costs,
Indirect costs are the expenses of a business that happen even if you don’t have birds.
Think of it this way,
“Even if I can’t afford to buy more livestock (birds), I still have to pay:
- Rent or mortgage
- Bookkeeping staff
- Trading license
- Loan repayments on equipment
These are your overheads or indirect costs.
With this, we need to substitute the word profit for another word or phrase entirely.
For example, there is:
Margin contribution (MC) is the term used for describing money from every sale that goes beyond the cost of goods sold and counts toward gross profit.
In other words,
Margin contribution is surplus money that is generated from the sale of each product.
MC is the money that every egg or kg of chicken meat contributes toward your poultry farm’s gross profit.
It’s like we took the biscuit of your business’s gross profit,
And broke it all the way down to crumbs.
To give a grain-by-grain snapshot of what:
- each chicken reared or,
- each egg laid
…adds to your business’s ability to stay afloat.
Margin contribution is like the pennies or cents that fill up your poultry farm’s money box,
Which (further down the timeline) give you whole pounds or dollars to spend.
Not to be despised.
Sometimes, instead of phrases like margin contribution,
We might use an acronym,
Like EBITDA, for example.
If you’re unfamiliar with EBITDA now, you won’t be for long whilst reading my posts.
I’m pretty big on EBIDTA.
But it’s not just me. You’ll find business valuation experts, brokers and poultry farm investors all fixated with EBITDA.
Because it’s a type of measure for what your business can do for them and their clients.
In other words, ‘return’.
And if the finance crowd are concerned about it.
So should you be.
On the face of it, EBITDA looks just about as mysterious as any other acronym out there.
However, if you’re ‘in the know’, it’s actually as easy as ABC to a child…
Or TTYL (Talk to you later) to Gen Z ‘digital natives.’
So, here it is:
EBITDA is earnings before…
- lender’s fees on loans
- governmental levies
- capitalisation for asset replacement
- (another word for depreciation)
Seeing as the points above are subject to one’s:
- lending terms,
- tax bracket and
- accounting practices
– which are different from person to person…
…EBITDA becomes a more translatable and universal language for labelling what is left in the tank for Return On Investment.
It’s a marker for ROI.
This brings us on to…
Step #2: Set Crystal Clear Earnings Expectations
The fruit of an investor or entrepreneur’s labour is the pay-off.
And as we just mentioned in the section above,
This can be neatly summed up using one word (actually another acronym):
ROI, or return on investment.
Now, ROI is your long term gain above and beyond all material input including:
In other words,
You must subtract from your ROI – your time, money and use of assets invested in the business.
It’s a bit like removing allowable deductions from your taxable income.
Where I am, we are allowed to deduct the proportion of my phone bill used for business from my taxable income.
Because phone calls used for business purposes should therefore be paid for by the business.
This is a business expense.
So likewise your time, money and capital asset usage for your poultry business should be chargeable as business expenses…
How much is your input worth?
So, when calculating the profitability of your poultry business,
You must set crystal clear expectations of how much:
- Personal asset usage
…you will allow your business to extract from you.
Then, using sound reason, calculate a fair recompense (or wage) to receive in return for all this personal expense.
“But HOW MUCH would be fair?”
The best acid test for ‘fair’ is simple:
Exchange ‘you’ for ‘someone like you’.
If you spend 10 hours per week:
- reporting and
- analysing the performance
…of your broiler flock to keep the farm on target for optimal returns,
“…if I wasn’t doing this, but someone else was: (a) what would be their job title & (b) what would be a competitive rate of pay for them to do it?”
Do some research and find out the answers to your question…and there you have it.
Whatever the average Poultry farm Manager’s wage is –
This becomes the rate that you compensate yourself for time spent doing those duties.
An example could look like this:
A job recently advertised for Poultry Manager at De-Olushelters Concept in Modakeke, Osun, Nigeria…
…offered a salary of N50,000 – N55,000 / month.
At 40 hours per week, 160 hours per month…
Your ten hours per week managerial performance analysis costs your poultry business
= N312.50 – N343.75
Add this to your business expense column as you build your cost projections.
Step #3: Plan A Growth & Reinvestment Roadmap
Every business needs to be maintained and also grow.
It’s actually a lesson I learned quite late.
(And the hard way, might I add.)
A true story
As you know, I’m in the agribusiness consultancy business.
I serve poultry farm owners as clients in the Philippines, Uganda, Ghana, South Africa and beyond…
In fact, with an audience reaching at last count 190 countries,
The internet is a major tool for my ability to communicate.
This blog is just an example.
My ‘brooding’ consultancy business
When starting out – I based all my cost projections on the original scale of my consultancy at the start.
This was some 500 contacts.
A key tool for me serving clients (or subscribers) is email marketing.
I actually send (almost) daily newsletters to my list of subscribers.
The topics are highly practical and ROI focused.
As many of my subscribers are at the stage of either:
- writing their business plans, or;
- doing a feasibility study
…email is my way of training them with tutorials, calculations, sample PDFs etc. to build that winning plan.
Things got bigger than expected…
The only problem with my decision to use email was:
The success of my poultry farming newsletter!
Only a year down the line my list size rocketed to over 5,000 subscribers – and still growing.
(That’s 1,000% growth in 12 months.)
Here’s that catch:
…so did my costs
Email marketing platforms (as I came to find out) earn their money by charging on:
- Volume of emails sent, or;
- Subscriber count
And their software has some HARD STOPS when you trigger their usage threshold.
Whereas, my bill last year was but a few dollars per month…almost negligible.
I now pay $100 more per month than I did last year.
(A cost I didn’t originally account for – because of GROWTH.)
Now, think about this in light of your poultry farming plans.
Where could your profit get stung?
Have you considered the cost of growth in your business modelling?
Here are some capacity related costs of growing a poultry farm:
- House construction
- Equipment upscale – like cage replacement
- Storage & Processing facilities
- Perhaps vehicular upgrades
…not to mention the increased cost of goods sold, like feed and chicks.
Sure, you’ll enjoy some economies of scale…
For example, feed suppliers might offer you a few per cent off the price for higher volumes purchased,
…But overall, your creep in the scale of production will almost CERTAINLY trip some considerable cost increases.
These ought to be accounted for in your net profit calculations.
This brings us on to…
Step #4: Calculate Net Profit
Once you have all reasonable expenses, costs and deductions removed,
You are left with a net profit.
What is net profit?
The simplest way to look at net profit is this…
Net profit is money that needs to go out of your business for either:
- Debt servicing
- Investor obligations
- Growth and reinvestment
In other words,
Any people or agencies which have indirectly or directly supported the success of your farm,
Outside of its day to day operations.
Say, without necessary investment – where would your business be…?
Or, without working equipment – where would your business be…?
Even, without public services like roads and licensing benefits – where would your business be…?
These parties all need to be paid back for their provision to run your poultry business.
This is the ITDA (inc. ROI) of your EBITDA profit – mentioned earlier on.
Step #5: Use Margin Contribution To Motivate
If you remember earlier on in Step #1,
I made a mention of a key indicator of your farm’s profit:
Like we said, the individual cents on your overall dollar ROI.
Or put another way,
Margin contribution is the exact amount that EVERY egg or bird carcass adds to your gross profit.
Look after the pennies…
A great motivator.
In business, I always like to think incremental or on a grain-by-grain basis.
A kind of ‘every little counts and makes a difference’ mindset.
The benefit of seeing things this way is simple:
It makes you appreciate the small stuff. Breeds diligence.
And it’s by this that every business succeeds.
Houses, cities and kingdoms are built by laying one single bring upon another.
Every bit counts toward the target
In the case of your poultry farm,
Your agribusiness will be built one single egg or bird at a time.
Every breakage, substandard product or % of under-production =
A great way to focus the minds of your operational team.
To get everybody target focused.
Set targets on volume and quality,
And make clear to every team member the influence their duties have on achieving the goal.
This leads on to…
Step #6: Pinpoint Your ROI
ROI being a long term goal needs some milestones attached.
Otherwise, how can you tell that your business is on track for delivering the rewards you seek after.
Early on in business, I learned a key lesson.
(And of great value too.)
Can you see your ROI clearly?
I learned that pinpointing ROI is possibly the BIGGEST blind spot in a small business owner’s planning.
Business owners or entrepreneurs often have in mind interim benefits:
- Scale and prestige of operation
- Cash flow
…but as we discussed earlier in this post, none of these ‘benefits’ should be included in the term ROI.
Returns go beyond what you put in.
This is where I’d say 99.9% of the business owners short change themselves in business.
And because of that, their aim is so low (so to speak) they end up shooting themselves in the foot.
Here’s what it looks like in practice:
You want to start up a poultry farm & pull together some financial projections for a business plan.
You take the approach that if you can pay your business bills,
PLUS ‘have some money over’ for the family, then your enterprise would have been a success.
As the business begins,
You find some discouraging effects:
- the personal time involvement is much higher than planned
- budget drains like petrol on delivery, office expenses were unexpected
Points like the ones above dampen enjoyment and spoil rewards.
And worse still, all of this is still only interim reward (during the time of ownership) – not ROI.
What about when you want to exit the business?
Not thinking of exiting the business?
Get smart about exit
Even if you have the intention of running your farm for the long term,
There are 101 reasons why you might be persuaded (in time) to exit?
Here are 12 of those reasons.
But in short,
Your plans in either ‘life’ or ‘business’ might change along the way and leaving might be your only sensible option.
The value of business
In such a case, if you did exit and considered selling the business as an asset,
Because business is one of the very few asset classes which are appreciable,
In other words,
‘…gets better and more valuable with time.’
This should mean if maintained well (all market forces being normal-ish),
That you should always expect to sell a business for more than you bought it.
The difference is your (and your investor’s) ROI.
And the amount that you gain should be prescribed and deliberate.
Never leave it to chance.
Calculate this as accurately as you would any other business profit.
This leads us on to…
Step #7: Set An Exit Value Goal Valuation
The final step in this process is to set a clear goal for exit value.
Remembering the cost of the business (plus any associated cost of acquisition, like legal fees etc.) should be deducted from this in any ROI calculation.
Say, your poultry farm cost $80,000 to set up or to buy from an existing owner.
Your ROI calculation using exit value should therefore deduct 80,000.
Selling the business for any less than $80,000 would leave you with a capital loss on exit.
Literally, giving money away – in large lump sums.
On the other hand, if you gained money on the sale of business – then you make a capital gain.
(This gain is usually taxable. And as such you should account for the taxable sum to be an additional expense deducted from the ROI.)
For example, if the capital gains tax is 20% – you should add a further $16,000 on top of the cost of acquisition or start-up which your exit value will have to exceed.
Add exit related fees like, accounts drafting etc. and your transfer value on exit will need to be in excess of $96,000 + other costs,
Say, $110,000 (inc. broker fees plus stock too).
But how much is enough ROI?
Life after poultry
It really depends on what your aspirations are beyond this business.
Where and what next?
- Extensive travel?
- New business venture?
- Start-up investment?
- Property or land purchase?
- Debt repayment?
A lump sum would be necessary for most?
Whatever the amount is, add in paying back your investors their ROI and adjusting your figures for ‘opportunity cost’ and inflation…
…you land at your ROI figure.
This is your target:
To grow your farm to reach a valuation that matches this ROI figure.
I call this number your end-stage ROI, or payday.
TIPS FOR INCREASING PROFIT:
That rounds off how you ought to go about calculating your poultry farm profits.
But how about optimising profit within your poultry business?
Here are some proven tips for adding great ROI value to your business.
Set Ballpark Profit Estimates
Firstly, you need some ability to see all your profit markers at a glance.
There are financial key performance indicators (KPIs),
Telling you if your business is on track for payday exit value.
These KPIs also double up as useful benchmarks for comparing the profitability of your poultry farm vs. others in your niche.
Start off with:
- Gross profit,
- Operating profit,
I recommend you set rough percentages for each one,
Perhaps you might use averages like this, for example:
- GP 40%
- OP 22%
- EBITDA 12%
- (BCR 1.5)
Said differently, every dollar taken in revenue would leave:
- 40 cents gross profit to pay business overheads
- 22 cents to pay debt & capital
- 12 cents to take earnings for you and investors
This is purely illustrative though. I really couldn’t say what it would look like for your poultry farm.
But that said, I would always have these benchmarks laid out in planning.
That way, you always have tabs on performance.
Optimise FCR (Feed Conversion Ratio)
Feed conversion ratio (FCR) is a critical marker of poultry farm performance.
FCR tells you how much feed is converted into meat or eggs.
Why is this so important?
Because research says that:
“…feed constitutes 60 to 70 per cent of the total cost of production, any attempt to reduce the feed cost may lead to a significant reduction in the total cost of production.” (Source)
So, the importance is simple.
Reduce feed cost and put a SERIOUS dent into your production expense.
This increases profit.
Looking at this another way,
If you increase conversion (get more meat or eggs) out of every grain,
This also boosts your profit.
So how do you increase FCR?
There are many proven methods,
But in short, you either want to:
- a) select a bird that uses feed more efficiently (a bit like a car’s fuel efficiency – more MPG)
- b) provide optimal conditions for production & comfort for birds
- c) type of feed used brings ideal results
Tweaks in this area could move the FCR needle for you from 2.5 to 1.5 reducing your feed bill by 40%.
40% of 70% = 28%
So by bringing down your FCR by a whole point you shave almost ~30% off your expenses.
If your poultry farm had a cost of production of $50,000 per year,
You’d save $15,000…or rather add $15,000 to your gross profit.
In the sense of earnings, you’d earn $4,500 more per year.
Develop A Premium Product Value Proposition
Maximising your sale price is a simple – but not necessarily easy or quick way – of increasing profit of your poultry farm.
Price is a feature of the value proposition.
What is a value proposition?
The concept that people (customers & clients) assess commercial opportunity by value,
The small business sector suffers serious financial damage by trading on the wrong side of this fact.
Before The Big Book Project, I used to run a strategic marketing consultancy for small business owners.
My clients were from a variety of industries:
- Food services
- Wholesale distributors
- Software manufacturers
The services I sold them did one thing that optimised their profit: short, middle and long term ROI.
I did it by teaching them strategies for raising the value bar of their business.
It gave them several benefits but two main selling points of my work was:
- More earnings
- Great exit value
I had clients who before my work faced insolvency and after investing with me could take early retirement.
Others launched franchises off the success.
How did I do it?
I achieved these results by thinking of value not price.
I engineered their businesses to:
Present and provide value that persuaded customers that paying more was worth it.
And like I said, It worked.
But don’t get me wrong. it’s not an instant success.
It takes A LOT of research and development.
i.e. finding out what customers value and HOW MUCH they value it.
This is quite a skill, but when you crack it – you’re able to put together the winning value proposition.
With broiler farming, the usual thinking is that quick and big is better.
But in this example,
We see a highly profitable premium value sustainable poultry model breaks that tradition,
And shows that slow-gro chicken can add MASSIVE profit to your poultry business.
Sure slower-growing broilers cost more to feed and keep,
But if the sales price achieved for the quality produced is multiple times higher than usual,
It can be more profitable to take your time than to rush.
Minimise Feed Costs
As I said above in the FCR section above,
Better use of feed instantly adds profit onto our poultry business.
But aside from conversion of feed,
Two other feed efficiencies can add major benefit to your bottom line:
- Minimising feed waste
- Reducing the cost of feed
Minimising feed waste
There are lots of strategies out there for reducing the amount of feed is wasted during production.
Using optimal feed particle size.
It’s well known that birds will eat more feed when particles are presented at a certain size.
Too big they’ll pass up on eating it.
Too small – it goes to waste uneaten.
There’s an ideal size.
Working towards achieving this takes some experimenting and monitoring.
But in the long run, can:
… increase feed intake, decrease waste, save cost, increase profit.
Reducing the cost of feed
If you buy your feed,
You could reduce your feed bill by:
- Negotiating cheaper terms
- Finding a cheaper supplier
- Increase your spending to benefit from discounts
These are just some ways to lower the expense.
But what if you mill your own feed?
How about using an alternative blend of ingredients?
Feed cost is directly in line with the prices of ingredients.
As maize contributes a high proportion of feed ingredients…
…the poultry business often finds when corn prices rise…
…poultry feed price rises too.
And where the cost exposure of your poultry business due to feed is as high as 70%…
…finding even just a few cost efficiencies from alternative ingredients can add significant profit.
But which feed alternatives should you use?
There are several well-documented ingredient substitutes.
It takes lots of trial and error to make a confident decision in this area,
But in the long run, it could pay off in increased earnings and ROI.
This is a very advanced commercial strategy for increasing profitability.
And as such takes a lot of capital investment and involves many risks.
But vertical integration has many advantages.
What is vertical integration?
Vertical integration is when two companies occupying separate stages for the value chain come together as one.
In the case of poultry,
It’s like when a hatchery buys out a farm.
The hatchery would normally be the supplier and the farm would be the customer.
One produces chicks and the other raises birds from day-old chick to maturity,
– for eggs or meat.
But integrated, the merger presents distinct benefits for the joint enterprise.
Here are a few:
Cost of sale saving – this is where the farm’s cost of buying the chicks is now absorbed by the joint enterprise.
The profit margin charged by the hatchery as a separate business is no longer charged to the farm in the newly merged company.
Shared assets – the merged company now has shared infrastructure. They have vehicles, buildings, computing etc. which is now used by the joint business.
Often a proportion of these items are sold as surplus to requirement – giving cost saving.
Economies of scale – naturally a merged business is going to be larger than two separate ones. The down size is complexity. It can be difficult to gel it all together properly which can cost more. But the upside is as a larger business can enjoy greater bargaining power.
This can lead to negotiating lower costs. A material profit booster.
[NEWS: feed price fluctuations]
One of the most potentially devastating economic factors for the modern poultry farmer is:
Massive feed price inflation.
Sharp rises in feed prices force poultry businesses to react quickly to cushion the blow to profit.
But one of the key steps in preparing your poultry farm for dealing with adverse economic conditions is:
What is sensitivity analysis?
It’s really another word for scenario planning.
It’s when business owners apply different cost or ‘other business’ conditions to their model in theory,
And see what comes out of the wash, on paper.
Sensitivity analysis is huge for knowing what to do if things go against your plans.
No one likes being caught off guard or unprepared.
So, when I started The Big Book Project I looked for a way to help poultry entrepreneurs avoid these nasty surprises.
Here’s what I did:
I made software that took all the leg work out of the calculations.
Calculate your poultry farm profits automatically
I called the software Poultry Project Reporter.
It was at first a tool I used for my own consultancy.
It saved me so much time and money writing plans and making calculations for poultry farming businesses,
That I literally used it daily.
But I saw great advantage for poultry farmer using this themselves
– without my expensive services in the middle.
So, recently I made it better and launched it as Poultry Project Reporter 2.0,
The fastest and most flexible way to build your winning layer or broiler financial plan or feasibility study.
And of course, it’s great for sensitivity testing.
I made sure of that.
The first thing I did was to separate out the feed and production-related figures from everything else.
As feed cost and chick cost are among the most volatile costs in any poultry business,
I wanted a quick way you could immediately zoom into those areas,
So. I made in the software what I call the ROI Analysis Sheet.
And it simply takes your:
- Cost of chick
- Cost of feed per kg
- Price of egg or chicken
…as the principal inputs of the gross profit calculation and gives your profit position immediately.
It actually presents it as a margin contribution.
I find this MASSIVELY useful.
It gives me precise sensitivity down to a breakeven.
So when considering poultry farm profits when reporting,
I know from step 1 if the farm in question is actually going to make money or not.
Immediate financial feasibility. A great acid test for you to know if your inputs are profitable or not.
A useful technique for quickly calculating how much you are likely to make from your planned enterprise.
Not bad, eh?
Is poultry farming a profitable business?
How much does a poultry farmer make?
I’d like to hear from you…
Are you currently calculating your poultry farming income?
Do you have experience running a poultry business?
Are you just starting out and need a way of accurately estimating your earnings?
Either way, I’m interested to hear from you.
How is it going?
Let me know by leaving a comment below right now.