What a gross margin is

A gross margin is the most common way to measure how one part of a farm is doing. It's also one of the most misunderstood.

The definition

NSW DPI defines a gross margin as "the gross income from an enterprise less the variable costs incurred in achieving it".

Let's unpack that.

• An enterprise is one part of the farm business. A breeding herd, a mob of trade steers, a first-cross ewe flock or a piggery are each an enterprise.
• Gross income is all the money the enterprise brings in. For livestock, that's mostly stock sales and wool.
• Variable costs are the costs that go up or down with the size of the enterprise. Run twice as many ewes, and you roughly double the drench and shearing bill.

What's in, what's out

Typical variable costs for livestock are:

• animal health, such as drench, vaccines and vet bills
• feed and pasture costs
• shearing and crutching
• replacement stock, such as rams and bulls
• selling costs, such as commission, freight and levies.

DPI says a gross margin "does not include fixed or overhead costs such as depreciation, interest payments, rates, or permanent labour". Fixed or overhead costs are the ones you pay whatever the size of the enterprise. Depreciation is the wear on your gear, spread over the years you use it.

So it isn't profit

Because overheads are left out, a gross margin is not profit. A farm can have healthy gross margins and still make a loss once overheads and interest are paid.

What it's good for

Gross margins are useful because overheads mostly stay the same whichever enterprise you run. So the gross margin shows what each enterprise adds towards paying those overheads. It lets you:

• compare one enterprise with another
• compare your figures with published budgets
• test what a change in price or weaning rate does.

Weaning rate means the number of calves or lambs weaned for every female joined, as a percentage.

Our guide to your first farm budget shows a gross margin built line by line. The sheep gross margin calculator does the sums for you.