Profit is the annual gross income less the annual costs, or what is left over after covering the costs of running a goat operation for a production year. This can be expressed in a number of ways depending upon which costs are included or excluded, for example:
Gross margin = gross farm income – variable costs
Operating profit = Gross margin – fixed costs
Farm net profit = Operating profit – finance costs – personal costs – capital costs – tax
The farm gross margin is often made up of enterprise gross margins. A comparison of the gross margins for a range of enterprises can help identify which enterprise or enterprises are most profitable.
Enterprise gross margins are created by identifying the enterprise’s income and the variable costs involved in generating that income. Gross margin can be expressed in a number of ways but generally refer to the most limiting resource, for example dollars per hectare ($/ha) or dollars per dry sheep equivalent ($/DSE). The use of a uniform comparator across enterprises, for example $/DSE, is important as it allows the relative profitability of different enterprises to be compared.
Operating profit is calculated by deducting the fixed costs from the farm total gross margin. Fixed costs don’t vary greatly, so increasing operating profit relies on generating a higher farm gross margin which is often best achieved by minimising the cost of production.
Once the operating profit is known, other costs can be deducted from this to calculate the farm net profit.