Most farm profit figures quoted in Uganda are gross margins wearing the wrong name. The difference is not pedantry: an enterprise can show a healthy gross margin and still lose money once it carries its share of the costs you pay whether or not you plant. Knowing which number you are holding is the difference between a plan and a hope.
The two calculations
Gross margin = revenue minus variable costs. Variable costs rise and fall with the size of the enterprise: seed, fertiliser, agrochemicals, casual labour, feed, veterinary drugs, bags and transport. Plant twice the area and they roughly double.
Net profit = gross margin minus fixed costs. Fixed costs are the ones you carry regardless: land rent, permanent staff, the depreciation on a pump or a store, loan interest, and your own time if you are managing rather than working.
Gross margin is the right tool for comparing two enterprises on the same farm, because the fixed costs are common to both. Net profit is the right tool for deciding whether the farm as a whole is a business.
Worked through on one acre
Take an acre of maize that yielded 900 kg and sold at 1,000 UGX per kilogramme, so revenue is 900,000 UGX.
Suppose the variable costs were 650,000 UGX: land preparation, seed, fertiliser, weeding labour, harvest labour, bags and transport. The gross margin is 900,000 minus 650,000, which is 250,000 UGX for the acre.
Now suppose the farm carries 1,200,000 UGX a year in fixed costs across six acres, which is 200,000 UGX an acre. The net profit on this acre is 250,000 minus 200,000, which is 50,000 UGX.
The gross margin was nearly four times larger than the profit. Quoting the first as the second is how a farm plan survives a spreadsheet and fails a season.
Keep enterprises separate
A farm running maize, goats and a poultry flock out of one cash box cannot tell which of the three is paying for the other two. The common pattern is a visible enterprise subsidised by an invisible one, and it persists for years because the household account balances overall.
Separating them needs nothing more than recording each cost and each sale against the enterprise that caused it, from the start. How to do that without a bookkeeping system is in the farm record keeping guide, which has a section on running several enterprises in one book.
Profit per acre, per animal, or per shilling spent
Profit on its own does not tell you where to put the next shilling. Three ratios do, and they answer different questions.
- Profit per acre matters when land is what you are short of.
- Profit per animal or per bird matters when housing or stock is the constraint.
- Return per shilling spent, which is profit divided by total cost, matters when cash is the constraint, which on most Ugandan smallholdings it is.
An enterprise with a modest profit per acre can be the best use of limited cash, and an enterprise with a large profit per acre can be the wrong choice if you cannot fund it to the end of the season.
The errors that flatter a profit figure
Four recur often enough to be worth checking for by name.
Family labour costed at zero, which makes a margin that cannot pay a wage look like one that can. Losses in store left out, which are a cost even though no money leaves your hand. Mortality ignored, so the cost of birds or animals that died is never carried by the ones that sold. And a feed or input table read at the wrong scale: published Ugandan budgets have applied a per-hundred-bird feed table to a flock of five hundred, which understates the feed bill fivefold and turns a modest margin into a printed profit rate several times the real one.
Profit and cash are not the same thing
A profitable season can still leave you unable to pay for the next one, because the money leaves months before it returns. Profit is measured over a season; cash is measured on the day the bill arrives. Both have to work. The timing side is in farm cash flow explained, and the point below which a sale is not worth making is in how to calculate the break-even point.
Frequently Asked Questions
What is the difference between gross margin and profit? Gross margin is revenue minus the costs that change with the size of the enterprise. Profit is what remains after the enterprise also carries its share of the costs you pay regardless, such as rent, permanent labour and equipment wear. Gross margin is almost always the larger number, and quoting it as profit is the most common error in a Ugandan farm plan.
How do I share fixed costs between enterprises? Use whatever the fixed cost is actually consumed by. Land rent divides by area, so share it per acre. A store or a pump divides by use, so share it by how much each enterprise used it. Management time divides by attention, which is harder, and a rough split you have thought about beats an exact split of the wrong thing.
Should I count my own labour as a cost? If you are asking whether the enterprise is worth doing, yes, at the wage you would have to pay someone else. If you are asking which of two enterprises to put your own time into, cost it in both and the comparison still holds. The case for leaving it out is that you have no alternative use for the time, and that is rarely true for a whole season.
Is a 30 per cent profit margin good for a farm in Uganda? A percentage on its own cannot be judged, because it depends on what the denominator is and over what period. Thirty per cent on a six-week broiler batch and thirty per cent on a nine-month coffee season are very different businesses. Compare return per shilling spent over the same length of time, and treat any published profit rate with suspicion until you can see the cost table it came from.
Why does my profit look fine but I have no money? Because profit and cash are different measurements. Profit counts a sale when it is made; cash counts it when it is paid. A buyer paying in three weeks, a crop sitting in store, and inputs bought on credit can all leave a profitable enterprise short on the day a bill falls due. See farm cash flow explained.