Management Fee and its Purpose
One of the students enrolled in our Farm Credit University ag lender training class asked me to explain the “management fee” and its purpose.
First, a management fee is deducted when deriving rate of return on assets and many of the other profitability measures recommended by the Farm Financial Standards Council, of which I was facilitator.
Currently to derive management fee, we suggest that you multiply 5% by earned gross farm revenue and add $15,000. For example, a producer who generates $500,000 in revenue would have a fee of $40,000, which is deducted to calculate the profitability measures.
Why should we calculate this fee? First, it provides a proxy for the range of family living withdrawals or corporate withdrawal, if it is under this business entity.
If one widely deviates from this calculated figure, taking a higher withdrawal, then off-farm income or a reduced living withdrawal might be necessary. Also, it provides guidance of how much revenue must be generated for a business to be sustainable without non-farm income.
In addition, current economic conditions suggest that with family living cost averaging $50,000 for many producers, it will take near $500,000 in gross farm revenue generated to support the family needs.
Thus, another answer for inquiring minds!
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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