Maintaining the Current Level of Activity‘M’ expenses arise from two two broad sources :
Enterprise Variable Expenses (seed, fertiliser, chemicals, dips, drenches etc)Repair and Maintenance expenses are a typical example of the type of overhead expense that are classified as a M expense. They maintain the present level of activity, but that is all they do. The business does not grow as a result of a repair and maintenance expenditure.
Overheads of the business (necessary to sustain the current level of business activity and quality of life)
Each Maintenance or M Expense item shares three common traits with each other:
Clearly, many ‘M’ Expenses have an air of necessity about them. For instance, few people are going to choose to turn off their connection to the power grid etc. Nevertheless it remains true that you choose (for very good and valid reasons) to remain connected. Therefore an expense planned for power in the forthcoming period is a direct decisions made for this planning period, in order to maintain the present quality of life.
- They do not grow your business one iota - they simply maintain the current level of business activity If you drop the expense business activity may decline, but increasing the expense simply reduces your Net Profit.
- They are not Inescapable. You get to choose whether you will spend the money or not! If you have no choice it is an Inescapable Expense!
- You get to choose the quantum of the expense! There is nobody standing in your doorway telling you that you must spend $X on the phone company, or $Y on fuel!
Skimping is not the objective
Skimping on M expenses is not the objective. For instance, skimping on R & M sooner or later leads to failure of the equipment or structure, and quality of life will deteriorate as well.
Depreciation and retirement funds
It is important to include provision for each of these as ‘M’ Expenses. Depreciation should be treated as a real expense and cash put aside regularly.
The amount of cash you put aside should be relative to the length of time you expect the piece of equipment/structure to last. You know best the amount of use you make of the item. You also know best whether you are ‘hard’ or ‘easy’ on equipment. This will make a big difference about the period of time you would depreciate the item over.
You need to depreciate the item by putting funds aside at the rate it will functionally depreciate under your ownership. Forget about Tax Office schedules - they probably do not reflect your reality. If the Tax office schedule says to depreciate over 5 years but you know you will have the item for 10 years, depreciate over 10 years!
If you are putting depreciation funds into a special “Depreciation” bank account, do not forget to tell your accountant what you are doing, so that he/she can deal with it appropriately at the end of the year.
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