Should you buy that new tractor? It is the right colour, after all.
What about the farm for sale nearby? You’d rather build equity than pay more rent.
For financial experts, answering these and other questions with confidence requires a hard look at existing profitability over multiple years.
If the math doesn’t pencil now, small improvements in each area of farm expenses can make a major difference in the not-too-distant future.
Why it matters: Breaking down costs and revenue into categories, and comparing those numbers over time, make it easier to incorporate many small – but collectively profitable – changes to your farm business.
Establish financial categories
Mark Verwey, partner and national agriculture leader with BDO, says personal benchmarking – that is, comparing your own farm financial data over time – is the first step in establishing where savings and new dollars can be found.
“Start with a base year [financial report] so we can compare our decisions to that year,” he says during a presentation provided during C & M Seeds’ virtual wheat industry day. “This is really your score card or report card. Use this to determine how you’re doing.”
The second step involves breaking down the report into its respective parts. Like a financial yield monitor, categorically establishing costs allows for direct comparison and analysis against a pre-established base year.
Verwey highlights four categories:
- Crop selection and mix – including the relationship between inputs and yield, or existing marketing strategy.
- Cost of goods purchased – such as chemicals, fertilizer, as well as seed and crop insurance.
- Direct operating expenses – labour, repairs, fuel, and other day-to-day costs.
- Capital related costs – including amortization, rent, or lease expenses.
The “five per cent” approach
Now you have multiple years – Verwey and several BDO colleagues recommend five – of directly comparable categorical data. It’s now possible to identify where improvements can be made.
This is where Verwey says the “five per cent strategy” can be employed. That is, incorporating incremental changes in each category to generate a significant result overall.
For crop selection, this could include investing in a more active or diverse marketing plan. Targeted improvements in costs of goods sold might warrant the adoption of a new technology, growing strategy, or just more involved consultations with a trusted agronomist.
Assessing whether the number of staff is appropriate for business needs, or whether an investment in new machinery is more financially astute than current repair schedules, can bring improvements in operating expenses. Clearly distinguishing between equipment “wants” and “needs,” as well as an equipment repair and replacement schedule, may improve capital expenses.
“Each operation will have its own unique circumstances,” says Verwey. “You kind of have to find that fine line to maximize performance in that area.”
While all efforts to increase revenues and decrease expenses can bring measurable increases in profitability, Verwey reiterates the most significant impacts are seen by improving revenue.
“Your biggest impact is on your revenue side. Improving your yield or marketing for better price. Always concentrate on the biggest ones first,” he says.
“Focus on key areas, compare against yourself, incorporate small changes, and use them in a flexible business plan… If you’re not changing, you’re probably moving backwards without realizing it.”