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Corn+Soybean Digest

Efficiency Versus Effectiveness

The economic turbulence facing the world today has many businesses focusing on cost control. There is a saying that “better is better before bigger is better” or businesses should get efficient before they grow.

Let’s take this idea a step further. The biggest problem I have noticed in economically stressful times is that there is a cost focus on decision-making. However, one must focus on effectiveness as much as efficiency. That is, reduce the right costs and invest in the right decisions for both the short run and long run.

For example, many companies are cutting training and education; however, most employees and managers today – including those in the agricultural industry – are knowledge workers. Without information, networking, and the stimulus of new ideas, businesses’ long-term profits can be hindered. There is also a possibility of losing long-term productive employees.

Next, when cutting costs, managers tend to cut the small expenses or focus on minutiae. Experience has found that isolating the four or five largest expenditures and establishing a goal to reduce these costs by 3-5% can be an effective management strategy. However, some of these costs may need to increase if they are deemed to add to the short- and long-run bottom line.

Next, effectively analyzing both overhead cost and fixed costs related to asset utilization can be a strategy to improve the bottom line profits. When times were tough in the 1980s, some producers sold expensive land, rented it back at a cheaper price and turned a profit.

Before conducting across-the-board cost cutting, determine what makes you money and what does not. This usually includes an enterprise analysis and another set of eyes such as an accountant, lender, consultant or farm-management instructor to bring objectivity to management decision making.

Editor’s note: Dave Kohl, Corn & 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. He can be reached at sullylab@vt.edu.

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