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Getting Your Farm Better Before Getting Bigger

Getting Your Farm Better Before Getting Bigger

Key points to consider when evaluating your farm's financial performance

Here are a few things to think about when it comes to farm performance, based on a study of Kansas farms participating in the Kansas Farm Management Association. Purdue economist Michael Langemeier offers insights:

* Farms who routinely achieve zero to 20% profit margins need to consider getting better before they get bigger, urges Langemeier.

* Studies of asset turnover ratios show farms are really all over the map, but in general, that benchmark really depends on whether you own land. "If you rent most of your land you'll have a higher asset turnover ratio than if you owned it," he says.

* Most successful farms look to clamp down on costs and sell at average prices. 

FARM ON TRACK: Total review of farm operation can help you plan for growth.

* What is your competitive advantage over other farms? From a purely competitive standpoint, those who can identify and utilize unique resources that are difficult for other farms to obtain will have an advantage.

So ask yourself: what do you do that is unique? Ask four questions:

- Does our firm have resources and capabilities that enable us to respond to environmental threats and opportunities?

- How many competing firms already possess this uniqueness?

- Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?

- Is the firm organized to exploit the full competitive potential of its resources and capabilities?

"Family farms often have problems with the last question," says Langemeier. He also notes that "If you answer no to all questions, you shouldn't be farming."

It's often difficult to know where to start when it comes to benchmarking your business. Langemeier suggests that you start by making sure that you have a balance sheet, income statement, and cash flow for your business. 

Using these statements, if it appears that profitability is an issue (average operating profit margin for the last five years is below 20%), then it is important to identify possible bottlenecks to efficiency. 

This usually involves an examination of the labor efficiency and enterprise analysis.  Often, one or more enterprises on a farm have substantially lower margins than other enterprises on the farm. 

If that's the case, operators of the business need to determine how the margins on these enterprises can be improved, or think about getting out of these unprofitable enterprises.

"Thinking about what you do well and what needs improvement is a very important part of a continuous improvement strategy," notes Langemeier. "This maxim holds for technical performance, financial performance, and enterprise performance."

- Read more on p. 32 of the March 2013 issue of Farm Futures

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