Determining if your farm made money would be easier if you produced just one product.
With just one product, say canola or broiler chickens, the total of the sales for the year minus the expenses would be the profit.
However, most farmers have multiple enterprises — crops, livestock and sidelines — that all contribute revenue.
A farm with multiple enterprises still reports revenue and expenses, leaving net income. The question is how each enterprise contributed to the overall profit. The greater the number of enterprises on the farm, the more challenging this exercise becomes.
However, it is a valuable exercise to determine the contribution of each enterprise. It can help give a clearer understanding of the role each plays in the financial health of the business. That is particularly true if the farm is planning an expansion or is struggling with debt.
There are two aspects to consider when looking at the contribution of different enterprises to overall business performance:
- Financial, which is the exercise of taking the combined profit and loss of the farm and allocating revenue and expenses to each enterprise.
- Job satisfaction — do you enjoy what you do?
Finance is about black and white numbers, albeit with some gray areas when it comes to allocating certain revenue and expense values to specific enterprises.
Job satisfaction is more about how you feel about the work associated with an enterprise.
You can think of the two aspects as being in a continuum of priorities.
On one end of the continuum there are farmers who consider financial performance to be the dominant factor when deciding whether to keep or expand a specific enterprise. At this extreme, they will retain the enterprise even if they don’t enjoy the work associated with it.
On the other end of the continuum are farmers who look first to job satisfaction when determining whether to keep or expand a specific enterprise. Even if a specific enterprise is making money, if they don’t enjoy the work, they won’t keep it going. They’ll sell it off or let it wind down over time.
Neither priority is right or wrong. Most farmers fall somewhere in between.
When it comes to job satisfaction, I find that the discussion and decisions become more difficult when several people are involved in ownership and management.
People will have different opinions about what they enjoy, which can make it considerably more difficult to decide what to do with a particular enterprise.
I further find that the discussions and related decisions become more challenging when a particular enterprise is performing poorly financially.
There’s less financial stress when more money is around, and correspondingly, less urgency to the feeling that something needs to be done. It’s human nature.
However, the discussions become even more difficult when things tighten up financially and an enterprise starts losing money.
I meet farmers who have a couple of enterprises and who aren’t happy with their overall financial performance. They might have one enterprise that is doing well and another that is losing money, resulting in overall mediocre performance.
This isn’t necessarily a bad thing, especially if the farm family knows and understands the situation. The family might keep an underperforming enterprise because they enjoy the work associated with it.
However, it is poor management when the situation continues without an understanding of what’s going on financially. Some farm families compound the problem by investing in and expanding the enterprise that is losing money. This is not a recipe for long-term success.
How do you know when an enterprise is making or losing money?
There are management theories that should be applied, but the process starts with a set of good accrued income statements, preferably five years to establish solid trends. The next step is to create a spreadsheet and allocate the overall revenue and expenses to each enterprise.
Some items are easy to allocate because they are directly associated with a specific enterprise. Others are more indirect, so an allocation method must be established and applied. Annual updates are much easier once the original structure is in place.
If you have multiple enterprises in your business, it can be a valuable exercise to look at what each one contributes to your overall bottom line.
It can be a make or break exercise in some situations when profit margins are extremely thin, especially if there is substantial debt in the business.
Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or email@example.com.