Return on investment for farms about more than numbers

Everyone wants the best possible return on their investments.

To achieve that, we first need to determine what the actual investment is that we want a return on.

Next, we need to define the return we want and determine how we’re going to measure it.

For a business, this is straight forward. Take the profit for the year and divide it by the investment — typically capital assets such as land, buildings, and equipment. There are other forms of investment such as time, energy and ideas.

Here is an example: An athlete aspires to be an Olympic gold medal winner. The medal is the return. The investment is a combination of their time, energy and the financial investment made. It’s not so easy to measure.

There’s another important consideration to factor into the discussion and that’s the risk associated in making the investment.

Risks exist in a variety of forms. Some can be managed and others, not so much.

Generally there is a trade-off between risk and return, the greater the risk, the greater the expected return.

Business owners will worry that profit generated won’t be enough to compensate them for the investment they’ve made.

The people who work at a business do make an investment in terms of their time and energy but they receive a return for that investment through their compensation (salaries, benefits and perks).

So what about our athlete? What is an acceptable return?

What if he invests all his time, energy, and the money that’s required for training but doesn’t win a medal?

He did qualify, attend, and compete at the Olympics. He did receive a return on the collective investment he made, but measuring that return is not as straight forward as how business owners measure their return. The point is that, for a lot of people, money is not the only return to be considered.

Farms are a combination of the athlete and a business. There’s a financial investment made and the desire to generate an acceptable margin of profit. There’s also the investment of time and energy.

Farm families want to get a good financial return on their investment, but there’s more to the discussion and it’s captured in the passion they bring to the business.

Without question, the financial return on investment needs to be analyzed and that information used in management and investment decision-making processes. But what if we were to drill down in the discussion about return on investment and try to put some parameters around time, energy, and passion?

Overall return on investment is a function of the collective return on investment made in operations (production), human resources (labour) and marketing. There is a management truism that says you can’t manage what you can’t measure. The measure we’re talking about here is return on investment. When it comes to management, we really need to understand what it is that we’re managing toward.

Write down your understanding of what you’re managing toward because that will capture the financial return and the return on time and energy.

The list will help define what is excellence in financing, operations, human resources and marketing for that particular farm.

This will help in understanding what investment should be made in those areas and the relative return on investment.

Which of the bullet points would you include in a definition of management excellence? The answers will help to define what it is you are managing toward and then from that understanding, help you to analyze your return on investment.

Operational excellence

  • maximum yield
  • long-term average yield
  • timeliness of getting the work done
  • efficiency in getting the work done
  • cleanliness and tidiness

Marketing excellence

  • top price
  • high average price for the year
  • cash flow alignment
  • risk management
  • information sources and currency in the market
  • farm business brand

Human resource excellence

  • productivity
  • least cost
  • recruitment
  • retention
  • safety
  • internal processes and administration
  • organizational structure and governance

Return on investment for farms is more than numbers. Sure, it’s the numbers that pay the bills, but it’s the other returns that provide farm families with a sense of satisfaction. Agreeing on what defines management excellence can form a key part of their understanding of what it is they are working toward.

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