I’m going to start by telling a story about my youngest son.
I dropped by the place he’s renting a couple of weeks ago. When I got out of the vehicle, I noticed three dimes on the driveway.
I picked them up, happy with my discovery. When I met him inside, I mentioned my find.
He answered by saying that yes, he had seen them there. I thought that was an interesting response because he hadn’t done anything about them.
So I asked him how much money it would take to get him to bend over and pick it up. He answered that a quarter would be enough.
He’s smart enough to know the significance of what he had just said, with three dimes being worth more than a quarter.
I wondered how many times he’d walked past the dimes and not stopped. Obviously, there wasn’t enough incentive to get him to do anything about the dimes.
Improving financial efficiency on a farm is more about the three dimes than it is the quarter, meaning that it’s the little things that count. Sure, adjustments can be made that result in bigger improvements in financial efficiency, kind of like the quarter.
If you can find them — the “quar-ters,” that is — then great.
But it is more commonly the little things that add up. Small changes are made that improve financial efficiency and therefore increase net profit. It is even better when small adjustments can be replicated year over year, resulting in sustained increases in net profit.
Three dimes are obviously enough to get me to stop and pick them up. I’d bend over and pick up a nickel. I think finding any amount of money is a hoot.
Looking at ways to improve financial efficiency on a farm is, in a way, like finding money. You’re already doing the work.
Increasing financial efficiency is rarely about working harder. It’s looking to find ways to do things differently — more efficiently — to increase revenue, decrease ex-penses or combinations of each.
There’s a caution to keep in mind. I’ve been discussing the importance of looking for the little things to improve financial efficiency and net profit that perhaps collectively generate large results.
On the other hand, the “little things” can work against you — some slippage here, some increase in expenses there and the result is poorer financial efficiency and lower net profit.
They too can add up, creating a significant and negative outcome on financial performance. They too can re-occur year over year and result in sustained decreases in net profit.
This can be particularly troublesome when farmers find themselves working harder but increasingly less financially efficient. The worst case is when they don’t realize what’s happening.
The key is to do the analysis so that you know where things are at when it comes to financial performance.
I’m often asked how to improve financial efficiency and net income on a farm. My first advice is obvious — you need good financial information that includes accrued income statements.
Secondly, you should organize or group your expenses into categories. The grouping is important because it breaks your income statement down into measurable chunks. The axiom that says you can’t manage what you can’t measure applies here.
You take each group of expenses and analyze how efficient you are at using them.
There are several financial efficiency ratios that you can use to help with the grouping and analysis. If you’re not familiar with them, do some research or find someone to help.
What incentives would you need to look at when making changes to increase efficiency on your farm?
How much money would have to be lying on your “driveway” before you’d stop and pick it up?
Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or firstname.lastname@example.org.