Management Drives Farm Profits

An Ipsos study has identified the top seven habits of successful farmers. Do you have them?

Results of a new national Ipsos study clearly show that management matters when it comes to farm business success. The report also identifies seven key habits that have the biggest impact on farm profitability.

The survey included 604 farms of all types and sizes and farmers of all ages across Canada in the grains and oilseeds, beef, hogs, poultry and eggs, dairy, and horticulture sectors; 183 respondents were grain growers.

The work was commissioned by the Guelph-based Agri-Food Management Institute (AMI) and Farm Management Canada for the Ontario Ministry of Agriculture, Food and Rural Affairs.

According to study results, leading farm businesses in the top quartile financially out-perform those in the bottom quartile by a wide margin: 525 per cent increase in Return on Assets (ROA), 155 per cent increase in Gross Margin Ratio, and 100 per cent increases in Return on Equity (ROE) and Asset Turnover.

Specific to grain and oilseed growers nationwide, the top quartile shows a 10.8 per cent ROA compared to 1.4 per cent in the bottom quartile; 47.6 per cent Gross Margin Ratio compared to 21.6 per cent; 36.4 per cent ROE compared to 8.4 per cent; and 28.6 per cent Asset Turnover compared to 7.2 per cent.

“The research clearly identified linkages between specific business management practices and financial outcomes. Overall, management matters and we’ve identified the seven activities that will make you more money in your farm business,” says AMI executive director Alison Robertson.

The seven activities

By far the most significant driver of farm financial success is continuous learning. Farms in the bottom quartile are three times more likely to not seek out new information, training or learning opportunities.

No. 2 is keeping finances current and using software with the latest updates so that key farm decisions are made based on an accurate financial picture of the business.

The study found that farms in the bottom quartile are three times more likely to have financial records that are months behind and are not being used on a regular basis for decision-making. They’re also almost three times more likely not to monitor their cost of production.

Rounding out the top three is the benefit of using professional advisors for outside perspectives. Results show that farms in the top quartile are 30 per cent more likely to work regularly with a trusted farm business adviser or team of advisers.

The next four most impactful activities include having a formal business plan to help meet long term goals, monitoring cost of production, assessing and managing risk, and having a financial plan with budget objectives in place.

The scope of these activities may seem like a daunting task, and Robertson says that jumping into all seven at once could prove to be too overwhelming, recommending instead farmers move ahead with a more moderate approach.

“Consider working on one or two items off the list during the less busy times of the seasonal cycle, for example. Even doing one activity can make a difference,” she says. “Change doesn’t need to be a big and overwhelming task.”

The report also identified other important management habits, such as human resource management, communication, risk management, and transition planning, but Robertson says the top seven were clearly shown to have the most significant impacts on a farm business.

Overall, 73 per cent of grain farmers surveyed across Canada felt the financial health of their farm was a little or much better now compared to five years ago.

Specific to grain and oilseed farms across Canada, the results also showed:

74 per cent of respondents have the ability to read and use financial statements. 62 per cent make use of financial risk management planning. 59 per cent use an accounting system to assist in business decision-making. 55 per cent use cost of production for benchmarking and decision making. 50 per cent feel they have the propensity to learn and improve. 45 per cent of respondents feel they have a clear vision and goals for the future. 37 per cent have a financial plan with budget objectives. 31 per cent use farm business advisers. 28 per cent have a formal succession or transition plan. 24 per cent have a formal business plan. 18 per cent have a formal human resources plan in place.