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Article:

Six Tips for Improving Farm Profitability

11 August 2020

As leading providers of accounting advisory services, the team at BDO Rotorua knows that the primary focus for any business is profitability. In the farming industry, this is uniquely measured, as profitability is dependent on many factors (e.g., farm size, availability of resources, climate etc.) that other businesses do not contend with.

So, how does a farmer improve their profitability? We have six key tips to incorporate into your best practice procedure. These tips are aimed to help you understand your own business so you can extract the best possible profit from your available resources. If a business can successfully implement the below, to a large extent, the profitability tends to take care of itself.

 

Tip #1: Have a Long-term strategy with tangible goal posts 

This first step often begins by asking yourself the question, “why are we doing this?”. Understanding your business’ purpose will help determine your growth objective, and your overall strategy to achieve that purpose should encompass all aspects of your life to help you establish a work-life balance.

Goals, on the other hand, need to be tangible and measurable, both to give you a sense of how well your business is progressing (which enhances motivation), and to establish a realistic timeline. Of course, some long-term goals can appear quite detailed and difficult to obtain, so it’s key to break larger goals into smaller ones. These goals accumulate over time, allowing you to reach your long-term goals without battling against a seemingly insurmountable mountain.

You should continually check how well your farm is doing against the measures you’ve set to ensure you’re on track, adjusting as you need to. That tension of accountability—regardless of the size of your farm—leads to a greater focus on detail and outcomes.

 

Tip #2: Understand your resources & capabilities 

Next, it is critical to understand the extent of the resources you have at your disposal, both concrete and intangible. In the farming industry, a tangible resource could be the genetic potential of your stock and the potential pasture yield for a farm of your size, while an intangible resource could be employee motivation.

Your resources will include your finances, plant and machinery, land, herds, human labour, and any other assets you have. Understanding what you have under your control will highlight where your Resource Gaps are, enabling you to make plans to fill those gaps and bolster the strength of your business.

We have found the secret to success is the careful utilisation of all available resources together, extracting the most efficient and effective use of what you have while making plans to expand. This, in turn, makes it far easier to set and reach your long-term goals.

The SWOT Analysis 

At BDO, we recommend that our clients do a SWOT analysis of their resources. SWOT analyses act as an internal assessment, determining a businesses tangible and abstract resources and mapping them against obstacles to business growth. Using this knowledge, farm owners can put strategies in place for managing internal issues and competing against external ones.

 

Tip #3: Create clarity and accountability within business roles

Whether you run a family business or a multi-national corporation, having clarity in the role each person plays in the business is essential, even in small farming businesses. Sharing the workload enables each person to focus on their strengths without distraction, creating space for profit to flow in. This requires a large amount of trust.

Creating accountability in each role drives the team toward the business’ goals because they understand their part in the business, which is why a holistic understanding is crucial on all company levels. For example, if your skillset is in animal husbandry and the next person’s skills lie in finance, worrying about the other’s tasks is not productive. The exception to this would be someone overseeing the operation, such as a farm adviser or an accountant, that helps the team to work towards the same goals.

 

Tip #4: Set budgets & monitor your KPIs 

Improving your profitability requires a constant, thorough understanding of how your farm is doing, but surprisingly, this tip is the one we see followed least. Recently, there has been more focus on internal measurement thanks to banks expecting a reduction in debt, but there is more that farm owners can do to progress in this area.

At BDO, our view is that budgets are best prepared as a team and created independent of banks’ or accountants’ wants. The more internal participation for the budget setting process, the more ‘buy in’ from the team. Once a budget is set, the challenge is in monitoring it against real-time results and industry benchmarks. There are many software programs available to you that have been specifically developed for agribusiness, and we at BDO can give you access to them as well as helping with implementation.

Again, ways to implement this measurement in-house should be a team discussion. Those in your team will be unique, but in our experience, we see the farm owner, farm managers, and advisers (business consultant, bank, accountant, or farm adviser) participating in these meetings.

 

Tip #5: Build a team you can trust

In each of our tips, your team is the core element when it comes to increasing profitability. The ‘Jack of All Trades’ stereotype is steadily being replaced by an emphasis on experts, and more and more businesses are choosing to include focused expertise in their teams to aid them in the pursuit of their goals.

Having a trusted team that you can bounce ideas off, and one that won’t hesitate to challenge you should it be necessary, is invaluable in the business world. This could be a formal team that takes the shape of an Advisory Panel or Board, or it may be a more informal version with members from your own team.

The key to success lies in knowing when you don’t know something and then actively seeking out someone who does. Being open to hearing other’s viewpoints on your business can be a challenge, but it is a worthwhile one. These individuals can offer insights born from their years of experience in their respective fields, generally garnered from advising many other similar businesses. Their competency is a resource just like the others in your business and must be utilised to grow.

 

Tip #6: Keep it simple

Our sixth and final tip? Don’t overcomplicate things. Our years of experience in various industries has shown that, no matter the industry, getting too bogged down in the details can kill profitability.

Focus on what you can control, such as your own processes and labour force (you can use the SWOT analysis to map these elements out). Build resilience in your business and in yourselves, giving you the space to adapt to things you can’t control. Often, too much time is focused on the things we can’t control, like constant conversation around the recent drought, schedule prices, or GDT pricing and exchange rates.

Awareness of external factors does help prepare your business for change, but your efforts and focus need to remain with your farm. This is what benefits your team. In fact, open team discussions can help to build clarity around any troubles you may be facing, helping to bring focus to the steps forward rather than spiralling into negativity or anxiety.

Most importantly, keep your goals achievable. Don’t make them hard enough to falter on day one, or too easy to present a challenge. A goal should be hard enough to drive profitability, but not so hard that is does the opposite.

Reach out to a BDO advisory partner to improve your farm’s profitability.

A last informal tip from us is to have fun. We believe that incorporating the above steps will help you enjoy what you do, and if you need help to integrate them fully, BDO is always here to help.

From the farming industry to the fishing industry, the BDO team has knowledge in all integral Kiwi verticals. If you’re in need of external advice from the world’s best business development organisation, look no further than BDO. Get in contact today.