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Follow the five per cent rule

Incremental changes can have a big impact on your operation

You may have heard the saying, “Take care of the small things and the big things take care of themselves.” This is a great piece of advice for life in general, and it also very much applies in the context of running a farm business, where even small changes can have a big impact on output — and on revenue.

The five per cent rule is a philosophy that advocates making small logistical or logical changes to the operation, rather than big, sweeping modifications, and it can often result in a healthier bottom line.

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Implementing this rule is easy, but it does require that farmers shift their perspective and adopt more of a management role, where they are working “on” the business rather than “in” the business.

Holistic management strategy

Ideally, the process begins at the budgeting and strategic planning stage, when you are developing the big picture plan for the year ahead and modeling various scenarios. Saving money is certainly the goal, but a common mistake can be to immediately, or only, look at cutting back costs or spending, without first considering the longer-term negative impact.

It’s the same way that buying cheaper fertilizer or reducing spraying may save you money now, but then reduce your profits at harvest. It’s important to take an agronomic approach, look at your plans holistically, and consider how one change can have an impact on another.

Trimming five per cent of your expenses may seem like a lot as a total sum. If that sum was $50,000, finding that much in savings on one or two big line items such as fuel or inputs will be challenging. But by spreading that amount across all expense lines, including smaller ones, it’s no longer such a daunting task. It can also be as simple as reframing the cost per acre to cost per bushel, considering input costs rather than just revenue, or incorporating new habits and ways of thinking.

By taking a close look at each expense line and considering various options or solutions, you’ll find that you can usually make better use of your resources to save or even make more money.

Spending money to save money

Sometimes, spending a little more can help save you more. For example, if your overall plan is to adopt new technology, think about all the areas where you could adopt it throughout your operation, and its impact across the board. It may make sense to spend more on advanced seed that is pest resistant, because it will save you more on other inputs. Before making any decisions, ask yourself: Is this technology something that can help to reduce expenses on smaller line items? If I invest in this, what is the cost and what is the potential savings or return? Is the return sufficient to justify the investment and whatever risk is involved?

When applying the five per cent rule, make sure your overall financial management strategy is cohesive. Break down steps so that the process is not overwhelming, and start with these practical tips:

  • Write it down: Put to paper your goals for each quarter. For example, in the first quarter, finalize your budget. In the second quarter, analyze your repairs and maintenance. Take a course on futures puts and calls for your marketing strategy in the third quarter. And in the fourth quarter, you may want to meet with your accountant on ways to improve things for next year.
  • Do the numbers: Ensure your internal accounting system is on an accrual basis. Compare your actual results to your budget quarterly.
  • Prioritize: Make a list of what tasks need to get done to achieve your goals each quarter and identify what’s really important, versus what just makes you busy.

Continued education

Sometimes, small changes can be more philosophical, but still have impact. Many farmers tend to do things a certain way simply because it’s the way they learned to do it from their parents or even grandparents. It’s important to continually challenge what you know rather than take for granted that it’s just “how it’s been done.”

Look at processes and ask yourself if it’s the most efficient or if there’s a better way of doing it. Apply new thinking to your processes, such as looking at your financial results on an accrual basis rather than a cash basis. This will help you get a more accurate view of your farm business’s profitability. Where cash income depends on the timing of inflows and outflows of cash, accrual accounting recognizes revenue when it is earned, regardless of when receipt of the cash from the sale occurs.

Continued education is another area where small changes can yield big results. Whether it’s a formal course on futures and options, or whether it’s workshops or simply networking with other farmers to gain new ideas or information, continued learning is critical to your farm’s success. With so many advances in the industry and global competition, applying what you learn could make a big difference to your bottom line. If you’re not keen on courses, hire a consultant or join with a few other farmers and consider sharing a team member who will focus on education and implement it for you.

As I mentioned in a previous article, peer groups are incredible resources and are becoming quite popular in the farming community. Utilize your network to learn from them, compare expenses or costs and identify areas where you can make improvements.

While it’s easy to hope for success, hope is not a plan. Even small changes can help ensure your business is sustainable for the long term.

Gwen Paddock, senior director, agriculture at RBC is a specialist in agribusiness. Since earning her B.Sc. with a major in agriculture economics she has been working with agriculture clients. A farmer at heart, Paddock was raised on a beef cow-calf farm outside Guelph, Ont., and participated in 4-H and Junior Farmers. To find out more visit www.rbcroyalbank.com/commercial/agriculture.

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