With the harvest finally in the bin, farmers across the country are evaluating their farm management practices and they are making management decisions for the future. Business management skills are more important than ever as farmers face huge challenges, including unpredictable weather, volatile markets, labour shortages, succession, and much more.
In this environment, a great question is: Which business management practices can help farms survive and then go on to actually thrive?
That was the question asked by the Dollars and Sense Study, which has analyzed financial data and business management practices from farmers across Canada.
This was groundbreaking research, says Heather Watson, executive director of Farm Management Canada which launched the study with the assistance of consulting firm Ipsos Agriculture and Animal Health (now Kynetec). Farm Management Canada is a national organization dedicated to providing Canada’s farmers with the learning resources to make sound management decisions.
“It was the first study to establish a measurable link between business practices and financial success that is nationally representative and cross-commodity,” says Watson. Financial Success Scores were calculated for each farm and then aggregated, allowing the researchers to compare the top 25 per cent financial performing segment with the bottom 25 per cent.
The magnitude of the differences in the financial performance between the top 25 per cent and the bottom 25 per cent was surprising, notes Guelph farm business consultant Rob Hannam, who served as an advisor to the project. Individual Farm Financial Success was based on the farm’s return on assets (ROA), gross margin ratio (GMR) and asset turnover ratio (ATR).
Asset turnover ratio is gross farm sales divided by total assets. It measures how efficiently the assets of the business are being used. Gross margin ratio is gross farm sales minus cost of goods and services then divided by gross farm sales and is an indication of how profitable the business is. Return on assets is gross farm sales minus cost of goods and services then divided by total assets and is an indicator of the return being earned on the farm’s assets.
The top 25 per cent (or quartile) had an asset turnover of 20 per cent versus just under 10 per cent for the bottom quartile, a difference of 100 per cent. Gross margin ratio was 50 per cent for the top quartile compared with just under 20 per cent for the bottom quartile for a difference of 155 per cent. And return on assets was 10 per cent for the top 25 per cent but only 1.6 per cent for the bottom 25 per cent for a difference of more than six times. To put a dollar value on these differences, if the return on assets for the top 25 per cent was $100,000, for example, it would only be $16,000 for the bottom 25 per cent, explains Watson.
The quality and quantity of the data made it possible to discern clear patterns in the behaviour of the most successful farmers, says Hannam. The study showed that “the success of any farm enterprise, regardless of size, geography, or commodity, is directly related to the farm business management skills and practices of the farm manager,” says Watson.
In order of importance, the seven habits of Canada’s most successful farmers are:
1. Lifelong learning
The most important practice is having a lifelong commitment to learning and skills development. These farmers made a commitment to attending courses, field days, conferences, farm shows, and webinars, says Hannam. “It’s about keeping your mind fresh and up-to-date, staying current with new ideas and new ways of doing things, and having an open and outward-looking mindset.”
Watson agrees and recommends doing an assessment of how your skills and those of your team meet the current and future needs of the farm. With that information, you can create a skills development plan as part of your business plan.
2. Business decisions were made using accurate financial data
On these farms, financial records used for decision-making are updated on a daily or weekly basis using software, says Hannam. Data is accessible and can be easily manipulated to look at various financial scenarios to determine the impact on the business. “The days of the shoebox are gone,” he says.
3. Seek the help of business advisors and consultants
“It’s hard to be an expert in everything,” says Hannam. The top-performing farms sought out the help of agronomists, nutritionists, lawyers, accountants, etc.
“There’s a saying,” adds Watson. “Do your best and hire the rest.”
One particular area where farmers may overlook the importance of hiring a professional is with farm transition planning, continues Watson. Psychologists or other consultants with communications expertise can facilitate the conversations that need to happen between the generations for a smoother transition.
4. Have a written business plan, follow it, and review it annually
Farmers will often say they have a plan, and point to their heads. Writing the plan down facilitates important conversations about the future of the farm and everyone’s role within it, providing a strong sense of direction for the farm, says Watson. “It’s your road map to success.”
5. Know and monitor your cost of production and what it means for profit
An accurate and up-to-date cost of production is essential, says Hannam. “If you did it (calculated your cost of production) three years ago, that’s not good enough,” he says.
Watson emphasizes that cost of production should be calculated for each farm product or business line. “While you may know if you’re making money, do you know what’s making you money and what’s not?”
6. Assess risk and have a plan to manage and mitigate risk
Risk management means identifying risks that are and are not under your control, and establishing measures that minimize possible threats. “It’s more than insurance and government support programs,” says Watson. How prepared are you? Are you taking a comprehensive look at risk (people, finance, markets, production, policy, strategy) and the connections between them? What measures could you put in place to manage risk?
7. Use a budget and financial plan to monitor financial position and options
“Have you prepared a budget for your farm, and the distinct business entities within it? Do you review your budget and financial plan when making business decisions?” queries Watson.
When it comes to following the seven business management practices used by the most successful farmers, the study showed there is room for improvement on most farms. Just under 60 percent of the farmers surveyed said they had accurate financial data, about half of farmers said they were committed to lifelong learning, about half had up-to-date cost of production figures, but only a third of farmers were using farm advisors, had a risk management plan or followed a financial plan/budget. Having a written business plan was the practice with the lowest rate of adoption. Only a little more than a quarter of the farmers said they had a such a plan.
Rather than trying to tackle all seven habits, Hannam recommends doing a self-assessment and then focusing on a few areas where improvement is most needed, adding, “Remember you are looking for progress, not perfection.”
- Farm Management Canada’s Dollars and Sense study, which identifies the 7 Habits of Successful Farmers.
- Many different kinds of educational resources are available through Farm Management Canada including a national conference, leadership program, tools, articles, videos, publications, and interactive online presentations (Agriwebinars).
- To assist farmers in starting a farm, growing the farm, transitioning ownership of the farm and creating a business plan, Farm Management Canada hosts the National Farm Business Management Resource Centre.
- Farm Credit Canada offers financial management resources including local events across the country.