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The Impact of 5%

by | Jun 12, 2019

Each year as you work with customers you encourage them to set goals.  Undoubtedly, some of these goals revolve around financial management.  Within your credit analysis review, you are looking at the past financial performance of the individual farm or business operation.  In this process, you likely look at their individual trend performance and may also benchmark this against their peers.  Hopefully, the customer has also taken the time to evaluate their financial position and talks to you as their lender about the business goals they’ve set.  These may be things like, “Reduce fertilizer costs”, “Improve marketing”, “Improve yields”, “Improve profit margins”, etc. 

Have you ever considered with your customers the impact these relatively small changes actually have on the business?  I suggest challenging businesses to work to improve their margin management by 5%.  It may seem like a simple task, improving gross income and decreasing operating expenses by 5%.  But, this 5% improvement can have a significant impact on a business in any given year.  And then, think of the impact over the customer’s career!

Understanding the numbers

Let’s take a look at the numbers.  Using the 2018 Southwest Minnesota Farm Business Management Association data as an example, we can consider the impact of this small improvement.  Here is a chart outlining the information[1].

The impact of 5% improvement on key financial ratios.

As you can see, and probably would expect, these relatively small changes can dramatically improve the financial position of a farming operation.  This would hold true for any business operation.  Here we see this 5% improvement leads to increasing net income by over $80,000, improving term debt coverage to 2.3, decreasing operating expense ratio by 8%, and increasing earned net worth by 2%.  This type of improvement would be impressive and desirable for any business.

Is this achievable?

Are these improvement achievable?  I certainly think so.  On the revenue side, what can be done?  A small improvement in selling price, coupled with a small increase in yields will quickly improve revenues by 5%.  Ed Usset, Grain Marketing Specialist with the Center for Farm Financial Management and the University of Minnesota always challenges farmers to “find the dime” when marketing.  Take advantage of selling opportunities when they present themselves and utilize a pre- and post-harvesting marketing plan are a couple of starting points.  For any small business, can more “earns” or “turns” be achieved to increase revenues?  Are product or service prices adequate to cover all costs?  Can more sales be boosted in some fashion to increase overall revenues?  All these would assist with revenue improvements for a business.

On the expense side, what can be done?  Many businesses identify areas of improvement by looking at their performance, compared to their peers.  In farming, a FINBIN Benchmark report can be prepared for the operation to consider their enterprise costs versus the spectrum of their farming peers.  For a commercial business, RMA data can be used to achieve similar results.  When benchmarking the business, take a look at where improvements can be made on expense management.  Again, consider the impact of each dollar spent, is the business improving the success of the operation by what they are spending on inputs?  Typically expenses can be shaved a little bit without sacrificing production.  Again, this practice will reap benefits to the business.

Challenge your customers

As has been said before, the key to success is doing a lot of little things better.  So challenge the farm and commercial businesses you work with to join the 5% club to improve their margins and overall financial performance. 

[1] This chart is found on page 21 of the Southwestern Minnesota Farm Business Management Association 2018 Annual Report. 

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