How can small changes have a big impact on your farm’s bottom line?

What changes can you make to boost your bottom line?

No two farms are the same. Understanding and monitoring the specific variances on your farm can help you adjust course to boost your bottom line. These steps can help you get started:

Follow the five percent rule

The five percent rule — introduced by the late Danny Kleinfelter, a respected instructor from The Executive Program for Agricultural Producers (TEPAP) — shows just how impactful small changes can be when applied across multiple parts of your farm. It involves improving many aspects of your operation by only five percent, instead of aiming to improve only a few aspects by 50 percent or 100 percent.

Increasing your yields and prices by five percent while decreasing your expenses by five percent results in 132 percent more profit. Following the five percent rule can make a massive difference on your bottom line and helps keep your goals grounded and attainable.

Imagine two farmers, where the first farmer has a yield of 82 bushels per acre and the second farmer has a yield of 78 bushels per acre. While this difference may seem small, this is a five percent difference in yield — and at $8 per bushel, one farmer is gaining an additional $32 per acre in revenue compared to the other farmer.

This is a significant difference considering the average profit per farm is less than $100 per acre, but these differences are often brushed off as no big deal. Many factors may have caused the difference in yield. However, if any of these factors were in the control of the farmer, then the farmer with 78 bushels per acre should consider what changes they may need to make to gain that extra four bushels per acre.

Collect accurate data

Many farming decisions are still made on instinct — and there’s nothing wrong with intuition. However, most farms already have the data to make better-informed decisions. The challenge is taking the time to analyze it and put it to work. The first step is to ensure that your data collection tools are properly calibrated. For example, your combine may have a monitor to track the yield of grain from your fields. However, this monitor needs to be calibrated on a regular basis to ensure it accurately measures this information.

The next step is to download the information to your computer or upload it to the cloud. Scrub the data to make sure it is accurate and then export it into data reports to monitor your yields. While data collection requires time and training, it provides significant value to your operation by enabling you to understand which areas are performing well and which may need improvement.

Effective farm management

Most farmers would agree that an effective manager should monitor the production side of the business. This goes beyond paying attention to production costs — and should include an understanding of what types of crops you grow and implementing precision seeding and precision fertilization using data from soil tests. 

However, careful management is also necessary to boost the profitability of your farm. An effective manager should pay close attention to the financial side of your business and be actively involved in essential activities such as debt structuring and cashflow management.

Invest in field mapping

Investing in field mapping can help you gain a more comprehensive understanding of your fields and identify areas where you can make changes to receive more profit from your yields. Field mapping can help you identify poor-performing zones — like saline patches — that drag down your yields year after year. Once you identify these areas, you can make simple changes such as switching to hay or even retiring these zones from active cropping. In many cases, this can result in better overall profits. Using field-level data enables you to turn losses into wins, sustainably and with less stress.

It is important to note that you will likely need about three to five years of data before you can make an informed decision. Additionally, some regions such as Southern Alberta have experienced over five years of drought. Therefore, you may need 10 to 15 years of data to support your analysis and decisions in that region. Collaborating with an agronomist is highly recommended, as they can help ensure you gain the right data from your fields to make informed decisions.

Prepare accrual financials

Accrual accounting enables you to gain a clearer perspective of the revenue and expenses on your farm. The farming industry has historically been allowed to file income taxes on a cash basis of accounting. This method recognizes revenue when grain is sold instead of when it is produced. It also recognizes expenses when they are paid for instead of when the expense was actually incurred. This can make it difficult to accurately track your profits from one year to the next, since farmers quite often do each of these tasks in the same year:

1. Sell some or all of last year’s crop
2. Sell some or all of this year’s crop
3. Pay for some or all of last year’s expenses
4. Pay for some of all of this year’s expenses
5. Pay for some of all of next year’s expenses

Accrual accounting enables you to more closely monitor the performance of your farm. It shows you the value of the crop you grew in the current year, and all the expenses incurred in that same year to grow it — whether you paid them last year, this year, or the next year.

While you may need to hire an accountant to perform accrual accounting, it provides significant value to your farm. It enables you to properly understand if you made a profit or incurred a loss, and pinpoint opportunities to improve your profitability.