If profits are low, it may be because assets are not creating enough gross revenues relative to total assets (low ATO). Expenses may not be managed well, and not enough net revenues are left out of gross revenues (low OPM), or both. If the culprit can be identified as either ATO or OPM, the next step is to look at the numerator and denominator of each of those to see if the problem can be discovered.
The farmer or adviser knows the farm’s performance differences are due to price, production, or asset utilization issues. There may be too many assets not generating enough revenue for the farm business. To decrease the denominator (farm assets), determine if they have unproductive or excess machinery, buildings that may not be used, non-producing breeding livestock, unproductive farmland or wooded land, or obsolete/inefficient assets. Also, enterprises that have assets associated with them, but are not creating “big enough” revenues, the farmer should consider reviewing each enterprise budget. To increase the numerator (gross revenues), increase productivity with improved feed conversion, fertility and nutrition programs, health protocols, etc. Also consider timeliness of operations, price and marketing, and price premiums and discounts.
The farmer or adviser knows that the farm’s difference was caused by efficiency issues. The farmer should seek out more efficient production practices, such as reducing feed waste, preventive maintenance, tillage systems, animal health protocols, etc. Consider negotiating or reducing input costs (seed, feed, etc.); seeking out quality of inputs and facilities; negotiating more favorable rental arrangements; improving labor (training, incentives, communications, procedures); consider outsourcing, partnerships, alliances. Better efficiency is often doing a lot of things 5% better versus fixing just one big problem.
By following the previously mentioned steps, the farmer or adviser can determine which price, production, asset utilization, and efficiency items would have the biggest impact of farm financial performance and prioritize their farm activities accordingly.