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Extension > Agricultural Business Management News > Managing Farm Profit Margins - Join "The 5% Club"

Wednesday, May 31, 2017

Managing Farm Profit Margins - Join "The 5% Club"

By Don Nitchie, Extension Educator

A single 5% improvement may be easy to overlook, but you should not take this small improvement for granted. Increasing revenue 5% while also decreasing costs 5% can have a big impact on your bottom line.

The table below compares actual outcomes for the average Southwest Minnesota Farm Business Management Association farm in 2016, to the projected 2017 results for the average association farm if it joins “The 5% Club”. Our analysis of “The 5% Club” compares farm performance if the average association farm improves gross revenues by 5% and lowers operating costs by 5% over 2016 for 2017.

It is impressive how just these small changes result in Net Farm Income of an average farm more than doubling to $170,000 and Term Debt Repayment Capacity improves from 1.4 in 2016 to 2.4 in 2017. In 2016, the same 5% changes would have almost tripled Net Farm Income for the average farm. Therefore, small changes have a BIG impact on your bottom line. Attention to the correct details can make a real difference.

Projected Impact of Improved Margin Management; 5% Increase in Revenue & 5% decrease in Costs on the average SWMFBMA Farm

Is it possible to achieve a 5% improvement in gross revenue? Probably. Do a little better than average on selling prices, yields or a little of both. Be willing to sell portions of your production when profitable pricing opportunities are available. Do not hold out for the highest price and avoid selling all your production in a few large portions. Make the basic math work in your favor. Try to sell increasing quantities if a market is moving higher and a greater quantity first as a market moves lower. Any price should always be evaluated relative to YOUR projected cost of production instead of on the latest price forecast.

Is it possible to lower costs by 5%? Probably. Being more effective with expenditures on inputs is one of the real keys. Getting the most revenue possible for each dollar spent on herbicides, pesticides, seed, fertilizer, and feed is very important. You do not necessarily want to try to cut expenses 5% across the board. Be strategic and critically examine which of those expenditures may not be adding to production efficiency at current expenditure levels.

Sharpen your production management and marketing skills. Be a student of current production technology research and methods. Discard products and methods that seem to only have great advertising and cost money with little proof of effectiveness. Know where your costs are relative to competitors using your benchmarking reports. Zero in on costs that seem out of line, and seriously examine the products or practices behind those costs. Also, celebrate the things you have done well.

Successful managers do more little things just a little better rather than doing one thing really well. It pays off when profits are scarce! Strive to join “The 5% Club” in 2017.

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