blog banner half

Show me the profit - Using benchmarking to classify costs and identify profit drivers

One of the most critical farm business skills is being able to understand, measure and manage the drivers of profit. Whilst ‘gut feel’ is often an approach taken by growers, this can be made more accurate by applying some easy to use tools to fully understand the key factors driving farm profitability.

Analysing costs in key performance indicators - Table 1 provides a relatively simple analysis of farm profit margins and can help identify the key profit drivers. 

A recent study of farmers in the Wimmera - Mallee region of Victoria, which measured key production costs, concluded the most successful growers within that region consistently operated with a higher operating profit margin than the group average.

One finding from that review pointed to the impact of management capacity as a key variable. The report indicates that good business outcomes tend to result for those who manage costs relative to income.

Dedicating time to establish, implement and update an effective business management framework can help mitigate the challenges of a more complex and time-hungry farm operation and position the business for better financial and social outcomes.

For the comparison group of approximately 150 farmers in the Wimmera - Mallee region between the 2010 and 2015 financial years, Figure 1 shows the relationship of annual costs and income for the group average and the Top 20% profit group.

 Showmetheprofitgraph

Figure 1: Farm costs versus farm income (as $). Note: Group average farm income is represented by the blue line; farm income for top 20% growers is represented by the pink line, Group average cost is left hand column and cost for top 20% growers is right hand side column. (Source: Ag Profit)

The top 20% profit group offset their higher costs with stronger income so their profit margin is greater. All costs have increased with machinery showing the greatest increase.

Profit margin

Looking at the profit margin for a farm business provides an insightful measure of how efficient the business is in managing costs in relation to income.

The business profit margin measures how much of the income generated is retained as profit and can be expressed as a percentage of the total income.

Ag Profit uses the guidelines in Table 1 to provide an assessment of how different key cost areas are consuming profit and thus reducing available profit.

Table 1: Profit margin and profit driver guidelines. (Source: Ag Profit)

showmetheprofittable1

Note: These guidelines have been assessed by looking at data over a long period of time. The data may be influenced by outliner years (i.e. high production years on one end and droughts on the other), and may not be completely applicable in all regions or rainfall regimes.

The total amount expended on costs (as a ratio of the farm income) and the respective profit margins are shown in table 2 .

Farm Profit Drivers (Wimmera 2010-2015)

Table 2. Cost classifications as % of farm income.

showmetheprofittable2

Cost management relies on monitoring and managing key costs constantly and consistently. If a farm is being well managed but profits are not as high as expected, it may be important to closely analyse costs that insidiously creep up each year without drawing attention for review.

One finding from that review pointed to the impact of management capacity as a key variable. The report indicates that good business outcomes tend to result for those who manage costs relative to income.

Dedicating time to establish, implement and update an effective business management framework can help mitigate the challenges of a more complex and time-hungry farm operation and position the business for better financial and social outcomes.

More information

Matt Bryant,
Ag Profit,
This email address is being protected from spambots. You need JavaScript enabled to view it.

BREAK OUT BOX - CASE STUDY

Farming trends in the Wimmera and Mallee

Reviewing approximately 70 farm businesses in the Wimmera Mallee over the past 20 years, revealed the following business performance trends.

  • Profit has been maintained at similar levels.
  • Average farm debt has increased significantly however market value of equity (including capital gain of land value) has remained relatively consistent.
  • The average farm business in the Wimmera and Mallee has doubled turnover and costs over the last 15 years.
  • Average size of cropped area has increased by over 50 per cent and cropping intensity has increased by 15 per cent.
  • The value of machinery working the cropped land area has more than doubled.

Note: Each farm business had a minimum of 14 years data to be included in the sample

Source: AgProfit