5 Tips for Reducing Risk and Increasing Profits.
There are so many factors that go into running a profitable farming operation. In an industry that faces several influencing factors such as new technology, government regulations, and climate change, the potential impact on your operation’s bottom line is high.
It’s helpful to take the time every now and then to reassess and determine how to increase your farm income while reducing overall operational risks. As 2019 comes to a close, consider taking a look toward the new year with a fresh, more profitable business plan.
We’ve put together a list of the top five actions that you can take to help you reach your farm business goals in 2020.
1. Do Your Market Research
Maybe you’ve been growing the same crop for years, or you’re thinking about adding in some different crops to the mix. Perhaps you’ve noticed that neighboring farmers are growing a new product, or you read a news story about the growing popularity of a specific commodity. Whatever the case, it’s always a good idea to do some market research before deciding what to grow next season.
If you’re not sure where to get started, begin by asking yourself questions and researching the answers. For example,
- Is certain equipment required for planting or harvesting this particular crop;
- How will that affect your profit margin;
- How much of the crop will you need to grow to break even;
- How much more to make a profit; and
- What are other people selling the same crop for?
This phase of planning is also ideal for seeking out new avenues for revenue. Are there places you can sell that you haven’t sold before? Is there a product you can make with what you grow that would increase your profits with just a little more effort? Talk to your local network of suppliers, fellow farmers, and customers; get real number estimates from catalogs; look for statistics on the internet—collect as much information as you can so you can make informed, intelligent decisions about the future of your farming operation.
2. Conduct a Key Performance Indicator (KPI) Audit
Once you’ve identified the opportunities for growth, you’ll want to take a look at how you’ve been performing. You’ll need to determine if your business is currently profitable and what your assets and liabilities are. This can be a complicated process and you might need to have a sit down with your accountant, but here are examples of key performance indicators that you should be assessing:
- Operating profit margin
- Asset turnover ratio
- Return on assets
- Return on equity
- Sustainable growth rate
3. Create (or Update) A Business Plan
Creating a detailed business plan is key to the success of your farming and ranching endeavors. A business plan can help you identify the strongest and weakest parts of your operation, giving you the chance to maximize profits and minimize risk. It’s important to understand where you want to go and what steps you’ll need to take to get there. Additionally, if you ever need to apply for a loan, your lender will likely want to see a business plan. Your business plan should be realistic, simple, specific, and complete, consisting of the following elements:
- Mission statement/executive summary
- Objectives and goals
- Company history/background
- Ownership/management structure summary
- Financial analysis
- Sales and marketing plan
4. Plan for Crop Selection and Diversification
After doing your market research, looking at KPIs and past performance, and putting together a business plan, you should have a pretty solid idea of what crops you want to grow and how much you want to diversify. If you’re branching out and growing a crop you haven’t grown before, make sure you understand the climate, care, and harvesting requirements. As the old saying goes, “Don’t put all your eggs in one basket.” With so many factors out of your control, it’s important to grow a variety of crops. Plus, there are many other advantages of diversification besides risk management that can benefit your overall operation.
5. Monitor Performance and Document Everything
Finally, once you’re ready to put your plan in motion, it’s essential that you keep track of as many factors as you possibly can. Take note of what you buy, for what price, and in what quantity. Write down the steps that you take and the results of those actions so that you can review them later and identify which contributed to your success and which may have detracted from it. Measure what unexpected costs come up and what gains you made. This information will be vital for comparison over the coming years and will help you have a better understanding of your operations, ultimately resulting in higher farm profitability.
Securing the Capital You Need
As you prepare your business for the coming year, take advantage of our low rates and learn how we can create a custom and flexible loan for your needs. We understand what you go through to make ends meet and build a legacy to pass on to future generations. As a non-bank lender, we have the flexibility to offer customized tier-priced, borrower-specific solutions based on your personal financial goals and your operation’s unique needs. Speak with one of our lending experts at firstname.lastname@example.org or 844.516.8176 to learn more about our spectrum of loan options.