What does efficiency of inputs mean to you? Most of us are familiar with the idea of adding inputs, like fertilizer, only to the point it can be utilized by plants. If we add too much, either the crop is harmed or the input is simply not utilized. We concentrate mostly on increasing yields. Increasing yields increases our net income, right?
Unfortunately, sometimes we spend more money to get that extra bushel per acre than what it returns. Such is the "Law of Diminishing Returns." In some cases, we actually reduce profit margin by increasing yields.
There is a ton of education and technology available to farmers regarding production practices. We know how to increase yields. What many lack is the ability to measure efficiency of inputs. Not only should we focus on finding the point of input efficiency, but we should also combine that notion with financial efficiency.
Consider this: sometimes the highest yield is not the most profitable. Unless we measure the financial component in conjunction with the operational component, we will never discover the point of financial efficiency.
There are many tools (software packages, GPS systems, etc.) on the market to help producers track inputs. The challenge is to find the tools that bring in the financial aspect. Cost per acre and cost per bushel produced should be part of our everyday discussions.
As an agricultural consultant, this has been my struggle for the past 15-plus years. Although most farmers know they need to spend more time on financial side of their business, many lack experience and expertise, and many do not see the benefit of hiring that experience and expertise. Furthermore, if they do see the benefit of hiring someone to help, the majority of financial advisors are geared toward income tax calculation or lending.
It would benefit our industry as a whole if we opened discussion and offered more education on understanding farm finances - from a farm management standpoint. There are several of us out there who are carrying that torch. In fact, the Farm Financial Standards Council was developed specifically to help agricultural managers understand, standardize, and interpret the financial measurement of inputs.
Ag Consultants are not a "dime a dozen," but we are out there. I urge you to familiarize yourself with the published financial and management accounting guidelines developed by the FFSC. Or, find an accountant or consultant who is familiar or willing to become familiar with them. You just might improve your bottom line by doing so.
Brenda Duckworth is a Certified Public Accountant with KCoe Isom (formerly Kennedy & Coe) LLC and has her Bachelor of Science in Agricultural Economics from Texas A&M University. She has specialized in management accounting for agricultural producers for over ten years.
Brought to you by Farm Financial Standards Council. The opinions of Brenda Duckworth are not necessarily those of Farm Futures or Penton Farm Progress.