Much like an electrical system, for our business to function well we must "complete the loop." In the past two posts, we discussed one of the critical ways we complete the loop, through the feedback we get from key financial gauges. Last week we discussed Working Capital as a Percent of Gross Sales and Equity. Today I'll discuss the gauges of Net Profit per Acre and Return on Assets.
In our effort to continually work smarter rather than just harder, Net Profit per Acre becomes a critical gauge. When making farm business decisions, we want to keep in mind the impact those decisions have on the final profit we drive to our bottom line and our ability to grow profit per acre. As our operation grows we want to ensure that we are able to maintain economies of scale and increase efficiencies rather than reduce them.
Successful commodity producers are great at per unit efficiencies. That means we must not focus on becoming the low cost per acre producer but rather the low cost per bushel producer. Net Profit per Acre becomes the guide to help us understand if we are increasing our efficiency per acre as we grow. It also helps us understand at what size we are maximizing our efficiency. It can guide us toward pulling in needed expertise as the complexity of the business increases.
The fourth gauge is Return on Assets, where we divide our net income by our total assets. This measure helps us to understand if we are maximizing the return on our assets. This is the second most important gauge to track changes over time. It's helping us to answer the question, "Am I doing better every year with what I have?" Return on Assets trending gives us a barometer to understand if we are investing our money in the right place in the operation.
This gauge gives us perspective on how all the small and large decisions we are making in the farm are impacting the bottom line. It feeds our ability to make decisions and forces us to think about the consequence to every investment of capital.
So our tractors, combines, planters and dryers are all "systems" and all have gauges to ensure they are on track. Think about how your farm is a system too and what you need to monitor to make sure the system is running smoothly. Work to continually improve how you can use those gauges to guide your farm business decisions to achieve your goals.