Drivers of profitability in farming systems - 'Production to Profit'

Author: | Date: 05 Mar 2013


Profit drivers (yield, price expenditure, cash flow)

Business resilience, diversity and reliability

Return on investment and Return on Capital

Key Take Home Messages

  • Have a deep understanding of the key profit drivers within your business
  • Strive for efficiencies in all aspects of the business
  • Surround your business with highly skilled and trusted advisors
  • Create a positive culture within your business
  • Limit profit erosion from financing costs, off farm investments and after tax expenditure


All farming businesses are unique. There is no one single model that you can take and apply to any farm and be guaranteed it will work as well for Joe as it did for Jim. This is because farming is essentially about people, we are all different and so too are the dynamics of each business.

There are however, common traits and processes that successful/profitable businesses apply intuitively and almost religiously. This paper aims to highlight and reinforce these.

Leadership and management

It seems that one of the most common traits of a profitable farming business is having a strong and respected business leader or leaders.

Over each 12 month period farm business managers make decisions on a daily basis that affect the productivity and profitability of the business. Many of these decisions are made based on gut-feel and experience after key business members are consulted.

Profitable businesses tend to make more good decisions than bad ones. This does not mean these managers are always right, it simply means they do not allow distractions to cloud their judgment but instead make considered and informed decisions they feel are best for the business at the time.

  • Avoiding a bad major decision is often more important to long term business strength than making several good ones.

Successful business managers are not always calm, however they do have a natural ability to lead, prioritize, teach and implement. They are responsible for their decisions and rarely if ever lay blame. Successful farm business managers have a strong grasp (sometimes unknowingly) of;

  • Business vision and culture. They possess a sense of purpose and belief in what they are doing, they listen well and are open to information
  • The key drivers of profit, being Yield, Price, Variable and Overhead costs and cash flow management
  • Risk management – law of diminishing returns
  • Profit focused more than production focused

Drivers of Profitability

There are many highly productive farm businesses, however there are less that achieve consistently high profits. Two of the main drivers of profitability are:

  • Reliability and diversity of income, and
  • Debt levels relative to income (debt servicing)

During good seasons flaws in farm business models (e.g. unreliable income or high debt levels) are often masked, however during poor seasons these flaws can be exposed.

It is common for profitable businesses to protect their downside risk in a variety of ways, such as;

  • Diversified income (e.g. contracting, livestock, off farm)
  • Leasing, purchasing or owning reliable farming land
  • Focus on return on investment
  • Maintaining low relative debt levels and cost structures

Businesses that entered the poor seasons of 06, 07, 08 with low relative debt levels and sound business models were able to emerge in a similar position (often with the feeling of having been “treading water”). In contrast businesses with unreliable income or high debt levels and/or cost structures eroded equity during this period.

Graph 1 below is an example business model that maintained equity through the poor years of 06, 07, 08 and as a result was able to generate significant profits over recent good seasons.    

Graph 1: Example business A – equity over time

Graph 1: Example business A – equity over time

Equally important as managing income and debt levels in driving profits, is the ability of managers to decide when to “rein in” or “ramp up” expenditure and identify opportunities.

An in depth understanding of the business financial position, expenditure and cash flow is essential. Along with this managers will also possess a sound understanding of production systems of each enterprise.

Almost always profitable businesses are underpinned by a strong work ethic, understanding of time management, prioritization and timeliness of key operations.

Challenges in maintaining profitability

At some point most businesses inevitably take on an uncomfortable level of debt, whether this be through succession, paying out partners or siblings, expansion or a run of poor seasons.

The time in which it takes a business to recover equity when faced with this situation takes some planning, resolve and a willingness to think outside the square. Meaning that that the way things used to be done may not necessarily generate enough income to recover the new business position.  

Whether or not your business is faced with this situation, the following questions should be asked to assist with improving/maintaining profit;

  • Can the current enterprise mix be adjusted to drive more profit and is it sustainable?
  • Is there an opportunity to diversify income through livestock, contracting, off farm employment or more efficient use of labor?
  • Can expenses or cost structures be adjusted without compromising profit?
  • Is there technology available that will immediately improve profitability and/or provide efficiency gains?
  • Is after tax expenditure or poor performing off farm investments impacting on farm profit?

Ideally farm businesses should strive to maintain equity above 80%, achieve a Return on Capital of >5% or target debt servicing (financing costs as a percentage of income) of less than 10%.  

Practical tips to drive more profit

The following dot points are observations of processes implemented by successful farm businesses that can be practically applied.

Reviewing the business

  • A must do! Taking time to take stock of the previous 12 months and consider year on year growth in equity is vitally important. This measures business performance and promotes effective strategic business decision making

Vision and goal setting

  • Part of the review process. Successful farm businesses have a clear vision of what they want to achieve over a period of time. Some are intuitive, though they are often well communicated with trusted members of the business
  • Goal setting whether intuitive or formalized is critical in driving day to day efficiencies within the business

A trusted team

  • Having a professional farm consultant, agronomist or mentor who understands your business and is a trusted member of the team is essential. Often discussions held with these people can be the catalyst for ideas and decisions that ensure or improve profitability
  • Equally important is an accountant who can provide sound advice on Tax planning with an appreciation of cash flow needs of the business

Analyze, plan and monitor

  • The old saying is “failing to plan is planning to fail”. Many farmers do this intuitively, however what sets profitable businesses apart is an eye for detail in the major areas that drive business profit, such as Yield, price, expenditure and cash flow management    
  • Monitor soil moisture, weather patterns and commodity markets and use trusted advisors and mentors to assists with profitable decision making
  • Successful businesses are continuously looking forward in an attempt to forecast what may occur, rather than being caught on the hop with something that may have been preventable

Maintain drive

  • Most successful businesses place a high priority on family and community and make time to attend important events
  • Taking holidays is critical to “re-charge” the batteries and reduce stress levels leading to clearer thought processes


  • Most successful businesses are either “innovators” or “early adopters” and can often lead practice change within a district. The common theme is that they continuously look at ways to improve upon the status quo.
  • Research, question, listen and then apply after considerable thought is given. Run trials on your property. Look for gains in efficiency in all areas of the business.


The key to drivers of profitability within a farm business are not an exact science, as all managers are different in their leadership and business style, though there are common themes that group these businesses.

To re-cap;

  • Have a deep understanding of the key profit drivers within your business
  • Strive for efficiencies in all aspects of the business
  • Surround your business with highly skilled and trusted advisors
  • Create a positive culture within your business
  • Limit profit erosion from financing costs, off farm investments and after tax expenditure

Contact Details

Josh Hollitt

Hollitt Consulting Pty Ltd


PO Box 2565 Port Lincoln SA 5606