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Farm Size: Am I Big Enough?

Farm Size: Am I Big Enough?. Objectives. Establish criteria for how big a business should be Estimate minimum viable size by assessing owner’s need for income Understand relationship between financial growth and earned income. How Big Should the Business Be?. The business is big enough when:

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Farm Size: Am I Big Enough?

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  1. Farm Size: Am I Big Enough?

  2. Objectives • Establish criteria for how big a business should be • Estimate minimum viable size by assessing owner’s need for income • Understand relationship between financial growth and earned income

  3. How Big Should the Business Be? The business is big enough when: • Internal Dimension • It is low cost – economies of size

  4. Cost $ Units of Output Economies of Size The Farmer

  5. How Big Should the Business Be? The business is big enough when: • Internal Dimension • It is low cost – economies of size • It meets its operator’s needs for income – minimum viable size from family income needs perspective • External Dimension • Its size permits access to markets, information, and competitive technologies – minimum viable size from industry perspective

  6. Income Needs Analysis • What is the minimum amount of net income that will satisfy operator’s needs? • What gross income would normally be required to produce this much net income? • How much investment (financial assets) would normally be required to produce this much gross income?

  7. Part I. Income Needs Analysis

  8. Part I. Income Needs Analysis

  9. Part II: Income Needs Analysis: Historical Performance

  10. Part II: Income Needs Analysis: Historical Performance

  11. Part II: Income Needs Analysis: Results

  12. Part II: Income Needs Analysis: Results

  13. More Spendable Income From the Farm Without Getting Bigger • Increase NFIFO Ratio • Reduce costs • Outsource • Increase Asset Turnover Ratio • Increase prices or output • Reduce investment

  14. Can the Business Grow? Growth is dependent on: • Identifying opportunities for profitable expansion • Acquiring resources to implement expansion

  15. Two Behaviors Critical to Internally Funded Growth • Earnings behavior • Savings behavior

  16. Leverage and Growth • In the short run, a farm can growing by borrowing, the potential to grow with debt capital is limited by earnings and assets • Earnings leverage growth, as well as fuel it directly • Appreciation in capital asset values may increase borrowing ability, but won’t increase the ability to service debt • Financial performance should be monitored annually using cost value ROA versus ROE (ROE should exceed ROA) and SGR trend

  17. Profitability, Size, and Growth are Interdependent Which button do we push to achieve competitiveness? • Profitability • Size • Growth • All of the above Profitability Size Growth Business Control Panel

  18. How Would You Respond? First scenario – The farm’s asset turnover ratio is 18%, when 38% would be typical for average competitors. The operating profit margin ratio is 12%. The farm has no debt and substantial equity, but little cash. A. Improve performance B. Expand operation

  19. How Would You Respond? Second Scenario – The farm’s asset turnover ratio is a remarkable 50%. The farm’s operating profit margin ratio is 5%. The farm has little or no debt, but little cash. A. Improve performance B. Expand operation Should a manager ever consider expanding an unprofitable business?

  20. Summary - Keys to Achieving a High Sustainable Growth Rate • High profit • Retention of income as opposed to distributing income to owners • Optimum leverage • Outside equity capital • Strategic fit with industry scale

  21. Strategic Business Planning for Commercial Producers

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