Economic Tidbits

Does Business Management Matter?

Business management is positively correlated to farm financial performance. That’s the findings of a University of Kentucky study exploring the links between business management and farm financial performance. The Kentucky research and findings were discussed in an article written by Larry Van Tassell, director of the Center for Agricultural Profitability at the University of Nebraska-Lincoln.

The Kentucky study surveyed farmers participating in the Kentucky Farm Business Management program about their business management activities—i.e., written marketing plan or knowing costs—along with their operations’ financial performance. According to Van Tassell, the researchers found that producers who scored in the top one-third on the business management survey had an average net farm income of $202,120. Farmers who scored in the lower third had an average net farm income of $55,406. Also, the top scoring one-third had an average debt-to-asset ratio of 20.52 percent while those with the lowest scores had an average ratio of 50.08 percent. A ratio above 30 percent is considered problematic.

Van Tassell noted there could be other reasons besides business management to explain the differences between farm financial success among the survey participants—correlation does not mean causation. However, the results suggest a link between farm success and business management. He writes, “Still, I believe business decisions are best made when understanding the true financial condition of the operation and the impact that pending decisions can have on that financial condition. At a minimum, removing some of the uncertainty of the decision can bring greater peace of mind.”

Given the uncertainties, volatility, and risk facing today’s farm and ranch operations, having a greater peace of mind through business management could be invaluable. More information on Van Tassell’s article and other farm business management topics can be found at: https://cap.unl.edu/management/what-value-financial-and-business-management-ag-producers.

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