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  Tips from the TIP (Towards Increased Profits) Report
By John Molenhuis - Business Analysis and Cost of Production Program Lead

How is your farm doing financially, compared to previous years and to your peers? Comparing your farm's current performance against your past performance and that of other similar operations is an important step in increasing profits. Another way to describe this is internal and external benchmarking. Identifying your areas of strength and areas that require further investigation can help you focus your management time where it will have the greatest benefit.

For the fourth year, the Towards Increased Profits (TIP) report has been sent to over 11,000 Canadian Agriculture Income Stabilization (CAIS) participants. Using the CAIS database, the report presents a financial analysis that compares your farm's performance to its previous five year average and to other similar farms in your sector. If your farm is significantly different than the sector average in any one expense, TIP flags it and this may be something you want to investigate further.

The sector average is comprised of farms with a similar mix of commodity sales and similar sales levels. Farms are classified by farm type when more than half of total farm sales come from sales of a specific commodity or group of commodities. For example, a farm with more than half of its $250,000 total sales in field crops is compared to other field crop farms with sales ranging from $100,000 to $500,000. There were 105 different farm type/income range combinations.

TIP measures cost efficiency by using a ‘per $100 of income' indicator. It directly compares your costs with the level income you are generating. It shows how effectively your cost outlays are able to produce gross income. Put another way, it is the percent of gross farming income needed to pay the farm's input costs. For example, if machinery repairs equal $4.05, then for every $100.00 of gross farming income $4.05 goes to pay this expense. A higher percent of income needed for an individual expense means there is less income available to pay other costs.

Average, low and high groups were identified for each expense within each farm type/income range combination. This allows for some reflection on questions like ‘Are larger farms more profitable and are they making better use of their assets?' or ‘Is there more variability within an income range or across the income ranges?' or ‘Where are the different farm types spending their money?'

In general, larger farms appear to be more profitable. They are better able to spread their costs over more production. This is not to say that small farms were not capable of achieving the same margins as larger farms. In almost all farm types there were farms in the smaller income ranges that out performed the average larger farm. Some smaller farms did achieve the same margin levels of bigger farms but they had to be better than average to do it.

Economies of scale were evident in how larger farms were able to more effectively use their assets to make income. With very few exceptions the large farms spent less of their income on land and machinery related costs than their smaller counterparts.

There were bigger swings within the income ranges than across the ranges. This variation between the low profit and high profit farms within the income range did tighten as the income ranges increased. The top income range of sales of over 1 million dollars had a range of only 10 percent from the low and the high farms. Farms with under $100,000 in sales saw differences of around 35 percent.

The TIP report clearly shows the horticultural sector's reliance on labour. Horticultural farm types spent 20 - 35 percent of their income on labour costs. The field crop (grain and oilseeds) and livestock farm types spent more in the range of 5 – 10 percent. Labour was one of the areas where the larger farms tended to spend more percent of their income on than the smaller farms. This could be a result of the fact that due to their size they could not rely as much on unpaid family labour.

Profit in the context of TIP is net cash income before any adjustments for inventory or outstanding payables or receivables since it is using information submitted for tax purposes. This reporting method may cause the analysis to highlight weaknesses that are primarily a result of income tax management or cash flow decisions, not a reflection of the farm management performance.

For this reason TIP recipients are encouraged to take advantage of the Canadian Farm Business Advisory Service (CFBAS) for a more complete accrual based farm financial analysis. A qualified private-sector farm business advisor will review your farm records and work with you to develop a financial plan to meet your business goals. Reach them toll free at 1-866-452-5558 or visit the website at www.agr.gc.ca/renewal for more information.

If you were in CAIS for the 2006 program year and did not receive a TIP report you can request yours by calling the Agricultural Information Contact Centre at 1-877-424-1300.

 
 

 
 


Eastern Ontario AgriNews is published on the third Monday of each month. The printed version is distributed free by postal mail to farms in Eastern Ontario, Canada.

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