Profitability: The Financial Ratio Mover

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Over the holidays, I received a note from a person I respect very much from the Upper Northwest. His name is Oliver, and he was a farm-management instructor working with producers in the western Washington region. Oliver was in my strategic planning class 20 years ago at the Ferguson Institute in Tulsa, OK. He encouraged me to continue as a teacher and business coach, rather than just a dairy farmer, because he stated that the good Lord wanted me to touch more lives. Two decades later, I have carved out a niche doing both.

At the bottom of his note, in writing, he made a profound statement. “Be profitable in business and all the financial ratios move in the right direction.” He also stated, “Life is so simple. Treat the soils, livestock, plants and people right, and everything will benefit.” Wow! These are some interesting philosophies.

 

Back to Profitability

Oliver’s statement about profitability is so true. When a business is profitable, and the owners have the discipline to utilize the profits constructively, equity will increase. If the business is profitable and those profits are turned to cash, they can be applied to service debt and grow the business. Profits with discipline can be used to build a financial buffer through working capital and liquidity, not only to be used in difficult times, but to capitalize on opportunities.

Profit margins and overall profitability are key indicators to observe in the grain and livestock industries. If a business is not profitable, it is often due to overhead or input cost exceeding the price.

Another angle on profit is to monitor the amount that makes it through the business and family living expense “funnel” to be deposited over on the balance sheet as earned net worth.

I offer my thanks to Oliver Kienholz of Mount Vernon, WA, for his words of wisdom that we sometimes forget. By the way, I have his license plate displayed in my covered bridge on our farm in Virginia!

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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