We have all heard the term ‘Work Smarter, Not Harder”. 
 
Well, today’s blog is all about that principle. 
 
Finding a profitable, scalable business model and continuously working on improving it is a key skill for any farm business owner and it trumps hard work any day of the week. 
 
What is a business model? 
 
Before we can work out how to make a business scalable and profitable, we need to define what a business model actually is. 
 
Whether a business understands or can outline its business model explicitly or not, all businesses have a business model. 
 
The clearer you are on what your business model is and how to drive profit through that business model, the simpler business becomes and the greater chance you have at consistently succeeding in your chosen industry. 
 
Perhaps the simplest definition of a business model is that offered by Michael Lewis. Lewis states that a business model is “how you plan to make money”. 
 
When we benchmark farm businesses, like those completing our 3-year business coaching & education program (The Platinum Mastermind), what we are really doing is looking at how well their business model performed compared to the previous year. You can click here to find out more. 
 
The 3 keys to a profitable, scalable farm business model are based on those insights and are what the Top Producers do better than the average farm owner. 
 
What is scale? 
 
The concept of scale is often confused among farm business owners. 
 
Scale is not about the number of hectares you farm. Scale is all about the revenue the business generates each year. 
 
Let’s say we have 2 businesses that each farm 1,000 ha. The first farm business generates $3m in revenue each year and the second business generates $500k in revenue each year from the same area. 
 
The first business has a 6 times larger scale than the second business, even though they farm the same area. 
 
There is a strong correlation between increasing revenue (scale) and increasing profitability in a farm business. And the good news is that once you let go of scale being related to the area you farm, it opens up many more opportunities to increase the scale of your farm business. 
 
The 3 Keys to a Profitable, Scalable Farm Business Model 
 
The diagram below shows the three keys to creating a profitable, scalable farm business model. 

The order of priority is important when addressing these 3 keys for your farm business. 
 
It is easy to believe, “We need to farm more hectares”. But if you haven’t got the other two components in place first, then adding more area often just amplifies the existing issues within the business, rather than driving more profit. 
 
This is why increasing scale through adding area should be the last step to consider after you have successfully integrated the other two key components of a profitable, scalable business model. 
 
Let’s explore the 3 components in the order they should be focused on: 
 
Simplification - is every aspect of our business as simple as it can be, but not simpler? 
 
THINK: Complex is easy, simple you have to work at. 
 
In nature, there is a concept called Entropy which describes the level of randomness in a system. The law of Entropy states that the natural tendency for all systems is to degrade to the maximum level of randomness possible. They do this because this is the lowest energy state that they can exist in. 
 
So, the natural order of things within our business is that we will make things more complex (random) than they need to be without continuous effort. It takes energy and thought to develop a simple business model. 
 
Without simplicity, a farm business will struggle to scale. 
 
There are just too many moving parts and too many things that can go wrong as a complex business model expands. 
 
When benchmarking profitable and successful farm businesses, it often feels like their business models are TOO SIMPLE…you are left thinking, “What do you mean that is all you do? Surely there is more to it than that!” 
 
There is such beauty that comes with this. That simplicity leads to scalability and profitability. 
 
So, is your business model as simple as it can be? 

• Where are we overcomplicating things? 
• Is our enterprise mix as simple & effective as it should be? (Benchmarking will help here.) 
• Is our management calendar as simple as it could be? There are so many examples of how this gets complicated for very marginal benefit e.g., lots of different crop varieties, complicated joining’s, not block cropping, multiple shearing’s, mustering more than necessary because management tasks aren’t grouped, running small mobs for longer than necessary…the list goes on.  
• Are our overheads as lean as possible? 
• Are we maximising our labour as much as possible? 
• Are our team’s job descriptions as simple & clear as possible? 
• Are we using the right technology to save time? 
• Where else can we simplify? 

 
Intensity - is the amount of revenue you generate per unit area. 
 
THINK: My profit comes from the last 20-30% of my production. 
 
Unfortunately, many farm businesses just don’t operate at the intensity required to be profitable. 
 
The Top Producers know the impact of increasing the intensity of their business profitability. 
 
They are focused on finding the optimum (not maximum) intensity for their farm. 
 
They challenge themselves to explore what is possible, not limit themselves to what everyone else is doing around them.

 
 
They continuously challenge themselves to sustainably intensify their current business because they know this is where the profit lies. 
 
For most farm businesses there are significant opportunities to improve profitability and scale by exploring how to intensify on the farm first. 
 
And, interestingly, the research backs this up… 
 
Grazing Enterprises: “Studies confirm that the amount of pasture utilised per ha is a key driver of profitability of Australian pasture-based systems. Despite this, the gap between potential (research) and commercial reality is huge.” 
 
Cropping Enterprises: “Australia’s farmers are among the most efficient in the world, despite a relatively large gap between potential and achieved water-limited grain yield. Analysis shows that wheat yield gaps are typically > 1.7 t/ha or 50% of the water-limited yield.” 
 
So, before looking to expand off farm, there is often a higher Return On Investment if you look at how to intensify on farm first. Ask yourself: 

• Are we nailing the timeliness of our enterprises? 
• Are we working with nature as much as possible? 
• Are we running the right enterprises on the right areas of our farm? 
• Is our cropping rotation as profitable as it could be? 
• Do we understand what is possible for our area in terms of yield and production? 
• Do we understand the marginal cost and impact on profit from an increase in production? 
• Do we know the most profitable farmers who farm similar enterprises to us? 
• How much time do we spend talking with profitable farm business owners about what they do on their farm?    

 
Area - the amount of area your enterprises are run over. 
 
THINK: Rocket fuel. 
 
Doubling the area for a profitable, scalable business model often improves the profit by more than double because the overheads don’t tend to increase at the same rate as the revenue increases. 
 
Doubling the area for an unprofitable, complex business model often increases the losses more than double - despite the advantage of dispersing the overheads. 
 
Expansion through purchase, leasing or share farming also requires the outlay of significant amounts of capital compared to the other 2 keys (Simplification & Intensification). 
 
It is true that there is a correlation between enterprise scale and profitability, however, it is critical that you have identified a profitable business model first before expanding over more area. 
 
The hardest part about scaling a farm business through increased area is cash management and access to capital through the expansion. It requires careful planning. Even a profitable farm business model that tries to scale too quickly can run out of cash (i.e. they are growing broke). 
 
In Summary 
 
Finding a profitable, scalable business model for your farm business is one of the key priorities for farm business owners. Driving scale in your farm business comes through the careful application of the 3 Keys - Simplification, Intensification & Area - for your farm business. 
 
Finding a great business model will trump hard work every day of the week. 
 
Once you have a great business model it’s hard not to see the opportunities for your business and the game of business becomes very fun to play!

 
 
To help improve your farm business model or explore strategies & tactics like those we have discussed today, join us at the next 2-Day Top Producers Workshop where we will help you identify opportunities in your farm business & equip you with the tools to take action. 
 
To register click here.
 
Have a great week! 
 
Regards

 
 
Sam Johnsson 
CEO - Farm Owners Academy 
 
PS - We are passionate about supporting farm owners to improve the profitability of their farm business, so we have created a training that teaches you how to do this. It is called the Cash Flow Optimiser for Farm Owners. Instead of paying $197, it’s on sale for a short time for $9. Click here to access. This is a great program to help you create a winning business model for your farm.