Business leaders ask about return on investment (ROI) almost daily when facing critical decisions — should I go with Option A or Option B? Or Option C and hold the course? At the end of the day, they need a way to know how the decisions they make today will impact their farm’s bottom line tomorrow, and possibly for years to come.
Various methodologies are commonly used when calculating ROI, depending on each farm’s management style as well as the parameters in question, such as:
• How many months do I have to recover the initial cost?
• How much more profit will be generated?
Sometimes, more comprehensive models such as weighted average cost of capital (WACC), free cash flows or time value of money are used. On the flip side, we all know that it can also come down to the harder-to-measure metric of ‘following the lead of your neighbors’, which drives a surprising number of on-farm business decisions.
In this blog we focus on how best to calculate ROI of cloud-based farm management software — one of the most crucial investment decisions farmers are making. The answer? We think it’s more nuanced than a spreadsheet, and that it transcends the standard yield enhancement equation. Here’s why:
Guide to Calculating the ROI of Ag Software
First, keep in mind that every farm is managed differently. That’s why we need to move from farming and financial practices, to more human aspects of how data is handled on the farm.
In the graphic below, the blue tiles show a typical path for how information flows from the operator in the field (on the left) to the farm manager (on the right) — who is also in the field when cloud-based software is not used. The yellow tiles show how cloud-based software shortens the time it takes for information to be accessible by the farm manager.
Here, we can clearly see that ROI is revealed in the wasted resources — time, money, peace of mind — that can be generated when cloud-based software is not used. It also calls out the opportunities that can be created when key personnel can be directed to do more valuable tasks, thanks to good software.
In the second graphic, pictured below, take a look at the light red tiles. They describe the types of waste that can occur when cloud-based software is not used. The bright red tiles on the right highlight the outcomes of those wasted resources — namely, there are more fires to put out, the team isn’t finding fires until after they have grown into blazes, and at the end of the day they have less time to put out the fires.
Naturally, reducing this waste can improve profitability because resources are being deployed efficiently. But that can be difficult to measure. Furthermore, we believe there is more to cloud-based software than simply reducing waste, which is an important goal of any organization.
But don’t take it from us. It’s much easier to relate to these impacts by hearing about some personal experiences of a few farmers we have been working with. These growers use cloud-based software that includes a native mobile app, vehicle display integration and a broad online array of functionality.
Case Study #1: Love That Smartphone
A potato grower in northwest United States shared his experience of reducing his costs during harvest by reducing the number of trucks because he could see his bins fill in real time. Before using our software, he received bin reports on Saturdays after the load tickets were collected in the office every Friday, loaded into a spreadsheet and sent by email. As a result, he did not see how the bins were filling up faster or slower than he projected mid-week.
In the first harvest after moving to software, he watched bins fill up on this smartphone app and redeployed trucks to fields with higher-than-expected yields to smooth out his logistics in real time, reducing the amount of time the harvest crews sat idle. He found that he could reduce the number of trucks because he did not have as many surprises on Saturday!
Case Study #2: Decisions Made Easy
A commodity grower in southeast United States shared that before software, he did not consider trying new crops because he felt it was too onerous to record field activities, scouting reports and weather while trying a new crop and trying to stay in touch with his agronomist. However, after trying cloud-based software for a year, he felt more confident about converting approximately 50 acres to watermelon. It was easy to record field activities and weather conditions for food safety compliance and he could see his agronomist’s scouting reports in near real-time. Plus, although he did not have 15 years of experience with watermelons, he felt the record keeping was more complete and easy to use, giving him valuable lessons for the next season. Not to mention… it provided a significant boost to his bottom line.
These examples are played out in the graphic below, where you can see how attacking cost reduction opportunities and pursuing new marketing programs become more attainable as cloud-based farm management software does more of the heavy lifting, freeing up valuable personnel who can help drive profitability!
At the end of the day, good management of ROI requires good data, and that’s why increasingly, farm management software is becoming a regular cost of doing business — no matter what you grow, or how large your farm operation.
The most important advice we give to prosperous farmers is to find the right software partner for your operation. Lean toward a provider who’s going to be here for the long term (i.e., not the latest free farm data app financed by a venture capitalist with no ag experience), and one who understands your need to incorporate more precision ag in order to scale your operation.
The ROI of ag software can be the most valuable metric in guiding us to make the right decisions. Good luck! And we wish you a great crop season.
Source: Matt Denninger, Customer Success Director with Trimble Ag Business Solutions.
To learn more about how to harness the ROI of Trimble Ag Software.