Measures of farm business success: liquidity versus profitability

Abstract

Investing in farmland is fraught with conflicting signals. While investing in land may generally be profitable it is seldom, if ever, feasible on a cash f low basis. The non-depreciable nature of land and longterm capital gains are incompatible with the capital recovery terms sought by investors and lenders. The literature on this subject tends to focus on either the returns (profitability) or the cash flow (feasibility) but not on both simultaneously. Too frequently rural professionals use the terms profitability and cashflow (liquidity) interchangeably. This paper presents a range of profitability measures and distinguishes between them and commonly used liquidity measures. The profitability measures include activity based costing which involves full economic costing and the entrepreneur's profit/loss is the difference between cost of production and market price. It is concluded that a number of measures are relevant to farm businesses but these should not be used in isolation. The critical importance of liquidity measures is reinforced but their use as profitability measures is criticised. Keywords: business success, farming business, liquidity, profitability, pr operty business