The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0002-1466.htm

Management practices and the Management

practices,
financial performance of farms financial
performance
Fedra Vanhuyse
Stockholm Environment Institute, Stockholm, Sweden
415
Alison Bailey
Lincoln University, Christchurch, New Zealand, and Received 26 August 2020
Richard Tranter Revised 12 November 2020
17 November 2020
University of Reading, Reading, UK Accepted 17 November 2020

Abstract
Purpose – Farm businesses in England are under pressure to intensify production sustainably while
managing costs and meeting market demands. Commodity prices and support from Common Agricultural
Policy (CAP) payments are important determinants of profitability. With the United Kingdom (UK) leaving the
European Union (EU), revised policy will see farming more exposed to fluctuating commodity prices and
financial support from Government more focused on encouraging environmental land management. The
research reported here, investigated whether business management practices of farmers influences financial
performance, and how policy could be tailored to better meet the needs of farm businesses.
Design/methodology/approach – Regression models were estimated for 862 Cereals, Dairy and Livestock
farms in England using official data for 2011–2012, in order to assess whether different farm characteristics,
business management practices (identified from a systematic review of 102 studies), knowledge acquisition
indicators and manager experience had an effect on four different financial performance ratios. The financial
performance of the top 25% of the sample was also compared to the bottom 25% in terms of use of business
management practices.
Findings – The results show that business planning and benchmarking had a positive, statistically
significant, effect on financial performance, as do business size and knowledge acquisition, albeit to a lesser
extent.
Originality/value – The research reported here is the most extensive examination, to date, of the impact of
management practices on the financial performance of farms. Thus, it sends strong policy recommendations.
Keywords Management practices, Farm financial performance, DuPont expansion model, Strategic planning
Paper type Research paper

Introduction
Farming in England has been under pressure to produce at least similar or higher level of
outputs whilst reducing the use of resources and the impact it has on the environment; in
short to intensify sustainably, and to do so at the lowest price possible. Alongside this, the
historic reforms of the CAP have meant reduced support in recent years for all farm types
except for those on upland severely disadvantaged moorland (RPA, 2014 and 2015 a, b). With
the UK leaving the EU, a revised agricultural policy will see the sector more exposed to
fluctuating commodity prices and financial support more focused on environmental land
management (Defra, 2018). There is, therefore, a need for farming businesses to
professionalise and have tighter control over their production methods and finances.
One way of improving control is to introduce management tools that help track and
monitor usage of inputs, including investment, with the most common tools being cash flow

The lead author is grateful to the Edith Mary Gayton Bequest and the Agriculture and Food
Investigation Team (AFIT) at the University of Reading for financial support. Technical advice and Agricultural Finance Review
Vol. 81 No. 3, 2021
assistance from Nenia Micha, Yiorgos Gadanakis and AFIT in the use of the FBS dataset is also pp. 415-429
acknowledged. Despite this, the opinions expressed here and the conclusions reached are the sole © Emerald Publishing Limited
0002-1466
responsibility of the authors. DOI 10.1108/AFR-08-2020-0126
AFR planning, formal business planning and benchmarking (see, e.g., Boddy, 2009; Pettigrew,
81,3 1992; and Vanhuyse, 2016.). These tools can be utilised at various stages of the planning cycle
and assist managers to maintain an overview of resources spent and allow them to forecast
their future utilisation (Friend and Zehle, 2009).
Within agriculture in England, the Department for Environment, Food and Rural Affairs
(Defra) and the European Commission’s Directorate General for Agriculture and Rural
Development, as well as Levy Boards and consultancy organisations, have advised and
416 supported farmers implementing management practices for their businesses, as they believe
that this will improve the management of the farm business, which should, in turn, improve
financial performance. Defra (2004a, b, c) in particular has promoted formal planning and
benchmarking as key management tools, and has developed a support package for farm
businesses in England, including funding under the Rural Development Programme of the CAP
to assist local businesses and farmers to diversify farm activity and boost farm productivity.
On behalf of Government, data is collected and presented on the financial situation of the
agricultural industry on an annual basis for policy-making purposes through the Farm
Business Survey (Defra, 2020). Despite this, there has been limited financial analysis of farms
particularly using tools more commonly associated with the financial industry itself.
Research on the effect of management practices within the farming industry is also limited
tending to focus on improving efficiency and productivity, excluding any assessment of
managerial ability and associated financial performance. This makes it unclear whether
promoting management practices, or particular tools as a policy, is an approach that farmers
and Defra should actively pursue.
The aim of the research summarised here, which stems from Vanhuyse (2016), was to
assess whether there are any management practices which farmers should use to improve the
financial performance of their businesses. The research question was: “What combination of
business management practices has had the largest influence on financial performance for
farm businesses in England”?

Method
A systematic literature review was initially undertaken to assess the effect of management
practices on the financial performance of businesses using the following criteria:
(1) Types of studies: only those that evaluated the impact of business management
practices on financial performance were included;
(2) Types of interventions: studies that considered the impact of planning,
benchmarking and knowledge management were included;
(3) Geographical spread: studies that considered business management practices and
financial performance in Europe, the USA and Australia were included;
(4) Publication date: studies published from 1960 to 2015 were included; and
(5) Sectors: both agricultural and non-agricultural sectors were included.
The review included the terms “management”, “performance”, “planning” and “financial
performance” and used the databases of journals such as the Journal of Finance, the Journal of
Agricultural Economics, the Agricultural Finance Review, the American Journal of Agricultural
Economics and publishers such as Elsevier, Springer, Wiley-Blackwell, Taylor and Francis and
Google Scholar. All articles were verified and the database was checked for duplicates.
In total, 102 studies were chosen for review, with this research reporting positive results of
business planning and benchmarking management practices on financial performance for
74 studies based on the binomial sign test, for 4 studies with a negative relationship and
24 studies having no statistically significant relationship (z-score 5 7.9259 meaning significant Management
at the 1% level). For the studies where there was no statistically significant effect, or where the practices,
effect was negative, the majority of their researchers concluded that environmental uncertainty
and hostility could result in planning not having an effect on performance.
financial
Using the findings from the systematic literature review, a research conceptual performance
framework containing six hypotheses was drawn-up:
H1. Greater use of business management practices leads to better financial performance; 417
H2. Knowledge acquisition has a positive effect on financial performance;
H3. Experience has a positive effect on financial performance;
H4. Good IT skills have a positive effect on financial performance;
H5. Farm size has a positive effect on financial performance; and
H6. Ownership has a positive effect on financial performance.
The systematic review also collected information on how financial performance was defined
in the 102 studies. In the meta-review by Capon et al. (1990) on 320 studies that looked at
factors that influence financial performance, they established that the most frequently used
financial performance indicators are: Return on Equity (RoE); Return on Assets (RoA); Return
on Sales (RoS); Price/Cost Margin; and Stakeholder Return. These ratios were used by:
Plumley and Hornbaker (1999); Soliman (2004, 2008); Erickson et al. (2009); Little et al. (2009);
Ahrendsen and Katchova (2012); Zhang and Xiaosong (2012); and Prasad Pokharel et al.
(2019) and make-up part of the DuPont Expansion model. This model was developed in the
1920s to improve the analysis of balance sheets and profit and loss accounts. It breaks down
the rate of return on equity for shareholders, and thence the return on assets, into three
distinct areas, to include operational or production efficiency or return on sales, asset
turnover and leverage, the extent to which assets are owned by the enterprise (Firer, 1999).
Given the perceived importance of productivity (sales) on profitability and the need to
manage assets in the farming environment, the research reported here assessed profitability
through RoE, RoA and RoS, and financial efficiency through Asset Turnover (ATO) to
determine the overall financial performance. It should be pointed out that, in the USA, RoS is
generally called Operating Profit Margin (see, for example, Barry et al., 2000).
These ratios were then calculated and applied to the FBS dataset for England. Every year,
all EU countries have to report on the financial performance of their agricultural industry in
an equivalent manner (EC, 2013) and, within England, Rural Business Research, a consortium
of six universities and colleges, carries out the FBS. This survey, which has been carried out
since 1936, contains information on a farm’s financial position as well as information on the
farmer, including farmers’ age, farm size and whether the farm is owned, rented or held under
mixed-tenure. Farm businesses in the FBS are selected stratified by size, farm type and
geographical region; spare-time farms are not included but part-time ones are and 7% of the
sample is replaced each year. The FBS is a panel survey and the identity of participating
farmers is strictly confidential. Their only recompense is that they are able to benchmark
their own physical and financial performance against their equivalent peers. Defra (2020)
provides further and fuller technical and statistical information on this. Data is obtained by
visit from specialist farm accounts investigators.
Additional sections are added to the FBS on an ad-hoc basis, with the 2011–2012 dataset
containing an additional “module” on the business management practices adopted by the
farmers. More specifically, as detailed by Defra (2013) that dataset included information on
their use of cash flow planning, formal business planning and benchmarking on the farm,
farmers’ knowledge of IT and education level, whether he/she participated in a formal
AFR Continuing Professional Development (CPD) Scheme, accessed paid business advice, and
81,3 whether their spouse was engaged in off-farm employment. The latter reflects the idea that
these may affect and influence the management traits of individuals (Dhaouadi, 2014; Gloy
and La Due, 2003) and their potential to adopt certain practices. In the text and tables that
follow, abbreviated descriptions of the business management practices are given and
discussed. When the data were collected in the field, participating farmers were provided with
full written and verbal descriptions of each practice as Defra (2013) pointed out. For that
418 reason, the 2011–2012 dataset for England was selected excluding pigs, poultry and
horticulture. This contained data on 862 farms in total: 233 Cereal farms, 228 Dairy farms, 170
Less-Favoured Area Grazing Livestock farms and 231 Lowland Grazing Livestock farms.
To assess the impact of business management practices on financial performance, two
tests were carried out. First, a comparison was made between farmers that had businesses
that were high financial performers and low performers. For each ratio (RoS, RoA, RoE and
ATO), the top 25% and the bottom 25% performers were distilled from the dataset per farm
type, and the application of each management practice and characteristic was calculated, to
ensure that the gap between both groups was large enough to warrant the implementation of
a management practice. Then, a comparison between the means of both groups was
calculated using t-tests to assess whether there were statistically significant differences
related to the management practice and its effect on performance.
Second, a linear regression model was applied, with the model being:
X
k
FPIi ¼ β0 þ βj xij þ εi
ij¼1

where FPIi is the financial performance indicator (the dependent variable) of farm i and
FPIi ε fRoSi ; RoAi ; RoEi ; ATOi g; xij are the explanatory (or independent) variables such
as formal business planning, cash flow planning, membership of a CPD scheme, education,
farm size, etc.; βj are the coefficients to be estimated and K is the number of coefficients. The
errors εi are assumed to be normally distributed with variance σ 2. Table 1 gives an overview
of the variables used in the regression analysis.
For RoE, RoA and RoS, a multiple linear regression model was estimated using
Generalised Least Squares as it did not violate any assumptions. A logarithmic
transformation was necessary for ATO, in order to achieve more normally distributed data.
Testing was undertaken to see if the model was specified correctly, including verification
of the existence of heteroskedasticity, transformation of variables, omitted variables and
correlation of independent variables. The models were estimated in two steps: in a first step,
the direct effects were estimated, followed by an estimation of the interaction effects, the
application of more than one management practice, in a second step.

Results
The results of both the t-tests and regression analysis confirm that use of the business
management practices considered has a statistically significant, positive effect, on the
financial performance of farm businesses in England for the 2011/12 harvest year (Tables 2–
7). However, the reader should be clear that the analysis reported here was based on a single
cross section data analysis conducted on a dataset that is now eight years old.
In the comparison of the high and low financial performers using the t-test, it is evident that
the higher performers consistently apply more cash flow planning, formal planning and
benchmarking practices on their farm than the low performers (proving Hypothesis 1). Table 2
shows the comparison between high and low performances for the ratio RoS, Table 3 gives the
comparison for ATO, while Tables 4 and 5 provide the results for RoA and RoE respectively.
Variable Type of variable Mean
Management
practices,
Age (average) Continuous 55.08 financial
Size Ordinal variable, ranging from 2 (small), to 3 (medium), and 4 2.88
(large) performance
Using formal planning Dummy variable, with 0 meaning not making a formal plan 0.2657
that is reviewed at least once a year, and 1 being undertaking
the practice 419
Cash flow planning Dummy variable, with 0 meaning not undertaking regular 0.2807
cash flow planning, gross margin or budgeting, and 1 being
undertaking the practice
Benchmarking Dummy variable, with 0 meaning not undertaking any kind 0.2042
of benchmarking, and 1 being undertaking benchmarking
activities
Having a university degree Dummy variable, with 0 meaning having a university degree, 0.1948
and 1 having a university degree
Accessing paid advice Dummy variable, with 0 meaning not paying to access 0.4432
advice, and 1 being accessing paid advice
Member of a CPD Scheme Dummy variable, with 0 meaning not being a member of a 0.2854
CPD Scheme, and 1 being a member
Off-farm labour Dummy variable, with 0 meaning not having a working 0.3979
spouse, and 1 having a working spouse
Having good IT skills Dummy variable, with 0 meaning not having good IT skills, 0.3875
and 1 having good IT skills
Formal planning and cash flow Dummy variable, with 0 meaning not undertaking both 0.1601
planning practices, and 1 being undertaking both practices
Formal planning and Dummy variable, with 0 meaning not undertaking both 0.0916
benchmarking practices, and 1 being undertaking both practices
Formal planning, cash flow Dummy variable, with 0 meaning not undertaking the 0.0742
planning and benchmarking practices, and 1 being undertaking all three practice
Owner-occupier Dummy variable, with 0 meaning not owner-occupied, and 1 0.3016
meaning owner-occupied
Cereal Dummy variable, with 0 meaning not a Cereal farm, and 1 0.2703
indicating a Cereal farm
Dairy Dummy variable, with 0 meaning not a Dairy farm, and 1 0.2645
indicating Dairy farm
LFA Dummy variable, with 0 meaning not a LFA Grazing 0.1972 Table 1.
Livestock farm, and 1 indicating a LFA Grazing Livestock Overview of the
farm variables used in the
Source(s): Calculated from the FBS 2011/12 regression analysis

Looking across Tables 2–5, the results show that formal planning differences between the
high and low financial performance groups are statistically significant, at the 5% level for
RoS and at the 1% level for ATO, RoA and RoE. Regular cash flow planning is also
statistically significant for three of the ratios at the 1% level for RoS and at the 5% level for
RoA and RoE. The difference in the use of benchmarking between the two groups is also
statistically significant at the 1% level for RoS, RoA and RoE. Neither cash flow planning nor
benchmarking are statistically significant for ATO. Differences between the low and high
financially performing farmers as a result of using a combination of practices was also
evident. Most notably using formal planning and benchmarking was statistically significant
for RoS at the 1% level, and for RoE using formal planning and cash flow planning, formal
planning and benchmarking, and all three management practices in combination was
statistically significant at the 5% level.
In terms of knowledge acquisition (Hypothesis 2), there is a statistically significant
difference in both paying for advice and having a university degree. Low performers were
AFR Alternative Alternative Alternative
81,3 Low High hypothesis hypothesis hypothesis
performers performers (Ha): diff < 0 (Ha): diff 5 0 (Ha): diff > 0
Variable Mean (st.dev) Mean (st.dev) Pr (T < t) Pr (jTj > jtj) Pr (T > t)

Using formal 0.2186 (0.4142) 0.2930 (0.4562) 0.0387 0.0773 0.9613

planning
420 Using cash flow 0.2419 (0.4292) 0.3814 (0.0332) 0.0009 0.0017 0.9991
planning
Any level of 0.1442 (0.3521) 0.2930 (0.4562) 0.0001 0.0002 0.9999
benchmarking
Using formal 0.1256 (3322) 0.1815 (0.3862) 0.0544 0.1089 0.9456
planning and cash
flow planning
Using formal 0.0651 (0.2473) 0.1349 (0.3424) 0.0079 0.0158 0.9921
planning and
benchmarking
Using formal 0.0605 (0.2389) 0.1070 (0.3098) 0.0410 0.0820 0.9590
planning, cash
flow planning and
benchmarking
Accessing advice 0.3860 (0.4880) 0.4698 (0.5002) 0.0398 0.0797 0.9602
Being a member of 0.2512 (0.4347) 0.2930 (0.4562) 0.1653 0.3306 0.8347
a CPD scheme
Having good IT 0.3814 (0.4868) 0.4605 (0.4996) 0.0486 0.0972 0.9514
skills
Having a working 0.4279 (0.4959) 0.3860 (0.4880) 0.8109 0.3782 0.1891
spouse
Having a 0.2046 (0.4044) 0.2372 (0.4263) 0.2085 0.4170 0.7915
university degree
Table 2. Farm size 2.6046 (0.7469) 3.0140 (0.8287) 0.0000 0.0000 1.0000
t-test results for Return Owner-occupier 0.2977 (0.4583) 0.3581 (0.4806) 0.0913 0.1826 0.9087
on Sales (RoS) for Age 55.70 (11.34) 53.2 (10.24) 0.9916 0.0167 0.0084
all farms Source(s): Calculated from FBS 2011/12

using less paid advice than high performers, statistically significant for RoE at the 1% level.
Low performers also scored less in terms of having a university degree, the latter being
statistically significant at the 5% level for ATO and at the 10% level for RoA and RoE. Being
a member of a CPD Scheme has no statistically significant effect on any ratio; low and high
financial performers do not apply this tool differently.
Where experience is concerned (Hypothesis 3), the difference in age is statistically
significant at the 1% level for ATO and RoS and at the 5% level for RoA and RoE, with high
performers being younger than the low performers. There is also a difference in IT skills
(Hypothesis 4), with low performers not rating as highly on this indicator as high performers,
statistically significant at the 5% level for RoS, RoA and RoE. The difference in having a
working spouse is only statistically significant for ATO at the 5% level.
Farm size, in area, terms also makes a difference (Hypothesis 5). Low performance farms
tend to be smaller than high performance farms, and the difference is statistically significant
at the 1% level for all four business ratios. Finally, the effect of ownership affects the ratios in
a different manner. Owner occupiers (Hypothesis 6) outperform mixed-tenure or tenant
farmers in terms of RoS, statistically significant at the 10% level, but perform worse on ATO,
RoA and RoE, statistically significant for ATO at the 1% level, and for RoA and RoE at the
5% level.
 Ha: HA:
Management
High diff < 0 diff 5 0 Ha: practices,
Low performers performers Pr Pr diff > 0 financial
Variable Mean (st.dev) Mean (st.dev) (T < t) (jTj > jtj) Pr (T > t)
performance
Using formal planning 0.2186 (0.4143) 0.3349 (0.4730) 0.0035 0.0070 0.9965
Using cash flow planning 0.2465 (0.4320) 0.3163 (0.4661) 0.0541 0.1082 0.9459
Any level of benchmarking 0.1907 (0.3938) 0.2186 (0.4143) 0.2372 0.4744 0.7628 421
Using formal planning and cash 0.1488 (0.3567) 0.2139 (0.4110) 0.0401 0.0801 0.9599
flow planning
Using formal planning and 0.1023 (0.3038) 0.0791 (0.2705) 0.7989 0.4023 0.2011
benchmarking
Using formal planning, cash flow 0.0791 (0.2705) 0.0744 (0.2631) 0.5717 0.8566 0.4283
planning and benchmarking
Accessing advice 0.4 (0.4910) 0.4139 (0.4937) 0.3845 0.7690 0.6155
Being a member of a CPD scheme 0.2558 (0.4373) 0.2977 (0.4583) 0.1666 0.3331 0.8334
Having good IT skills 0.3488 (0.4777) 0.4046 (0.4919) 0.1167 0.2334 0.8833
Having a working spouse 0.3628 (0.4819) 0.4558 (0.4992) 0.0250 0.0500 0.9750
Having a university degree 0.1535 (0.3613) 0.2279 (0.4205) 0.0248 0.0497 0.9752
Farm size 2.6977 (0.8241) 2.9860 (0.7823) 0.0001 0.0002 0.9999 Table 3.
Owner-occupier 0.5256 (0.5005) 0.0837 (0.2776) 1.0000 0.0000 0.0000 t-test results for Asset
Age 57.23 (11.38) 53.56 (10.20) 0.9998 0.0005 0.0002 Turnover (ATO) for
Source(s): Calculated from FBS 2011/12 all farms

Ha: HA:
High diff < 0 diff 5 0 Ha:
Low performers performers Pr Pr diff > 0
Variable Mean (st.dev) Mean (st.dev) (T < t) (jTj > jtj) Pr (T > t)

Using formal planning 0.2372 (0.4264) 0.3581 (0.4806) 0.0030 0.0060 0.9970
Using cash flow planning 0.2698 (0.4449) 0.3581 (0.4806) 0.0242 0.0485 0.9758
Any level of benchmarking 0.1535 (0.3613) 0.2698 (0.4449) 0.0015 0.0031 0.9985
Using formal planning and cash 0.1395 (0.3473) 0.2046 (0.4044) 0.0370 0.0740 0.9630
flow planning
Using formal planning and 0.0651 (0.2473) 0.1209 (0.3268) 0.0232 0.0465 0.9768
benchmarking
Using formal planning, cash flow 0.0605 (0.2389) 0.0977 (0.2976) 0.0768 0.1535 0.9232
planning and benchmarking
Accessing advice 0.3767 (0.4857) 0.4744 (0.5005) 0.0203 0.0406 0.9797
Being a member of a CPD scheme 0.2651 (0.4424) 0.3023 (0.4603) 0.1966 0.3933 0.8034
Having good IT skills 0.3628 (0.4819) 0.4419 (0.4978) 0.0475 0.0950 0.9525
Having a working spouse 0.4093 (0.4929) 0.4232 (0.4952) 0.3849 0.7698 0.6151
Having a university degree 0.1907 (0.3938) 0.2465 (0.4320) 0.0811 0.1622 0.9189
Farm size 2.6186 (0.7385) 3.1070 (0.7988) 0.0000 0.0000 1.0000 Table 4.
Owner-occupier 0.2837 (0.4519) 0.1953 (0.3974) 0.9841 0.0318 0.0159 t-test results for Return
Age 55.19 (11.50) 53.09 (9.96) 0.9785 0.0429 0.0215 on Assets (RoA) for
Source(s): Calculated from FBS 2011/12 all farms

The regression analysis, carried out as a second examination of whether use of the studied
business management practices affects financial performance, confirms some of the above
differences. Table 6 shows the results of the regression analysis for the direct effects, and
Table 7 for the interaction effects, respectively.
AFR Ha: HA:
81,3 High diff < 0 diff 5 0 Ha:
Low performers performers Pr Pr diff > 0
Variable Mean (st.dev) Mean (st.dev) (T < t) (jTj > jtj) Pr (T > t)

Using formal planning 0.2279 (0.4205) 0.3721 (0.4845) 0.0005 0.0011 0.9995
Using cash flow planning 0.2698 (0.4449) 0.3581 (0.4806) 0.0242 0.0485 0.9758
422 Any level of benchmarking 0.1442 (0.3521) 0.2651 (0.4424) 0.0009 0.0018 0.9991
Using formal planning and cash 0.1349 (0.3424) 0.2186 (0.4143) 0.0114 0.0229 0.9886
flow planning
Using formal planning and 0.0605 (0.2389) 0.1256 (0.3321) 0.0100 0.0201 0.9900
benchmarking
Using formal planning, cash flow 0.0558 (0.2301) 0.1023 (0.3038) 0.0371 0.0742 0.9629
planning and benchmarking
Accessing advice 0.3674 (0.4832) 0.4837 (0.5009) 0.0073 0.0147 0.9927
Being a member of a CPD scheme 0.2605 (0.4399) 0.3116 (0.4642) 0.1207 0.2415 0.8793
Having good IT skills 0.3581 (0.4806) 0.4512 (0.4988) 0.0248 0.0496 0.9752
Having a working spouse 0.4279 (0.4959) 0.4326 (0.4966) 0.4613 0.9226 0.5387
Having a university degree 0.1814 (0.3862) 0.2465 (0.4320) 0.0501 0.1002 0.9499
Table 5. Farm size 2.6139 (0.7329) 3.0930 (0.7976) 0.0000 0.0000 1.0000
t-test results for Return Owner-occupier 0.2884 (0.4541) 0.1954 (0.3974) 0.9879 0.0243 0.0121
on Equity (RoE) for Age 55.15 (11.48) 52.95 (9.84) 0.9833 0.0334 0.0167
all farms Source(s): Calculated from FBS 2011/12

The R-squared are 0.3949 for RoS, 0.3141 for log_ATO, 0.1632 for RoA and 0.1979 for RoE.
The interaction models were also statistically significant from 0, but had a lower R-squared,
namely 0.2461 for RoS, 0.1538 for ATO, 0.1108 for RoA and 0.0956 for RoE. The interaction
effect models explain less of the variation in the dataset than the direct effect models.
However, the interaction effects model for RoS has a higher R-squared than the direct effects
model for both RoA and RoE.
Looking at the management practice activities (Hypothesis 1), the direct effects (Table 6)
show different results than the interaction effects (Table 7). In terms of direct effects, formal
planning, by itself, has a positive, statistically significant effect on log_ATO only. In turn,
benchmarking has a positive, statistically significant effect on RoS, but a negative,
statistically significant effect on log_ATO. Cash flow planning is not statistically significant
for any of the four ratios examined. In terms of interaction effects, carrying out formal
planning and cash flow planning has a positive, statistically significant effect on log_ATO,
RoA and RoE. Combining formal planning with benchmarking also shows positive,
statistically significant effects, this time on RoS, RoA and RoE. These practices are
significant at the 5% level, and impact RoS with 8.54%, RoA with 2.27% and RoE with
3.10%, meaning these practices affect financial performance quite substantially.
Undertaking all three practices does not have a statistically significant effect on any of the
financial ratios.
In terms of knowledge acquisition (Hypothesis 2), being a member of a CPD Scheme has a
positive, statistically significant effect on RoS, but not on any of the other ratios. The effect is
quite large (7.42%), and is statistically significant at the 5% level. None of the other
knowledge acquisition practices, having a university degree or accessing advice, have a
statistically significant effect on the ratios.
Experience (Hypothesis 3), measured in age of farmer, has a minor, negative effect on log
ATO (0.68%) and is statistically significant at the 1% level. Engaging in off-farm labour, by
having a spouse that works elsewhere and gains an additional income, does not have a
statistically significant effect on any of the ratios examined.
 RoS Log_ATO RoA RoE
Direct effects Coefficient (S.E.) p-value Coefficient (S.E.) p-value Coefficient (S.E.) p-value Coefficient (S.E.) p-value

BMP_Fml –0.0150 (0.0168) 0.373 0.1466*** (0.0555) 0.008 0.0011 (0.0072) 0.879 0.0003 (0.0076) 0.971
BMP_CF 0.0083 (0.0170) 0.623 0.0360 (0.0491) 0.464 0.0159 (0.0116) 0.170 0.0073 (0.0069) 0.293
BMP_AnyB 0.0338* (0.0174) 0.052 –0.1055** (0.0534) 0.049 –0.0135 (0.0091) 0.137 0.0069 (0.0078) 0.382
Uni 0.0096 (0.0200) 0.630 0.0823 (0.0526) 0.118 –0.0024 (0.0061) 0.698 –0.0019 (0.0074) 0.795
AA –0.0037 (0.0223) 0.869 –0.0305 (0.0448) 0.496 0.0015 (0.0052) 0.780 0.0049 (0.0049) 0.315
CPD 0.0742** (0.0304) 0.015 0.0355 (0.0680) 0.602 0.0036 (0.0064) 0.573 0.0071 (0.0062) 0.257
Age –0.0002 (0.0008) 0.826 –0.0068*** (0.0020) 0.001 –0.0014 (0.0017) 0.405 –0.0001 (0.0003) 0.908
Off_farm –0.0284 (0.0223) 0.202 0.0511 (0.0433) 0.238 –0.0091 (0.0058) 0.115 –0.0060 (0.0054) 0.269
IT –0.0075 (0.0222) 0.734 –0.0153 (0.0494) 0.756 0.0069 (0.0064) 0.280 0.0046 (0.0055) 0.397
Size 3 0.1062*** (0.0225) 0.000 0.3418*** (0.0635) 0.000 0.0155*** (0.0058) 0.008 0.0255*** (0.0064) 0.000
Size 4 0.1828*** (0.0244) 0.000 0.3551*** (0.0813) 0.000 0.0351*** (0.0067) 0.000 0.0432*** (0.0088) 0.000
Own 0.0538*** (0.0177) 0.002 –0.5130*** (0.0420) 0.000 –0.0033 (0.0053) 0.529 –0.0082* (0.0047) 0.084
Cereals 0.1150*** (0.0383) 0.003 0.0324 (0.0855) 0.705 0.0209** (0.0087) 0.017 0.0327*** (0.0067) 0.000
Dairy –0.0433* (0.0237) 0.068 0.3811*** (0.0890) 0.000 –0.0038 (0.0088) 0.666 –0.0168* (0.0085) 0.049
LFA 0.0077 (0.0257) 0.765 0.1648** (0.0760) 0.031 0.0038 (0.0072) 0.604 0.0148* (0.0082) 0.072
_cons –0.0503 (0.0496) 0.312 –1.5320*** (0.1354) 0.000 0.0084 (0.0132) 0.524 –0.0068 (0.0175) 0.698
F 23.84*** 26.69*** 9.67*** 8.80***
R-squared 0.3949 0.3141 0.1632 0.1979
Note(s): *** is statistically significant at the 1% level, ** is statistically significant at the 5% level, * is statistically significant at the 10% level
performance
practices,

423
Management

regression analysis –
Table 6.
financial

direct effects
Results of the
 81,3

424
AFR

Table 7.
Results of the

interaction effects
regression analysis–
RoS log_ATO RoA RoE
Interaction effects Coefficient (S.E.) p-value Coefficient (S.E.) p-value Coefficient (S.E.) p-value Coefficient (S.E.) p-value

BMP_Fml_CF 0.0025 (0.197) 0.900 0.3711*** (0.0978) 0.000 0.0172** (0.0084) 0.042 0.0194* (0.0117) 0.097
BMP_Fml_AnyB 0.0854** (0.0329) 0.010 –0.1471 (0.1220) 0.228 0.0227** (0.0096) 0.020 0.0310** (0.0121) 0.010
BMP_FmL_CF_AnyB –0.0566 (0.0446) 0.204 –0.2115 (0.1774) 0.233 –0.0222 (0.0151) 0.141 –0.0259 (0.0207) 0.212
Cereals 0.2547*** (0.0199) 0.000 0.2898*** (0.0749) 0.000 0.0562*** (0.0060) 0.000 0.0738*** (0.0086) 0.000
Dairy 0.0642*** (0.0198) 0.001 0.7434*** (0.0669) 0.000 0.0151*** (0.0056) 0.007 0.0189*** (0.0072) 0.009
LFA Grazing Livestock 0.0020 (0.0269) 0.940 0.2982*** (0.0841) 0.000 0.0120* (0.0066) 0.069 0.0151* (0.0086) 0.078
_cons –0.0169 (0.0165) 0.307 2.036*** (0.0541) 0.000 –0.0034 (0.0038) 0.377 –0.0080 (0.0052) 0.123
F 47.13*** 26.36*** 18.14*** 15.23***
R-squared 0.2461 0.1538 0.1108 0.0956
Note(s): *** is statistically significant at the 1% level, ** is statistically significant at the 5% level, * is statistically significant at the 10% level
 Having good IT skills (Hypothesis 4) has no statistically significant effect on any of the Management
four business ratios. practices,
Size, in area, of the farm business has a statistically significant, positive effect on all four
ratios, and at the 1% significance level (Hypothesis 5). This shows that resources, if utilised
financial
more effectively through an increase in size, will lead to economies of scale and advantages in performance
financial terms. The effect is the largest for log_ATO, which was to be expected as ATO
measures how assets are used to generate sales. It is quite substantial for RoS at 10.62% when
increasing from a small to a medium-sized farm, and at 18.28% when increasing to a large 425
farm. For RoA and RoE, the effects are between 1.55% and 3.51%, and 2.55% and 4.32%
when increasing to a medium and large-sized farm respectively.
Ownership matters for RoS, log_ATO and RoE (Hypothesis 6). While ownership has a
statistically significant, positive effect on RoS due to the fact that owner-occupiers have a
different cost structure than tenant farmers, it has a statistically significant, negative effect
on log_ATO and on RoE. The effect of ownership on log_ATO is quite large (51.30%), but
this is, in part, because ATO is transformed. For RoE, the effect is small, at 0.82%, and is
statistically significant at the 10% level only. Ownership is not statistically significant
on RoA.

Discussion and conclusions

Of all the variables examined from the dataset covering both the farm descriptors and the
adoption of management practices, the one that had most influence on financial performance
in terms of both profitability and financial efficiency was increasing farm size in area terms.
This was evident from both the comparison of low and high performers through business
ratios using t-tests and in the regression analysis. It is generally believed (see, for example, in
the seminal text books of Barry et al. (2000), Nuthall (2010) and Warren (1998), and the
research in England of Hadley (2006) and Wilson et al. (2001) and in the USA of Wolf et al.
(2016), and demonstrated in the analysis summarised here, that larger farm businesses can
utilise resources more strategically and effectively.
The analysis also demonstrated the importance of farmers undertaking certain
management practices, as the results suggest that their adoption can also benefit farm
business financial performance. This resonates with work in the USA as reported by Gloy
and La Due (2003) and Plumley and Hornbaker (1999). Individually, the comparison between
the high and low performers represented in the data set demonstrated that formal planning,
cash flow planning, and benchmarking all have positive effects on profitability, with
adoption of more than one of these in combination also having positive effects. This is not,
however, clearly evident in terms of financial efficiency. The regression analysis also
demonstrates a positive effect for profitability from formal planning and benchmarking, and
also when these two are used in combination. A positive effect for both profitability and
efficiency is also evident from the regression analysis when cash flow planning is combined
with formal planning. This is not evident when using cash flow planning in isolation. What
the results show is that it matters to plan and review. This is especially the case when several
tools and techniques are combined-together in practice.
Other factors, beyond that of farm size and the adoption of management practices, appear
to have less, mixed or even a negative influence on financial performance.
Knowledge acquisition appears to have a limited, and mixed, influence on profitability and
no effect on financial efficiency in terms of being a member of a formal CPD Scheme, and/or
accessing advice. When comparing low and high performers, the results are positive for
accessing advice for profitability for only one ratio, and in the regression analysis for a
different ratio. There is no evidence that being a member of a CPD Scheme has any influence
on profitability. This may be due to the lack of formal opportunities in the farming sector.
There may, however, be informal opportunities not captured in the data set used in this
AFR analysis. Having a University degree also appears to have a limited influence. When
81,3 comparing the low and high financial performers, having a degree can have a positive impact
on profitability. However, the regression analysis suggests there is no positive impact. The
analysis indicates there is no proven benefit in having a degree for financial efficiency.
Experience, as represented by age of farmer, does appear to have a positive impact on both
profitability and financial efficiency according to the results from the comparison of low and
high performers. The regression analysis, however, does not support this, suggesting that, in
426 fact, experience that comes with age can have a negative influence on financial efficiency.
Similarly, having IT skills also appears to have a positive impact on profitability according to
the results from the comparison of low and high performers, but again this finding is not
supported by the results of the regression analysis.
Engaging in off-farm employment activities in the form of having a working spouse, did
not indicate any benefits for profitability, but in the comparison of low and high performers it
did have an influence on financial efficiency.
Ownership/tenurial status appears to have a negative influence on profitability and
financial efficiency. In the comparison of low and high performers and, in the regression
analysis, there appears to be a positive benefit for one ratio only. For most of the other
profitability ratios and for the financial efficiency ratio the impact is negative. It may be the
case that ownership involves incurring debt and thus debt repayments. This could be one
factor that would explain the negative influence of ownership on financial performance.
There are some important policy implications that can be drawn as a result of the analysis
presented here. However, the reader should consider the fact that the financial performance
measures were for one year only and that weather and other factors could have impacted on
this. In addition, the management practices survey was conducted for one year only. Thus,
causality could not be explored in a definitive way and our analysis only showed association,
albeit strong for some of the factors considered. First, the research confirms the findings from
the systematic literature review initially carried out. It expands the evidence base on the
importance of management practices to improve financial performance, but differentiates
between a series of tools, identifying which ones could potentially be most beneficial for farm
businesses if their aim is to increase financial performance. The research highlights the
importance of formal planning and benchmarking, but the evidence is less convincing for
cash flow planning. Nevertheless, it does suggest, in the case of all these three management
practices, that a combination of two or more of these would have the largest impact compared
to the adoption of one only. Related to this, is the need to understand what these management
practices actually constitute.
The dataset used carried with it some limitations, particularly with the definitions used. It
is unclear how farmers understand some management tools and skills, for example, what
processes are used to set-up the formal plan, and how they utilise benchmarking to compare
their situation with that of others. There is also no information on the quality of the business
planning instruments reported. Gathering further information on the quality of the tools and
their effects could build out the evidence base further in the future as could extending the
analysis for a longer period, say three years. This would avoid and smooth the effects of
annual fluctuations in yields and financial performance for farm businesses resulting from
weather and disease changes.
Second, the research suggests the need for policy makers to adjust policies and
programmes to support the development of managerial skills. This is especially pertinent for
the UK as farmers will have to quickly adapt to the trilogy of challenges they now (November
2020) face from Brexit, COVID-19 and Carbon Net Zero. What is evident from the results is
that formal CPD schemes, accessing advice and a University education may not always be a
significant positive influence. This suggests the need to rethink the provision of information
in relation to management practices and the subsequent processes behind their
implementation. Related to this is the role of wider industry and how it can better meet the Management
needs of farmers. Responding to new knowledge is essential in innovating and improving practices,
both financial and technical performance. Whilst there is a role for the farmers themselves in
this, there is also a role for industry organisations and rural professionals in determining how
financial
best for the farming population to acquire knowledge to improve both profitability and performance
financial efficiency of farm businesses. The emphasis should be on designing appropriate
mechanisms to encourage the adoption of management practices.
Finally, if financial performance of farm businesses is to be maximised, farmers should try 427
to achieve economies of scale through increasing the size of their business. This may not
necessarily be about buying or renting more land, with the data suggesting that ownership,
and thus the purchase of land, may actually have a negative effect on financial performance.
An alternative approach is through collaboration with other farmers in terms of pooling and
sharing resources such as the labour, machinery and fixed capital already invested.

References
Ahrendsen, B.L. and Katchova, A.L. (2012), “Financial ratio analysis using ARMS data”, Agricultural
Finance Review, Vol. 72 No. 2, pp. 262-272.
Barry, P.J., Ellinger, P.N., Hopkin, J.A. and Baker, C.B. (2000), Financial Management in Agriculture,
The Dryden Press, Chicago, IL.
Boddy, D. (2009), Management: An Introduction, 4th ed., Pearson Education, Harlow.
Capon, N., Farley, J.U. and Hoenig, S. (1990), “Determinants of financial performance: a meta-analysis”,
Management Science, Vol. 36 No. 10, pp. 1143-1159.
Defra (2004a), “Getting started in farm management accounting. Part I: using the farm accounts to
point the way”, available at: http://adlib.everysite.co.uk/resources/000/015/579/defra_using-
accounts1.pdf (accessed 16 November 2015).
Defra (2004b), “Getting started in farm management accounting. Part II: mapping out a farming
future”, available at http://adlib.everysite.co.uk/resources/000/015/753/defra_accounting2.pdf
(accessed 16 November 2015).
Defra (2004c), “Farm business benchmarking. Part II: mapping out a farming future”, available at
http://adlib.everysite.co.uk/resources/000/220/545/benchmark-online.pdf (accessed 16
November 2015).
Defra (2013), “Business management practices on farm 2011/12, England”, available at https://www.gov.
uk/government/uploads/system/uploads/attachment_data/file/201043/fbs-businessmanagement-
statsnotice-22may13.pdf (accessed 27 October 2020).
Defra (2018), Health and Harmony: The Future for Food, Farming and the Environment in a Green
Brexit CM 9577, TSO, London.
Defra (2020), “Farm business survey–technical notes and guidance”, available at: https://www.gov.uk/
guidance/farm-business-survey-technical-notes-and-guidance (accessed 27 October 2020).
Dhaouadi, K. (2014), “The influence of top management team traits on corporate financial performance
in the US”, Canadian Journal of Administrative Sciences- Revue Canadienne des Sciences de l’
Administration, Vol. 31 No. 3, pp. 200-213.
EC (2013), “Agriculture and rural development: FADN”, available at: http://ec.europa.eu/agriculture/
rica/index_en.cfm (accessed 22 February 2016).
Erickson, K.W., Moss, C.B. and Mishra, A.K.A. (2009), “Regional differences in agricultural
profitability, government payments, and farmland values: implications of Du Pont
expansion”, Agricultural Finance Review, Vol. 69, pp. 49-66.
Firer, C. (1999), “Driving financial performance through the DuPont identity: a strategic use of
financial analysis”, Financial Practice and Education, Vol. 9, pp. 34-46.
Friend, G. and Zehle, S. (2009), Guide to Business Planning, 2nd ed., Profile Books, London.
AFR Gloy, B.A. and LaDue, E.L. (2003), “Financial management practices and farm profitability”,
Agricultural Finance Review, Vol. 63 No. 2, pp. 157-174.
81,3
Hadley, D. (2006), “Patterns in technical efficiency and technical change at the farm-level in England
and Wales 1982-2002”, Journal of Agricultural Economics, Vol. 57, pp. 81-100.
Little, P.L., Little, B.L. and Coffee, D. (2009), “The Du Pont model: evaluating alternative strategies in
the retail industry”, Academy of Strategic Management Journal, Vol. 8, pp. 71-80.
428 Nuthall, P.L. (2010), Farm Business Management: The Core Skills, CABI, Wallingford.
Pettigrew, A. (1992), “The character and significance of strategy process research”, Strategic
Management Journal, Vol. 13, pp. 5-16.
Plumley, G.O. and Hornbaker, R.H. (1999), “Financial management characteristics of successful farm
firms”, Agricultural Finance Review, Vol. 51, pp. 9-20.
Prasad Pokharel, K., Regmi, M., Featherstone, A.M. and Archer, D.W. (2019), “Examining the financial
performance of agricultural cooperatives in the USA”, Agricultural Finance Review, Vol. 79
No. 2, pp. 271-282.
Rural Payments Agency (2014), “RPA announces 2014 SPS entitlement values”, available at: https://
www.gov.uk/government/news/rpa-announces-2014-sps-entitlement-values (accessed 16
November 2015).
Rural Payments Agency (2015a), “Basic payment scheme entitlement values and National Reserve
confirmed”, available at: https://www.gov.uk/government/news/2015-basic-payment-scheme-
entitlement-values-and-national-reserve-confirmed (accessed 16 November 2015).
Rural Payments Agency (2015b), “The basic payment scheme in England 2015. Guidance for farmers
about the basic payment scheme in 2015”, available at: https://www.gov.uk/government/
uploads/system/uploads/attachment_data/file/406452/BPS_Handbook_-_final_v1.0.pdf
(accessed 16 November 2015).
Soliman, M.T. (2004), Using Industry-Adjusted DuPont Analysis to Predict Future Profitability,
Stanford University, CA.
Soliman, M.T. (2008), “The use of DuPont analysis by market participants”, The Accounting Review,
Vol. 83 No. 3, pp. 823-853.
Vanhuyse, F. (2016), The Impact of Management Practices on Financial Performance: Evidence from
Farm Businesses in England, unpublished PhD thesis, University of Reading, Reading.
Warren, M. (1998), Financial Management for Farmers and Rural Managers, 4th ed., Blackwell
Science, Oxford.
Wilson, P., Hadley, D. and Asby, C. (2001), “The influence of management characteristics on the
technical efficiency of wheat farmers in eastern England”, Agricultural Economics, Vol. 24 No. 3,
pp. 329-338.
Wolf, C.A., Stephenson, M.W., Knoblauch, W.A. and Novakovic, A.M. (2016), “Dairy farm financial
performance: firm, year and size effects”, Agricultural Finance Review, Vol. 76 No. 4,
pp. 532-543.
Zhang, B. and Xiaosong, Z. (2012), The application of adjusted DuPont model in financial performance
evaluation, paper presented at the 7th International Scientific Conference, Business and
Management, Vilnius, Lithuania.
About the authors
Fedra Vanhuyse is the Head of the Societal Transitions Unit at the Stockholm Environment Institute,
focusing on sustainable consumption, cities and finance. She has also worked for the UK’s National
Audit Office, evaluating Government projects on value for money, and for the Natural Resources
Institute, University of Greenwich, monitoring international agricultural projects. She obtained her PhD
in agricultural economics at the University of Reading in 2016, researching the impact of management
practices on the financial performance of farms in England. She has a MSc degree in applied economics
from the Catholic University of Leuven and a MA degree in conflict and development studies from the
University of Ghent.
 Alison Bailey is the Professor of Farm Management at Lincoln University, New Zealand. She did her Management
undergraduate degree and PhD at the University of Wales, Aberystwyth. Since then she worked at the
Scottish Agricultural College, Edinburgh, Cranfield University and the University of Reading. Her practices,
research focuses on the analysis of agricultural production systems including the investigation of financial
farmer decision-making and motivations and the impact on farm productivity of alternative farming performance
systems and technology adoption.
Richard Tranter is the Professor of Rural Economy and Director of the Centre for Agricultural
Strategy at the University of Reading. He is an agricultural economist, with over 40 years’ experience in 429
rural land use and farm economics and structural issues. In recent years, much of his research focuses on
the decision-making behaviour of farmers, as they strive to adapt to the various challenges they face.
Richard Tranter is the corresponding author and can be contacted at: r.b.tranter@reading.ac.uk

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com