Harness the Power of Benchmarking for Your Farm’s Growth
What is Benchmarking and Why Should You Use It?
Benchmarking is the process of comparing financial ratios to those of similar farm operations to evaluate performance. It’s a powerful tool for managing a farm. When done correctly, it provides a clear view of where to focus efforts to meet financial goals, aiding decisions to enhance performance and leverage strengths. While no single ratio ensures success, balancing revenue, expenses and debt can set an operation up for success.
Track Your Progress: Start with Quality Financial Data
Before comparing your operation to others, start with quality financial data, including:
- Accurate year-end balance sheet
- Accrual-adjusted earnings statement
- Annual tracking of scope and production
- Recorded family living expenses
To perform financial benchmarking, consistently complete an accurate year-end balance sheet. This will enable you to adjust your earnings for accruals, considering changes in grain inventories and values, livestock inventories, pre-pays and accrued expenses at year-end. Accurate scope and production information quantify the operation each year. Recording family living expenses annually helps understand the funds required to support the family (groceries, family vacations, everyday expenses).
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Data-driven Insights: Analyzing Strengths and Areas for Improvement
Benchmarking can be overwhelming. Start with key targets to assess if your balance sheet is structured for success and if your farm operation can service current debt levels with enough margin left to seize opportunities and weather less profitable years.
Working Capital to Adjusted Gross Income (AGI): Calculate working capital to adjusted gross income by subtracting current liabilities from current assets and dividing by adjusted gross income. Maintain enough cash reserves to cover any cash flow shortages you might have due to farming volatility. Working capital to adjusted gross income specifically considers the farm’s capital reserves in relation to its size and scope.
Equity to Asset Ratio: Avoid becoming too highly leveraged by calculating equity to asset ratio – divide net worth by your total assets value. It measures the solvency of your operation.
Capital Debt Repayment Capacity (CDRC): Assess an operation’s ability to repay debt with CDRC, considering both on- and off-farm income as sources of repayment. Despite volatility, be mindful of borrowing levels relative to profit generation.
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Margin after Debt Service to AGI: Calculate the margin after debt service by deducting all expenses, loan payments, family living and income taxes from income. Divide this by adjusted gross income to measure profitability relative to the operation’s size and scope. Your target should be 10%-20%.
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Compeer can help you with benchmarking your operation. Talk to your local financial officer about Compeer’s Financial Peer Report where we can help use your operation’s data to identify competitive advantages, areas for improvement and establish your financial goals.
Benchmarking Basics
Benchmarking is a powerful tool farmers can use to better understand and improve their operation. Compeer can help you see how you stack up against other producers and guide you to meet your goals.