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ARTICLES >> Business Articles

Key Farm Financial Benchmarks

Posted by Bestprac on Feb 07 2012

What should I be monitoring?

Benchmarking is an important farm business management practice. The benefits of benchmarking include providing:

  • A reference point for each year to monitor change
  • A way to compare how your business is going against other similar businesses
  • Targets for your business
  • Confirmation of your business strategy

As the old saying goes around our office – “you cannot manage what you cannot measure, so measure everything.”

As a starting point, your business should have an understanding of operating profit.

Operating profit is the production year performance of the business using the most accurate data available for that period. You may say “but that’s what the reports from the accountant are for”. That is right, but financial statements are prepared by an accountant and the purpose is for tax minimisation. This is not the focus of an operating analysis. We want to know the “true” business performance without the need to focus on tax. Therefore, the first focus should be profitability over a year period with accurate data inputting / assumptions.

One of the first benchmarks to explore is equity in conjunction with debt to income ratio. Equity is a great benchmark as the goal of many farming businesses is to build wealth but we need to remember that cashflow is king and without it we cannot service debt. Therefore to review these benchmarks together is very worthwhile.

Equity:

Net Worth divided by Total Assets x 100%

For example:
I have $1,000,000 net worth and have $2,000,000 total assets.
Therefore I have 50% equity.

Debt to Income Ratio:

This benchmark measures the debt burden associated with a business, and is an important benchmark to monitor. It provides an indication of current debt levels in relation to business income. When a business goes into debt, they need to ensure they have adequate income to meet interest and principal repayments. The debt to income ratio can provide an indication of this ability.

A high debt to income ratio (greater than 1.5) indicates that the business has a high risk profile caused by excess debt or low income.

It is important to monitor these benchmarks in conjunction with other financial (for example finance costs as a percentage of income, operating costs as percentage of income) benchmarks and production (for example lambing / calving percentage, wool cut per DSE) benchmarks to determine an accurate business position. Analysis in isolation will not provide an accurate result. It is also valuable to review your business performance over multiple years to develop a trend analysis that “tells the story” of your business.

Rural Directions Pty Ltd
 

Last changed: Feb 08 2012

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