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Evaluating your Operation's Profitability with Benchmarking

The day-to-day work of owning and operating a farm business takes a lot of time and energy, making it tough to focus on some of the things that may be holding you back and limiting your profit potential.

That’s why at Farm Credit East, we offer a series of financial benchmarking programs that allow you to compare your operation to other businesses that are similar in size. The basic benchmarking process measures your business primarily on the income statement, comparing it to an aggregate data set from comparable operations. This creates a context that can show you whether your financial results are a consequence of industry cycles, or if you should consider making changes to your operation.

Steps In The Benchmarking Process

Our benchmarking services – ranging from a no-cost review of financial statements all the way up to our Success Strategies benchmarks that look at detailed industry metrics – entail a four-step process.

First, it’s important to put together a good set of financial records for your business. Then, you can compare your ag business to other similar operations. Based on that comparison, you can identify areas where your business is performing better or worse than your peers.

Generally, producers have a sense of whether they’re doing well or poorly without having to use benchmarking, but may not know why. You may have limited profitability, but, you may not know the specific areas where improvement is needed. Perhaps your business has high labor costs or low sales on a per acre or per worker basis. Benchmarking can help identify these variables, and show how you compare to other farms, enabling you to target areas for improvement.

Start With The Right Data

A comprehensive self-evaluation is the first step of a successful benchmarking process. Having good records is of utmost importance when comparing yourself to a benchmark; a benchmark standard of what the industry looks like isn’t going to help if you don’t have your own house in order with consistent records and financial statements.

In compiling these records, it’s also important to accurately account for variables like inventory and depreciation. That means adjusting for things like prepayments, deferred payments and bonus depreciation because not doing so can cause inconsistencies that make comparisons difficult. Making adjustments like these can paint a more accurate picture of your finances.

Our benchmarking data is managed the same way. We take out farms we feel are outliers because of unusual circumstances. If, for example, a dairy farm has a major herd health problem or an operator inherits $1 million – unusual factors that can cause a sharp change in their financial picture – we take them out of the equation.

Benchmarking Options

We offer several benchmarking options with a range of prices and level of detail. Our Benchmark Solutions Program provides financial statement data and some general industry-specific metrics for basic comparisons.

Our Success Strategies Benchmarks take into account more industry-specific variables to paint a much more comprehensive financial picture. Our comprehensive dairy benchmark, for example, takes into account cow productivity, feed ratios and other variables that allow for a more detailed analysis.

Keep The Right Goals In Mind

If an analysis of your operation using one of our benchmark programs reveals change may be beneficial to your operation, think in terms of “S.M.A.R.T.” goals: specific, measurable, achievable, results-focused and time-bound.

If a benchmark analysis reveals your cost of labor is preventing you from reaching median or higher revenue, be careful of overcorrecting in the short-term. See if you can bring it closer to the mean by 10% over the next year, for example. You can do that by being more efficient in how you utilize labor or changing staffing policies. Start with smaller adjustments like these.

Don’t Rush The Process

If the data shows a more profound departure from the average operation, it may be a call for more sweeping change. If you operate a dairy and also grow some field crops, benchmarking may reveal that one enterprise is performing considerably better than the other. If you come to this conclusion, it is probably best to make adjustments over a period of more than one season.

Just like a tractor, benchmarks are tools and not ends in themselves. This series of steps, from recognizing an issue to taking action to improve your operation, is a process and should be carried out over time. Benchmarking is just one tool to employ in the process of maximizing profits in your operation.

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