Road Warrior

An Aussie’s view of financial and business benchmarking, part 2: Profits

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In the last column, discussion centered on financial and business benchmarking, which can provide a competitive edge. I was joined by Richard Heath, a fourth-generation Australian producer and Nuffield Scholar, to discuss our top ten best management practices with the New Century Farmers who are part of the FFA’s innovative leadership program.

A quote from my dairy farm and creamery business partner, Dave Bower, at a recent conference builds upon our suggestions from the northern and southern hemispheres to the young farmers. Dave’s quote was, “Take everything you do and put it into numbers. Either it will work, or it won’t make sense. Real numbers often tell the truth.”  Financial and business benchmarking is not an option but a requirement in today’s global agricultural economic environment. Financially, there are four cornerstones regardless of enterprise, size or location that need to be examined.

First and foremost are profits, which are the lifeblood of any business. Do you consistently have a positive bottom line? Be careful of using tax records to determine profitability, since expense and revenue manipulations and depreciation methods often result in losses according to the tax records. Accrual-adjusted financial statements tell a more accurate story. Adjusting for inventory, prepaid expenses, receivables, crops growing the field, payables and accrued expenses using beginning and ending balance sheets is very critical in financial benchmarking. If you do not know how to do this, contact your lender for assistance. If they do not know how to do it, then you better get a new lender! What is a good dashboard metric?  A return on assets (ROA) of 5% or greater is good. If you want to be in the top 20% of producers, strive for a 10% or higher ROA.

The farm record databases since 1995 consistently illustrate that the top 20% of producers earn more than a 10% ROA, and the bottom 20% earn less than a 1% return. How do the low 20% remain in business? They usually refinance operating losses every three to four years, as long as assets are appreciating.

Next time we will talk about debt levels.

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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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