Catch the second installment of this series, Are You Operating an 'Average' Farm Business? Benchmarking, Part Two
Benchmark, Yardstick, Standard, Target, Scale, Rank. Whichever word you want to use, there is value in knowing how you stack up and rate in comparison to yourself and industry peers. Benchmarks are typically used to help you understand and improve your operational efficiency and financial performance.
Benchmarking is the process of comparing measurements of your operational efficiency and financial performance to either best-in-class industry performers or to industry averages. What you actually measure will vary depending on your unique operation and what you determine are keys to the performance of your business.
Standard financial measurements include profit margin, return on equity and other measurements of profitability, liquidity, solvency, efficiency and repayment capacity. Other common measures might include yield per acre, revenue per employee, sales per tasting room visitor, capital equipment per acre, cost of production, and so on.
Consistently benchmarking your business is considered a best-practice for helping you measure the overall effectiveness of your decision-making skills relative to changes in your operations, strategies, time or the marketplace in general. The objective of benchmarking is not to crunch numbers for numbers sake. The key is how to interpret them relative to your specific business. Also, since most of you likely don't have a monopoly, it's a good policy to understand your performance within a competitive marketplace and whether your management practices help or hinder your long-term sustainability.
Knowing what you do well is incredibly helpful in propelling your farm business forward. Knowing your numbers will help you determine the merits of implementing a certain strategy or long-term plan. Benchmarking will also alert you to any poor performing areas of your business and help steer you away from what otherwise might appear as an attractive endeavor, but is really a snake in the grass.
Overall, financial benchmarking will help you decide to move ahead when opportunities arise and to walk away from potential disasters. In part two of this series, we will explore the importance of data accuracy. Know your numbers. Know your business.
Explore additional items in the benchmarking series:
How Do You Rate? Benchmarking, Part One
Are You Operating an 'Average' Farm Business? Benchmarking, Part Two
Why timing is important: Benchmarking, part three
Ready to benchmark your farm? Compare apples to apples
Brought to you by Farm Financial Standards Council. The opinions of Jim Casler are not necessarily those of Farm Futures or the Penton Farm Progress Group.