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6 Benchmarks for Farm Success

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Has the ever-fluctuating agricultural market left you uncertain about the future? These six industry-established benchmarks can help you stay on track for long-term financial success.

  1. Working Capital
    • Do you have sufficient assets to cover short term debts? To calculate, subtract current liabilities from current assets. Ideally, you should have enough to cover at least 50% of expenses.
  2. Owner’s Equity
    • Who is the majority stakeholder of your business? Determine your Equity-to-Asset ratio by dividing net worth by total assets. Because this ratio calculates how much ownership you have in your farm, results of less than 50% means the bank may have more impact on business decisions than you do.
  3. Return On Assets (ROA or ROI)
    • Are you using your assets effectively? To calculate your ROA, divide your annual net earnings by the total assets. Optimal ROA should be 6% or more.
  4. Return On Equity (ROE)
    • How profitable is your operation? Calculate your return on net worth by dividing annual net income by shareholder’s equity. A return of 16% or more is ideal for long-term success.
  5. Expense-To-Revenue (E/R)
    • Is your operation using financial resources efficiently? To find out, divide your annual operating expenses by annual revenue. Efficient operations should achieve a ratio of less than 65%.
  6. Family Living Withdrawal
    • Farm families should strive to keep living expenses under 10 percent of total revenue. Farms that exceed this benchmark should re-evaluate how many individuals are making a living from the farm’s income.

Producers are encouraged to regularly recalculate, compare, and evaluate these six ratios when making cost management decisions.  

 

 

Sources:
Kantrovich, Adam. “Financial Ratios.” Michigan State University Extension.
Kitchen, Sara. “6 financial targets for long-term dairy success.” Progressive Dairyman.

 

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