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.
- 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.
- 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.
- 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.
- 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.
- 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%.
- 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.