Top producers understand their farm business.
They know their financial and production profiles and they use benchmarking to compare the performance of their operation against that of their peers.
Benchmarking helps them identify their operation’s strengths and weaknesses as well as areas that need improvement. It helps them set future goals and improve production levels.
Benchmarking has traditionally been used to compare yields, such as piglets per sow, return per bird or production per cow.
However, farmers are interested in taking benchmarking to a much more sophisticated level, and most are eager to compare industry benchmarks, both from a managerial and financial perspective.
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This approach looks at the farming operation not just as a profit centre or a lifestyle but as an innovative and dynamic entity where owners can compete against themselves and their past performance and compare and compete with others locally, nationally and internationally.
Farmers are interested in the correlations between management and financial performance so that they can better understand which best practices are used in what ways to replicate similar achievement. In other words, they want to determine what leading farmers actually do to consistently achieve superior financial performance.
Farmers can benchmark against:
- Their own performance by comparing current accomplishments to historical trend lines.
- General industry standard performance guidelines.
- A peer group or a number of farmers with a common interest in benchmarking their performance against each other.
- Their forecasted base line performance as an indication of where a farmer’s performance is tracking, given what has happened in the past.
Two further questions must be considered for this final point:
- If the forecasted performance were to materialize, would it be acceptable?
- If it isn’t acceptable, what can be done to improve it?
Targets or performance goals can then be established to determine if their performance is getting them to where they want to be.
Benchmarking is used extensively in production, such as yield and cost per productive unit.
It is also used to a lesser degree in marketing, such as tracking units of production sold in the top quartile.
Benchmarking financial and managerial performance is less common.
Farmers who participate in a financial benchmarking exercise and are able to see how their performance compares to others quickly want to know what the farmers who report top quartile performance results are doing to achieve those results.
An assumption can be made that better managed farms are more profitable, but is that true and can it be confirmed by measurement?
To answer that, there must be a way to compare the financial and managerial performance of farms. There are several key issues to consider:
Finance
- Financial analysis needs to be standardized. Accounting firms present financial statements for farms in several formats, which makes benchmarking difficult.
- Financial analysis must use accrual accounting. Cash-based financial statements do not provide an accurate enough base of information upon which to benchmark performance.
- Financial statements must be based on original cost less depreciation or amortization. Market value adjustments are less reliable because they are usually based on subjective opinion.
- Significant variability exists from farm to farm in how they are capitalized and financed, which in turn affects benchmark results.
Management
- Management performance analysis must be standardized as part of a benchmarking exercise.
- Most importantly, an approach needs to be developed that enables the comparison of financial and managerial results in a benchmarking exercise.
Profitability and long-term sustainability require that farm businesses develop and implement strategies designed to advance management practices.
Combining a balanced approach to management with financial performance provides useful information when determining which business strategies to use and how outcomes are measured.
Making management decisions that affect substantial growth, intergenerational transition and financial performance demand much more than looking at the business through an operational lens.
