More farmers are measuring financial and production data to analyze business performance.
They use the information to make management decisions about production, marketing, investment choices and debt.
On average, farm margins are thin and sometimes nonexistent, so it’s important to use performance data to put management decisions on a solid footing. Relying on the alternative, the gut-feel approach, is increasingly risky.
There are various approaches farmers can use to measure business performance. None are wrong, as long as the information used in the analysis is accurate and applied correctly.
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Farmers, especially those who grow grain, oilseeds and special crops, manage a multitude of per unit (per acre) decisions on a daily basis, such as applied fertilizer, litres of chemicals, fuel and repairs, crop insurance, equipment investment, yield and revenue. Profit margins per acre also factor heavily into crop rotation decisions.
The per unit analysis approach is not specific to grain farms. Livestock operation analysis is also based on a per unit approach: number of litres of milk per cow, pigs weaned per sow per year and daily rate of gain per beef animal.
Farms in southwestern Saskatchewan and Manitoba’s Red River Valley usually have different cost structures, partly because of geography, climate and soil type. The differences can be analyzed on a per unit basis. For example, one would expect a Red River Valley farm to have a greater investment per acre in equipment. What are the cost structure and operating cost comparisons between a wheat farm in Kansas and the Red River Valley? Is per acre analysis still meaningful and relevant?
There are other equally important and relevant approaches to analyzing farm business performance. One is to pay particular attention to the balance sheet.
The balance sheet, with assets valued at cost less depreciation, captures the history of farm financial performance. The change in equity over a five year period reflects earned financial progress and provides an indication of the farm’s sustainable growth rate.
Businesses are built to be sold, either at arm’s length or non-arm’s length (intergenerationally).
The more wealth the farm business owner has accrued during his farming career, the greater the likelihood of a successful transition to the next generation and/or the more money there is for retirement and estate distribution.
The value of the business at the point of sale is not measured in per unit terms, although it typically is when assessing the value of the land. When it comes to analyzing financial performance at the day of reckoning, the most important questions to ask are how much money is there and is it enough?
Farmers who want to determine what a desired, future financial state might look like must analyze balance sheet performance. What must the balance sheet look like in five, 10 or 20 years or even further out?
The balance sheet is what will see a farm through tough financial times.
Per unit performance indicators from past years, especially those that report better than average performance, provide good information and will be factored into a decision to carry a farm through financial difficulty.
However, it is strength in the balance sheet that will win the day.
It would be interesting and perhaps somewhat useful to compare farms in Kansas and the Red River Valley using per acre performance. However, even though the farms are several hundred kilometres apart and do not compete directly, balance sheet strength will significantly play into the long-term advantage one farm may have over the other.
Performance per unit is what drives balance sheet growth and as a result, there is valuable and relevant information in that approach. Just don’t forget to pay attention to the balance sheet.
Terry Betker is a partner with Meyers Norris Penny LLP in Winnipeg. Contact: 204-782-8200.
