When assessing plans for the future of your farm, it often helps to test them against past performance.
Would a change in operation enhance your average performance?
But what is average?
A major league baseball player with a .300 or better batting average is considered to be achieving superior hitting performance. That’s a successful at-bat three out of 10 times — or failure seven out of 10 times.
Sixty-seven National Hockey League goalies had save percentages greater than .900. That’s stopping nine out of 10 shots and failing, or allowing a goal, one out of 10 times.
For the ballplayers, a .300 average is something to strive for. For goalies, though, the performance generally needs to be greater than .920 over a season for the team to have a reasonable chance at winning on a consistent basis.
Averages provide information that can be used to evaluate performance, but as these sports illustrations show, the context for the average must be understood.
Let’s apply the averages discussion to farm financial performance. Here is a question: over five years, how many times would you classify your financial performance as:
- Above average or outstanding: to spin the baseball metaphors, a home run or better, a grand slam. Or in hockey, back to back to back shutouts.
- Average: a single or only allowing a couple of goals.
- Below average or poor: going hitless in seven games.
The accompanying table is a summary of a farm’s income statement based on real farm data. With big swings in net income, it isn’t easy to determine a trend or what could be called average performance.
Another question follows: how do you define “average” on your farm?
If the farm financial performance in the accompanying table was a mirror image of your farm’s performance, what would you consider the average to be?
Do you simply calculate it mathematically, meaning adding the five year income and dividing by five? Or do you consider a form of an Olympic average, excluding the outstanding and poor years?
Interestingly, the five-year average net income is $139,574 and the Olympic average is $143,014.
I ask farmers what they think their good year-bad year average is: not the actual calculated average net income but their general observations on performance. How many years are “grand slams” and how many are “extended hitless streaks?”
The answers vary, but farmers will generally say that if they can get two or three outstanding years out of 10, they would be satisfied.
Looking at the data in the table and doubling it to 10 years, you would get two home runs and two busts.
Past financial performance can be used as a basis upon which to test future plans. Past performance expressed as trend lines can be useful, but often, such as the farm in the table, there is no clear trend.
It can be tricky to know what numbers to use as a basis for the analysis to support, or challenge, future decisions that involve capital investment and additional debt.
I’m not aware of a right or wrong approach, but I have some general guidelines that make sense to me:
- I use trend lines whenever I can.
- If there is only one outstanding year or one poor year in the period, I will discount it as an outlier.
- If there are a couple of either really good or really bad years, or a combination of the two, I will use an Olympic average approach. Be cautious, though. They have to be really good or really bad before I exclude them.
- I will place a bit more emphasis on the results from the most recent one or two years. There is so much change in the industry, and most recent results can reflect some of that change.
Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or firstname.lastname@example.org.