Better benchmarking – how to get the most from your numbers
Benchmarking — or comparing business finances to other operations of a similar kind — can be an insightful and useful way to improve a farm’s financial performance. However, getting the most value for your efforts requires consistency in comparison.
Compare apples to apples
Joerg Zimmermann, chair of Farm Management Canada, says business owners must perform apples to apples comparisons. This only works with predetermined standards on categorizing the farm’s financial and natural data, such as bushels per acre or piglets per sow. Effective insights also come from analyzing more than one crop or herd cycle. A multi-year approach helps to identify trends and eliminate outliers.
Standardization is the prerequisite to benchmarking. You have to do it the same all the time, every time.
“Is rent a capital cost or an operational cost? You need to define that from the get-go. There’s no real right or wrong,” Zimmermann says. “Standardization is the prerequisite to benchmarking. You have to do it the same all the time, every time.”
You can apply benchmarking to almost anything in crop and livestock production, including non-financial natural data such as bushels per acre, piglets per sow and kilograms of milk per cow. Actual comparisons tend to be easier with other businesses in the same sector. But, cross-commodity measurements are still possible, provided the right parameters are employed, such as looking at cost as a percentage of revenue rather than dollar returns per cow or acre.
Context is important too
High labour costs might warrant cost-saving measures, for example, unless those high costs are there on purpose – say, as part of a succession-related salary plan paid to parents exiting the farm.
“Quick results from just plugging in numbers doesn’t bring the true value. You need to dive deeper,” Zimmermann says.
Comparing overarching trends between different geographies is possible as well.
“For example, Germany has a relatively low cost per ton of wheat for direct inputs compared to Canada. But on the other side, their machinery costs are high compared to Western Canada,” Zimmermann says.
In this case, farmers in Western Canada know to focus on inputs and other less efficient aspects characteristic of farms in their region, rather than improving their already low machinery costs.
“The highest profit farms may not necessarily have the highest yield. They care more about the bank account. You can analyze the bigger trends, then steer your farm strategically to get a more efficient dollar output per dollar spent,” Zimmermann says.
Use peers, advisors and resources
The information necessary to make business comparisons can come from a variety of places. Lenders or advisory companies are a good place to start since they frequently utilize collective client data for that purpose.
“It would be nice to have a nationally recognized standard,” Zimmermann says, adding there are already nationwide peer group networks in other countries that have taken such an approach.
Indeed, peer groups — and even like-minded neighbours — are themselves options.
“If you do operational benchmarking – you need to be open-minded. Benchmarking is not to say I’m the best, but it’s there to expose and fix weaknesses.”
Benchmarking can improve farm financial performance, but consistency is key. Experts say that means using predetermined standards and analyzing more than one crop or herd cycle and can also include natural data. Maintain context as well, they say, and resist the urge to just plug numbers into a spreadsheet.
Article by: Matt McIntosh