Here are the key metrics to measure your farm’s financial success.
Nearly all farms today are feeling some level of financial stress. “Some need a little tweaking, while some need an overhaul,” says Freddie Barnard, Purdue University professor emeritus.
Before you can make an adjustment, you need to know your farm’s strengths and weaknesses. A good way to evaluate your standing is by looking at a few key financial metrics, Barnard says. Each one evaluates a different part of your operation and can uncover problems. If you monitor them annually you can do a trend analysis to make better long-term strategic decisions.
“The margins are too tight for just a hope; you have to actively manage it,” he says.
Here are several key metrics you should track, as well as targets for each ratio provided by the Center for Farm Financial Management at the University of Minnesota.
The ratios above are five of the 21 financial ratios you can monitor. Here is the full list:
Efficiency Ratios
- Asset Turnover Ratio
- Operating Expense Ratio
- Net Farm Income Ratio
- Interest Expense Ratio
- Capital Consumption Ratio
Liquidity Ratios
- Current Ratio
- Working Capital
- Working Capital To Gross Revenues Ratio
- Debt Service Ratio
- Times Interest Earned
Profitability Ratios
- Net farm Income
- Earnings Before Interest, Taxes, and Capital Consumption (EBITC)
- Operating Profit Margin Ratio
- Total Rate of Return on Farm Equity
- Rate of Return on Farm Equity from Income
- Rate of Return on Farm Equity from Capital Gains
- Total Rate of Return on Farm Assets
- Rate of Return on Farm Assets from Income
- Rate of Return on Farm Assets from Capital Gains
Solvency Ratios
- Debt-to-Asset Ratio
- Debt-to-Equity Ratio
- Equity-to-Asset Ratio
Michigan State University Extension provides detailed overviews of all 21 ratios.
Use Purdue University’s spreadsheet to compute accrual net farm income, key financial ratios and repayment capacity measures. It uses Schedule F information (net cash income or net cash profit) and beginning and ending balance sheets.
The farm finance scorecard from the University of Minnesota Extension helps you see where you are in terms of financial ratios and measurements
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