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Measuring Farm Performance

Grahame Rees - Tuesday, August 14, 2012

Measuring farm performance

 

By JIM LINDSAY

 

As the saying goes: it is difficult to manage what you don’t measure. There are three main methods for measuring financial performance in farm businesses:

1) Total net worth, ie cash, plus the value of your livestock, plant and land inventories

2) Cash plus livestock inventory value

3) Cash---livestock numbers and class----plant----land, etc.

The third method is a separate measure and value of the different inventories.

It is also the one that KLR Marketing would suggest to use, as it gives the business a clear view of the separate inventories.

I am not suggesting that the other ways do not have a place, however they can be misleading if not understood correctly.

 

View inventories clearly

 

Just to expand on the third a little:

Cash is easy to measure: it is either up, down, or the same.

Livestock numbers and class: the numbers are like the cash - they are up, down, or the same.

The class of stock may be different even if the numbers are the same, so that can be noted. For example, the class of livestock could have changed from heifers up to cows and calves, or from 200kg steers up to 400kg steers. However, remember the profit is not yours until you have actually sold and replaced, (either with outside animals or ones you have bred).

 

A catch in ‘book valuing’

 

Be careful about valuing the livestock inventory for the purpose of measuring profit or loss, as a business can make the mistake of ‘book valuing’ its livestock inventory for profit or loss, only to have that ‘book’ profit or loss change the

moment the market value of the livestock shifts.

For example, if the business had determined a profit by including a livestock inventory value, and the market value of the livestock halved, it could easily turn a profit into a loss and vice versa.

The only real profit is when the cash is taken off the table!!

Plant and its upkeep is something that can influence profit, so needs to be kept in mind.

Measure what you can control..

 

Land value generally only matters if you want to sell it, or use it as equity to go to the bank.

If the land is reasonable enough to depasture livestock on, then a livestock business can be carried out on that land regardless of its value. Unless you have good reason, don’t’ measure the business performance on things that cannot be influence by management. If you are looking at your overall investment return then combining all the inventory values would be necessary.

 

...don’t base decisions on what you cannot control

 

If a livestock  business can generate cashflow and profit while maintaining the livestock inventory, that is the best risk management it can have.

Businesses relying on an increase in land values for equity to borrow against and run the business, can be at high risk.

One of the most valuable things a farm/livestock business can have is the ability to create a cash profit.

That profit can then be used to go towards all types of different things.

 

A word on benchmarking

 

We benchmark our business every year, however the whole concept can be quite complex and confusing. I like simple things, so……… if we have a better cash position than last year and have maintained our livestock inventory, I reckon that’s a benefit.

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