Mike Hosterman, AgChoice Farm Credit Ag Business Consultant
Are they controlling their input costs better than you? Do they have greater outputs per unit? How do their gross margins compare?
We all strive to have successful operations. No matter if you have a large dairy operation or small vegetable business, the five keys to profitability for any business are:
- Volume - amount of product produced on a per unit basis
- Efficiency - gross margin of your business
- Overhead - capacity of your business
- Industry skills - standard measures within your particular industry
- Cost control - management of costs for your business
To better understand how you are doing in relation to these keys to profitability, benchmarking can be an effective way to see where you are and help make a plan for where you are going. Benchmarking includes comparing your business performance to previous years and/or comparing your business performance to others with similar operations.
Both methods of benchmarking help you to find weaknesses within your operation so that you can make improvements to be stronger and more profitable. Comparing your farm to previous years allows you to assess positive and negative changes in your operation that you might not have otherwise realized. There are few published benchmarks for horticultural crops so comparing against yourself may be your best option. Comparing your farm to your peers shows you how your business stacks up. However, don't strive to just be average. Each year, we lose the bottom 10-20 percent of all industries and the competition continues to get tougher. Always compare yourself to the best of the best.
As you begin your quest in benchmarking, follow these suggestions:
- Measure and record your data consistently
Consistency is important in benchmarking, so be sure to calculate your benchmarking factors the same, year after year. Otherwise, you may be using inaccurate data in your benchmark analysis.
- Compare your financials on the accrual basis
Year-end balance sheets should be prepared each year and used to generate accrual-based financial statements. This ensures that inventories or other factors aren't skewing your financial data and allows you to make smarter management decisions.
- Calculate your ratios
When you have completed your financial statements for the year, be sure to calculate your ratios. This will make comparisons from previous years much easier.
- Look for benchmarking services to help you
Many benchmarking programs are offered by industry organizations and consultants. These programs can help you gain access to a broader, more accurate database of comparable operations.
- Don't stop with benchmarking
Take time to assess your data, put an action plan together and follow through.
When used effectively, benchmarking can help operations turn weaknesses into strengths, improving the overall profitability of the business. Get started today by assessing where you've been and making a plan for improvements for the future.
By Mike Hosterman, AgChoice Farm Credit Ag Business Consultant