One of the more difficult elements in benchmarking the financial performance of your farm business is how to acquire accurate industry information to use in your analysis. Benchmarking can sometimes mean the average statistic (as in the letter grade "C" in school) or the absolute highest, best-in-class statistic (as in the highest grade in the class).
When benchmarking your business, you can use whichever type of industry data you have available, whether it is industry averages, top performance, or both. The critical point here is that you must understand which type of industry measurements are being used in the examination of your business; otherwise your analysis will be flawed and you may come to the wrong conclusions.
When considering industry benchmark data, there are three important items to consider -- accuracy, timeliness and applicability.
In order for your analysis to offer useful insights, the information used must be accurate. This seems obvious, right?
More importantly, you as the business owner or manager need to have trust in its accuracy. Without that trust, you will generally not accept the analysis as it relates directly back to your business. Trusting the data can sometimes be a challenge because statistics, and data in general, have abnormalities or irregularities that can skew the effectiveness of some benchmark measurements.
Therefore, benchmark measurements need to come from a large enough collection of similar farms to be a reliable representation of the larger population. The benchmark data also needs to be collected using objective and correct methods.
Explore additional items in the benchmarking series:
How Do You Rate? Benchmarking, Part One
Are You Operating an 'Average' Farm Business? Benchmarking, Part Two
Why timing is important: Benchmarking, part three
Ready to benchmark your farm? Compare apples to apples
On a side note, it is usually not a good idea to find relief in knowing that your business is average (a letter grade "C"). Over the long term, below-average performers will go out of business. As they do, you, once the average performer, will now become the new below-average performer. Uh-oh! Remain in that position too long and you too run the risk of becoming non-existent.
Of course that's not an absolute guarantee, and it may take two generations, but it's very likely. Consistently underperforming businesses generally don't stay in business, so don't settle for average.
The Farm Financial Standards Council produced guidelines to help standardize accounting for agriculture so that benchmarking is more reliable.
Above-average industry performers have higher profitability allowing them to further reinvest in their businesses, say for newer, more efficient technology. Alternatively, they may also choose to build their cash reserves allowing them to better ride out the down years or take advantage of opportunities as they present themselves.
Either way, being above-average allows you to widen the gap between you and your underperforming competitors helping ensure your long-term sustainability. But, you'll never know where you are until you take an interest in benchmarking your business.
Brought to you by Farm Financial Standards Council. The opinions of Jim Casler are not necessarily those of Farm Futures or the Penton Farm Progress Group.