Last week I talked about some metrics you want to be tracking on your farm. We'll continue this week with another metric to add to your farm's financial dashboard – one that might not yet be on your radar, but that you'll want to know about.
One thing to think about as you develop metrics for your farm is to be careful what you measure – because you get more of what you measure. So you want to choose wisely as you think about what's going to be most important to measure on your farm in the coming years.
But how are we supposed to decide what to measure? We have to make some choices around that. There's just too much information available to us now – too much data – and we can't possibly go through all of it and use everything that's available. And there will be even more of it coming to us in the future.
As you decide on the key metrics for your farm business, the best metrics are usually simple to explain and easy to figure out. They make up a helpful dashboard for your business. What gauges on your dashboard do you need to focus on to help you understand what's going on in your business from a financial standpoint?
I mentioned working capital and equity last week as two metrics you should be tracking. Your term debt coverage ratio is another one that's going to become more important if farms run into tighter margins in the next few years. It looks at your net income compared to your term debt payments.
For example, if your principal and interest payments are $100,000 annually, then you'd want to have an accrual net income of around $150,000. You need to be able to cover 1.5 times your payments (principal and interest combined), or – put another way – 150 percent. That would be a healthy number for most farms.
Working capital is connected to this metric. If you have a loss year, then your working capital is what's going to help you through it. But if you allow your working capital and equity to drop to low levels while servicing too much debt in your business, you're going to run into trouble.
If you're interested in hearing more about farm metrics, I'll be going into more depth and detail on them during a session at the Ag Edge Farm Business Seminars this winter. You can find out more about all of the topics you'll learn about and the speakers who will be presenting there by taking a look at the program agenda. I'd love to see you there this winter as we discuss issues you might face in the near future in your farm business.