Financial Benchmarks for Your Operation

Hi, I'm Dr. Dave Kohl, Professor Emeritus of Agriculture, Economics, and academic hall of famer from Virginia Tech, Blacksburg, Virginia.

Today, I'd like to discuss the latest on financial benchmarking for 2020. One of the things that I like to do is look at various financial record keeping systems around the United States of America and kind of compare financial benchmarks of this year or 2022, to previous years.

Well, let's look at three specific benchmarks that you might want to use in your business. First of all, is the coverage ratio. It's real interesting. The median coverage ratio this year with the financial benchmarks on the record systems was 250%. This is compared to 120% to 150% in previous years. One of the things that we've got to be really careful about this number, particularly for 2020, is many farms and ranches have received government stimulus checks. And it's real interesting, talking with an upper Midwest lender, he said that his median customer had a 248% coverage ratio when he looked at all of his customer base. However, when they took out the government payments, that dropped to 114%. So again, if you're benchmarking that number, that's a little difference you might want to do in your analysis.

Second, let's look at operational efficiencies. I like to look at the operating expense revenue ratio, excluding interest and depreciation. Looking at the financial benchmarks across the country, the median was 71%. The top 20% was generally in about the 65% to 68% range. And then, the bottom third to bottom 20% was in the 89% range. Again, if you're benchmarking these numbers to your business, adjust those government payments and see how those benchmarks will come out.

Finally, let's look at return on assets. It was real interesting, the median was almost 8%, whereas the top third or top 20% of managers was 12%, and the bottom 20% was 2%. I always remember, and particularly in this type of environment, we're in an inflationary environment, you always like to see your rate of return on asset twice the rate of inflation, or if you can't get twice the rate of inflation, at least exceeding inflation. Of course, inflation is starting to pick up to 4% to 5%.

Well folks, these are three benchmarks that you might be able to apply to your operation. And again, financial benchmarking is one of the best management practices amongst peak performing producers. Well, we'll see you the next time for another issue dealing with finance and business.