Benchmarking and What it Can Do For You?
F.S. (Rick) Hirtle, FCA, Partner
Country Guide
April 2008
Most producers know their farm or ranch intuitively. Time and experience have taught them how to spot potential trouble – whether it’s an approaching storm, the color and feel of the soil, or the way the livestock act. And yet one of the strongest indicators of how their operation is doing overall as a business – and can do better – often sits idle in a folder or computer file.
Just as producers can read the outward signs, a financial professional can dig inside and spot important information from documents like financial statements. It’s called benchmarking – measuring how well your agri-business is doing by using certain industry markers as a reference point that can identify the source of many problems.
The producer likely already knows when something isn’t right. There are the nagging questions about how well the operation is doing, especially when compared to previous years. There is the sense that your neighbor down the road is doing better, even though you run identical operations. How can he afford that new tractor? And there is the perennial concern that costs are rising faster than returns.
For an accountant, financial statements are like a map that gives the lay of the land. The information in these statements going back three to five years can give a full picture of how the operation is performing over time. What the accountant looks for are anomalies – spikes in revenues or expenses – and tries to determine the source.
Statements alone, however, only give a narrow view of how one’s operation is doing. Typically, we compare five years of a producer’s information to the local industry’s record, which provides a fuller picture of the producer’s performance. This can isolate the rise and fall in revenue that is clearly a market-wide phenomena – for instance, from a sudden drop in demand – would come as a surprise for most. The cause for a drop in sales is obvious and apparent to all. But if your business is doing poorly while the industry is doing well, the problem may be buried within your numbers.
For example, a dairy may learn that its production numbers are off when compared to similar operations of the same size and capacity. Despite a near identical outlay for labour and equipment, the litres ultimately produced do not match the industry average. A comparison between your revenue and expense figures and the industry numbers would produce percentages or the equivalent in cents per liter that show if your farm’s performance is above or below everyone else.
For the accountant, these benchmarks would flash brighter than a railroad warning sign. Digging further into the data, usually looking at detailed costs it shows: Is the dairy mechanized? Do you own or rent land? If you rent, do you rent more than the industry average? Are you paying more for feed than your peers?
The objective of benchmarking is to highlight where your farm is different from the local industry averages as the first step to finding solutions. Conversely, this comparative data can also buy a measure of piece of mind. Those fluctuations in your financial statements could be nothing more than what the industry as a whole is experiencing.
At BDO we not only compare your farm to others but we also perform a self-comparison over a five-year period. This gives us the best of both worlds; information on what is particular to your farm while comparing your farm to other local farmers who have many of the same challenges you have.
True story: When I sat down with one of my clients to review his financial information, we reviewed the comparison information in detail. When we went over both the five-year and industry comparisons, we noted that the feed and the purchased feed costs were high both as a percentage and by cost per litre, compared to the average. The five-year comparison to their own farm showed that feed costs had been accelerating but were not really out of line. But, in comparison to their peers, costs were significantly out of line.
The records were checked to see if the information entered in the records was correct. The data was verified. Our conclusion was that the records were correct. The next step was to check with the feed company, who were very cooperative.
Through discussions, it became apparent that the mix that this farmer was using had not changed to reflect the increased costs for that mix, while other farmers had changed to a less costly mix. Changes were made so that, this year, all costs were in line and the farm is now saving money.
Ultimately, unlocking the information buried within your financial statements is just another tool available to help make your operation run and grow in the best way possible.
Rick Hirtle, Chartered Accountant, has a large dairy, orchard and vineyard, and ranching clientele and has helped many farm families achieve their optimum succession. Rick is located in BDO’s Salmon Arm office, but travels throughout the province to meet and work with clients. He can be reached by telephone at (888) 832-7171 or by emailing rhirtle@bdo.ca.
This material is general in nature and should not be relied upon to replace the requirement for specific professional advice.
