Benchmarking success
Author: Gilles Lapointe
Date: December 2010
Publication: The Milk Producer
As a dairy producer, you’ve got a lot invested in your farm business. Taking care of the day-to-day activities is your primary goal, but you also want to make sure you’re setting your farm up for future success.
Benchmarking is one tool you can use to improve your farm’s performance and profitability. It lets you measure the current state of your farm business using industry markers as a reference point. It’s also a good way to measure your farm’s successes and determine areas that need improvement.
Getting to the facts
Although you may feel you already know your farm inside out, analysing your farm’s financial records can provide valuable insight into your farm’s state of affairs. This is not an area you want to overlook. Your financial statements are one of your farm’s strongest performance indicators that often sit idle in a computer file or folder on your accountant’s desk.
Just as you can read the outward signs, a financial professional can analyse your farm business from the inside and discover important information that may not have been obvious before.
Financial statements are like a map, giving you and your accountant a good picture of how your operation performed over a certain period. Your accountant uses this information to look for anomalies, like spikes in revenues or expenses. They also help your accountant learn more about your operation and how it compares to other farms with similar challenges.
Statements alone, however, offer a limited view of your farm’s financial status. Your accountant will also want to compare industry benchmarks to at least five years worth of your farm’s financial records.
Reviewing your revenue and expense figures, in cents per litre, provides a good indication of your farm’s financial status, whether it is above, below, or on par with industry averages. If your business is doing poorly while the industry is doing well, the problem may be buried within your numbers.
For example, your records could indicate the number of litres of milk your cows’ produce differs from the industry average. If you are currently below the provincial average for kilograms of milk per cow, your initial goal may be to bring up your herd’s average. On the other hand, if your current production levels are near the average, you’ll know you’re achieving targets for your breed.
For what it’s worth
When something goes wrong with your farm, you’re the first person to know. You can tell when something isn’t right. You may question how well the operation is doing, especially compared to previous years. Or you may question your management ability and wonder if your neighbour is experiencing the same problem.
Your accountant can help you determine your farm’s strength and weaknesses and provide feedback by asking the following questions, is the dairy mechanized? Do you rent land? If so, do you rent more than the industry average? Are you paying more for feed than your peers?
The goal of benchmarking is to highlight where your farm is different from local industry averages. This type of comparative data can also bring peace of mind. Those fluctuations in your financial statements could be nothing more than what the industry as a whole is experiencing.
Whether you are reviewing financial ratios or looking to improve certain management practices, unlocking the information buried within your financial statements is just another tool your accountant can use to help your farm operation succeed.
Gilles Lapointe is a chartered accountant and partner with BDO in Emburn, Ont. He can be reached at glapointe@bdo.ca.
