What can benchmarking do for you?
Author: Rick Hirtle
Date: January 2011
Publication: The Milk Producer
Most producers know their farms or ranches intuitively. Their experience has taught them how to decipher potential trouble ― whether it’s an approaching storm, the colour or feel of the soil, or the way their livestock act. And yet one of the strongest indicators of how their business operations are performing overall often sits idle in a sophisticated accounting software file, or in a folder on an accountant’s desk.
Just as producers can read the outward signs, a financial professional can investigate from the inside and discover important information from documents like financial statements. This is called benchmarking ― measuring the current state of your agri-business using certain industry markers as a reference point to identify the source of potential problems.
Most likely, producers like you already know when something is wrong with your operation. You often face nagging questions about your performance (especially compared to previous years), whether your neighbour down the road is doing better (even though you run identical operations), as well as the perennial concern that costs are becoming greater than the returns.
For an accountant, a financial statement is like a map that can provide a full picture of how an operation is performing. Accountants look for discrepancies or changes in revenues or expenses and try to determine the source.
However, statements alone can only offer a limited view of how an operation is doing. Typically, accountants compare five years of a producer’s record to the local industry’s record to provide a more complete picture of your performance. This can isolate the rise and fall in revenue that is clearly a market-wide phenomenon. The cause for a drop in sales is obvious, but if your business is doing poorly while the industry is doing well, the problem may be buried within your numbers.
For example, despite a nearly identical expense of labour and equipment to similar operations of the same size and capacity, a dairy may learn that the litres it produces differ from the industry average. Your revenue and expense figures compared to those of the overall industry produce percentages, or the equivalent, in cents per litre that would indicate whether your performance is above, below, or on par with the average.
For an accountant, these benchmarks would flash brighter than a railroad warning sign. When examining the data, accountants usually look at detailed costs that would answer the following questions: Is the dairy mechanized? Do the operators own or rent the land? If they rent, do they rent more than the industry average? Are they paying more for feed than their peers?
The objective of benchmarking is to highlight in what ways your farm differs from the local industry averages and to ultimately find solutions if there are issues. Conversely, this comparative data can also offer piece of mind, as the fluctuations in your financial statements could be nothing more than what the overall industry is experiencing.
At BDO, we not only compare your farm to other operations, but also to itself over a five-year period. This helps to provide us with information on what is particular to your farm, while learning about your operation compared to other local farmers who are faced with many of the same challenges.
Upon sitting down with a client to review his financial information, including the five-year and industry comparisons, we noted that his feed and purchased feed costs were quite high (both as a percentage and by cost per litre) compared to the average. The five-year self-comparison indicated that feed costs had reasonably accelerated, while the industry comparison showed that these costs were significantly out of line.
We first checked the records to ensure that the data was correct. After concluding that it was, we checked with the feed company, which was very cooperative. Through discussions, we discovered that the client had not changed the mix he was using to reflect its increasing cost, while other farmers had switched to one that was less expensive. The client ultimately made changes so that, this year, all costs were in line and his farm is now saving money.
Unlocking the information buried within your financial statements is just another tool available to accountants to help your operation run as efficiently as possible and to ultimately succeed.
Rick Hirtle, FCA, is a partner in the Salmon Arm office at BDO.
