Benchmarking Article 6 - What to Measure

Benchmarking - What To Measure - Profitability and Liquidity

It would be wonderful to define all the financial and industry-specific benchmark indicators that you could use in your business.  Space constraints won’t allow me, it might bore you to tears and....it’s already been done! 

In addition to several standardized financial benchmark measurements, every business owner needs to understand the key components that drive their success and how those business components are measured.  For an authoritative guide and recognized as the definitive resource of financial guidelines for agricultural producers, the Farm Financial Standards Council has developed two resources:

• Financial Guidelines for Agriculture

• Management Accounting Guidelines for Agricultural Producers
  

"The Farm Financial Standards Council is the definitive resource of financial guidelines for agricultural producers."

The definitive resource of financial guidelines for agricultural producers."

Generally speaking and from a financial perspective only, there are five main categories of financial analysis.  Today we will simply summarize the first two, talk about the remaining three in the final segment, and leave a much more detailed discussion for subsequent articles.  Categories of financial analysis include: 

• Profitability
  
• Liquidity
  
• Solvency
  
• Efficiency
  
• Repayment Capacity
  

Profitability is the most common and easily understood financial measurement.  Technically speaking, profitability measures the extent to which your business generates a profit from the use of land, labor, inputs, management, and capital.  Profitability measurements include:

• Rate of Return on Assets (ROA)
  
• Rate of Return on Equity (ROE)
  
• Operating Profit Margin Ratio 
  
• Net Farm Income
  

Liquidity measures the ability of your farm business to meet financial obligations as they come due in the ordinary course of business, without disrupting the normal operations of the business.  Liquidity measurements also represent your ability to take advantage of any opportunities that might require quick action.  “Keep your powder dry.” and “Cash is King” are derived from the concept of liquidity.  Liquidity measurements include the current ratio, the quick ratio and working capital.

The final article on Benchmarking will summarize the remaining categories of standardized financial measurements of performance – solvency, efficiency and repayment capacity.  

Know Your Numbers.  Know Your Business.