Benchmarking Article 7 - What to Measure

Benchmarking - What to Measure - Solvency, Efficiency and Repayment Capacity

The remaining three categories of financial measurements for your farm business are Solvency, Efficiency and Repayment Capacity.  Recall the last segment summarized the first two categories – Profitability and Liquidity.  Subsequent articles will provide more detailed discussion of the various ways you can measure your business performance.

Solvency measures provide an indication of your farm’s ability to repay all financial obligations if all of your assets were sold and your ability to continue operations in the event of a shock to your operations and financial position as a result of say, a drought or other near catastrophic type events.  Another perspective reveals the respective investment levels of both owners and lenders.  Specific measurements of solvency include 

• Debt-to-Asset Ratio
• Equity-to-Asset Ratio and 
• Debt-to-Equity Ratio
  

"Measures of solvency determine 
who actually owns your business."

Efficiency measurements provide indications of the intensity with which your business uses its assets to generate gross revenues and how effective your farm is with production, purchasing, pricing, financing, and marketing decisions.  Financial efficiency measurements include

• Asset Turnover Ratio
  
• Operating Expense Ratio
  
• Depreciation Expense Ratio
  
• Interest Expense Ratio
  
• Net Farm Income from Operations Ratio
  

Repayment Capacity measurements provide insight on your ability to repay farm debt, meet all your living expenses, replace depreciating assets and make investments for the future in your business and for personal retirement plans.  Repayment measurements include

• Capital Debt Repayment Capacity
  
• Capital Debt Repayment Margin
  
• Replacement Margin
  
• Term Debt and Capital Lease Coverage Ratio
  
• Replacement Margin Coverage Ratio
  

That concludes the final segment to our Benchmarking Series.  If you have any questions, don't hesitate to send us an email.  We'll gladly help you in any way possible and might use the topic of your question in a future newsletter article.

Know Your Numbers.  Know Your Business.