SDSU specialist: Assess farm financial performance Now is a good time for producers to assess farm financial position and performance, a South Dakota State University specialist said.
"It is important to remember that if a cost can be measured, it can be managed. Start your farm's benchmarking and profit improvement by taking the first step: Measure your costs to know where you are," SDSU Extension Area Management Specialist Jack Davis said.
SDSU has online resources available to help producers measure costs and returns for last year, and prepare a budget for this year. Use the Farm Enterprise Budget available from SDSU Extension at http://econ.sdstate.edu/.
Use the "Extension" pulldown bar, then click on "Management tools and links" to find the budget appropriate to your operation.
Davis said machinery, labor, and management costs account for 30 percent of total costs and may provide an opportunity for helping control costs. These costs can vary greatly between operations.
Machinery costs include operating and ownership costs. Ownership costs include depreciation, insurance, interest, and capital recovery. Labor and management costs include direct labor and withdraws for family living costs.
When measuring labor costs for your operation, include withdraws for the year, self-employment taxes, health insurance payments and all hired labor costs, Davis said. This number divided by total harvested acres will give a good measure of total labor and management costs per acre.
Machinery, labor, and management costs tend to be fixed costs. In managing fixed costs, it is important to make sure that the assets are fully employed. It may be possible to spread fixed labor and machinery costs over more acres by performing custom work.
Take the time to assemble the records to do a financial analysis using ratios and trends. Two key ratios to monitor are the operating expense ratio and the return on assets (ROA) using DuPont analysis. The ROA is used to measure the effectiveness of resources used in generating a profit, with the focus being on how well the assets are being used. The DuPont analysis method breaks ROA into its two components of operating profit margin and asset turnover. The operating profit margin measures how effectively the business is controlling expenses relative to the value of output. Asset turnover measures how efficient the business is in its use of assets.
The other key ratio, the operating expense ratio, is calculated as operating expenses (less interest and depreciation) divided by gross revenue. An excellent guideline for this ratio is to keep it below 65 percent. Monitor the trend of this ratio over the years. If it starts to elevate it may be an indication that the "escalators" have started to move and are eroding profits.
For more information on financial analysis see SDSU Extension Extra 5046, "Your Annual Financial Check-Up." It's available online at the economics Web site listed above by using the "Extension" pulldown bar, then clicking on "Tools and publications."
Contact Davis for more information at (605) 796-4841.
, or by e-mail at firstname.lastname@example.org. Or contact your local county Extension office.