On a ranch, measuring financial benchmarks is important to give you a true picture of the financial health of your operation.
Regardless of your type of operation, you can use three standardized measures to judge your efficiency, according to the U.S. Roundtable for Sustainable Beef. They include:
Ratios: This includes measures such as the debt-to-equity ratio, which compares the bank’s ownership to your ownership in an operation.
Percentages: Percentage rates, such as rate of return on farm equity, can tell you the return you are getting out your investment in the farm.
Dollar Amounts: Here, you can obtain dollar figures like the net farm income (the farm’s gross income less expenses), inventory changes and depreciation.
Then, using a balance sheet, income statement, cash flow statement and other financial documents can help you find some key financial facts about your operation. These are:
Liquidity – Your ability to have cash readily available to meet financial obligations, such as living expenses, taxes or debt payments.
Solvency – Your ability to pay off all debts if they were to be called in today – solvency is a measure of the borrowing risk and capacity of an operation.
Profitability – The difference between revenue earned on goods produced and the costs of production.
Repayment Capacity – Your ability to repay debts on time using both on-farm and off-farm income as a measure of capacity.
Financial Capacity – How well your operation can generate income using your assets; past performance can help indicate future potential.
In the below video, OSU AgEcon features Rodney Jones, who demonstrates the use of financial ratios to evaluate farm financial performance on an example farm.