By Devin Brand and Katherine Wilts Johnson

Benchmarking is the process of a farm evaluating and comparing its performance to its own history or to other similar operations, to determine strengths and weaknesses. For example, crop operations can benchmark operational performance by analyzing bushels or tons per acre. Now you can benchmark a farm’s financial performance too, using a standard set of measures recommended by the Farm Financial Standards Council. This is a way to measure your farm’s profitability, liquidity, solvency, repayment capacity, and financial efficiency.

The team at the Center for Farm Financial Management at the University of Minnesota, in cooperation with University of Vermont Extension, has created a scorecard, assigning a standard range of acceptable values for each of the FFSC measures.

“The recently updated Farm Financial Scorecard is an easy-to-use and highly informative resource for farm financial benchmarking,” says Pauline Van Nurden, an Extension Economist at the Center. She spent the last two years leading the FFSC task force that updated the ratios for today’s farm operations.

Three components

The updated scorecard is made up of three primary components – a stoplight analysis, a description of each financial measure, and the calculations for each ratio.

“The stoplight analysis allows farms to see how they are performing in various financial measures, ranging from vulnerable to strong performance,” Van Nurden explains. “These ranges allow farmers to analyze their financial strengths and areas to improve.”

Next to the ‘stoplights’ are arrows signifying which direction the financial ratio should move over time, indicating if the financial measure should increase or decrease to improve the farm’s financial position.

Second, the description of each financial measure explains what the ratio means to an operation. This section also describes the financial statements needed to calculate each measure. The FFSC lays out standard and acceptable alternatives for gauging certain financial measures.

Finally, the scorecard outlines the calculations driving the FFSC financial measures.

“This empowers farmers and others to be able to calculate these measures on their own, using their own financial information,” Van Nurden says.

What to do with the info

While benchmarking allows a farm to compare its financial performance against industry standards, it requires the use and understanding of accurate financial records. Many of the financial measures within the Farm Financial Scorecard use values from a farm’s balance sheet and income statement.

Along with developing the Farm Financial Scorecard, CFFM has also developed an interactive online resource to help create and interpret these items. “Developing Financial Statements & Measures” provides guidance on how to convert financial records into financial statements and ratios. Interpreting Financial Statements and Measures trains on how to improve farm decision making, using farm financial statements and measures. Both tools can be found at ifsam.cffm.umn.edu and will assist in preparing farm records for the benchmarking process.

The Financial Guidelines for Agriculture encompassed in the farm financial scorecard supply farmers and farm stakeholders with a visually interactive form to analyze farm financial performance.

“Using this benchmarking tool, farms will gain a deeper understanding of the areas that require improvement on their operations,” says Van Nurden.

Devin Brand and Katherine Wilts Johnson are Extension Economists at the Center for Farm Financial Management.