We recently interviewed Mike Hosterman, ag business consultant for AgChoice Farm Credit. If you own or operate a farm business, chances are you often think about how you compare to your peers. Are they controlling their input costs better than you? Do they have greater outputs per unit? How do their gross margins compare? During the interview, Mike discussed benchmarking, why it is important and how to get started.
LISTEN TO THE EPISODE HERE OR FIND US ON YOUR FAVORITE PODCAST LISTENING APP!
Let’s start with the ‘why.’ You’ve helped many farm operations over the years, whether it is through a formal benchmark program or simply a farm comparing themselves year-over-year. Why is benchmarking valuable to farms?
To me, benchmarking is a checkup. The analogy I'll use is most of us go to the dentist to get a checkup, to keep our teeth and gums healthy. Or we go to the doctor annually for a checkup to stay healthy. Benchmarking is your business's checkup. It's an effective way to see where you are and help you make a plan for where you are going.
Benchmarking includes comparing your business performance to previous years. Comparing your business performance to others with similar operations. Whether you're comparing to others or yourself, benchmarking in both those forms can help you find weaknesses within your operations so you can make improvements to be stronger and more profitable.
Comparing your farm to previous years allows you to assess positive and negative changes in your operation that you might not have otherwise realized or found. Comparing your farm to your peers shows you how your business stacks up. However, don't always strive to be average. Average is good, but really we lose the bottom 10 to 20% of our operations each year. So it's good to be trying to strive to be in that top part of the business each year. You don’t want to be in that bottom portion which is usually what we see drop off.
Benchmarking can cover a lot of areas. What key aspects do you recommend farmers consider when they approach benchmarking.
I get asked that question a lot. There are many things we can benchmark ourselves to. It can be our financials, our income statement. It can be herd performance. It could be our crop practices and yields.
The key is to be sure what you are benchmarking and have your records for these areas in place and in good form before you do that comparison. The records are the key. There's an old adage I've heard for years doing this job, "Garbage in, garbage out." So if we have poor records, the comparison you get is going to be swayed by your data. So the better data we have, the easier it is to do that comparison.
When you are thinking about benchmarking, get your records in order first. Producers do need to be careful when comparing to others though, data is not always collected or stored the same way and especially if not compared from the same system. Benchmarks can be calculated differently and if the comparing apples to bananas it may not be giving you fair results or fair comparisons. The key to your comparisons to others is make sure that you try to do it from the same type of program, whether that could be the AgChoice Dairy SPR, or if you're with another accountant who does benchmark that it's compared from their system, because each of us may calculate our benchmarks slightly different. Just know that as you go into it and get prepared to do benchmarking.
Benchmarking is better done though when it's year after year. If you do it just once, all you're able to really do is compare to the others. Benchmarking is for the long term, and you should compare yourself over time to get a better understanding of if you are making the progress you want? Are you improving or getting worse? It gives you the ability to try to see where you're going from year to year. Again, are the decisions you make each year making your business better?
When doing financial benchmarking, we believe every business has five keys to profitability and you should be really comparing these. Any business, I don't care if you're dairy, a crop, or let's just pick on the automotive industry, maybe you're GM, look at your volume. The amount of product produced per unit, your milk output. How much volume do you have and are we operating in a full volume? Look at your efficiency, measures, your variable costs. Again, a gross margin measure we use in our benchmarking is a key to this of how efficiently we take every dollar of income and convert it to that gross margin to cover our debt and our other overheads. Then you need to look at your capacity or your overhead. Where does it stack up to others? In each industry, we have certain industry skills. Industry skills need to be compared but with standard measures and standard business practices. Then finally look at your cost control. How does our overall cost compare from year to year and to others?
So I'm going to stick with my analogy about going to the dentist, to me, as you prepare to do benchmarking, if you're going to the dentist on a regular basis, it's usually not just one checkup a year. We normally go to the dentist twice a year. When doing benchmark, I think it's good to do it more than once a year. By that, I mean, you do your benchmark, let's just say in the spring, know where you were, get that comparison, but you need to do that action plan or that health checkup plan to say, "Okay, I'm having some issues. What are the next steps?" And then you go back to find out are we making progress even before you get to your next annual benchmarking. You come back in the fall of the year and have that second checkup to say, "Am I making the progress I intended this year?"
Again, benchmarking is a health checkup for your business.
For a farm looking to get started in benchmarking, what suggestions do you have?
When you're doing benchmarking, have your records in order. Consistency is important in benchmarking. So be sure to calculate your benchmark factors the same each year, year after year. Otherwise, you may be getting inaccurate data in your benchmark analysis.
Don't make major changes to your records each year just to try to make your benchmark look better. The example I'll give you there is I've had farms that when you do a culling comparison. In our one benchmark program for dairy, we compare reasons animals leave the herd and if you have a high injury rate, it can be just the way you cull your cows. Maybe instead of having cows culled for lameness, you put it under injury. So, when you adjust it to another category, that category may be high.
Be consistent in your record-keeping, the way you do it so that your benchmark year after year gives you the ability to compare your decisions. Are we getting the results we intended from our decision-making?
Compare your financials on an accrual basis, do not use a cash-based benchmarking system because cash in cash out is a poor way to do it. To do an accrual analysis you must do a year-end balance sheet. That year-end balance sheet, if we are not putting good inventories on there, are payables, do we owe anyone some money? The example I used there is in our inventory, we put the feed that was just delivered to the farm. We have the feed in your inventory, but did you pay for it? Even though it may not be a past due bill, you have a payable for that feed that we're including in your inventory. So make sure we're doing a year-end balance sheet either December 31st, January 1st if you're a fiscal year-end business, and do it consistently every year reporting all your inventories, all your payables, all your receivables.
To get started, look for a benchmarking service to help you. Many benchmarking programs are offered by organizations or consultants out there. These programs can help you gain access to a broader, more accurate database and comparable operation. Again, it's important to have a comparable operation. It is sometimes hard for a 50-cow dairy to compare themselves to a 5,0000-cow dairy in Pennsylvania. Try to make sure your service can provide you different size groups to help you compare it to a comparable operation. If you're a dairy farmer considered joining the AgChoice SPR Program, or if you want a more detailed one our Progressive Dairy Benchmark.
But don't stop with benchmarking. Like I said before, using the twice a year, dentist example, take time to assess your data, put an action plan together and follow up and follow through. The follow-through is the key to making your benchmark truly work for you. Find the weaknesses, put a plan together to improve it, and then follow through and make sure we're getting the results we wanted.
As we wrap up, is there anything else you’d like to share with our listeners?
Benchmarking takes time. It's a good step to check the health of your business. That's the key. Think of it as a health checkup, like our bodies, we need to take care of them. Benchmarking is the checkup and planning for your business. It can help keep your business healthy and headed in the right direction.
Finally, most of us don't go on a major trip without a plan, and benchmarking can be a good tool to help you develop the roadmap or plan to move your business to where you want it.
< View All Blog Posts