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Wimmera Farming – Establishing KPIs

Wimmera Farming – Establishing KPIs

By Brian Watts

 

These days, Wimmera farmers cannot afford to treat their farm as anything other than as a business.  Just taking the value of assets used, the median dollar value in 2019 of farm assets under management was $10,787,000.  That was eighteen months ago! Asset values have not remained stable!

Apart from the value of assets being managed, the huge cost of inputs, cropping decisions in light of more volatile climatic conditions, agronomic decisions, no longer a single desk when selling grain; the volatility of grain prices, grain storage decisions just to name a few, add up to ‘a very complex business model’!

This vastly more complex nature of broad acre farming as opposed to those in earlier generations, coupled with the significant investment in farm assets basically mean farming is serious business.

Most serious businesses monitor performance and returns on investment especially when multiple owners have invested their ‘hard earned’, with responsibility for performance is in the hands of a CEO or business manager.

Non-farm businesses, will measure returns on investment or profitability, by using key performance indicators or KPI’s.  Many factors affect a KPI.  For example, customer satisfaction, average dollars spent by each customer; sales per worker, service standards impact on bottom line profit.   Sporting clubs of all types measure many KPI’s for each player as they impact on the number of wins and losses.  Goals kicked, points scored, intercepts, possessions, aces and so on.  They all count!

There is a massive difference in performance across the Wimmera farms!  How is this measured?

In response, without going into great detail I will refer to three KPI’s taken from our most recent completed Wimmera Farm Performance Report:   Both the median result and that for the Top 20% farm will be quoted for the 5-year rolling average to 2019.

Return on Farm Assets Under Management at current day valuations:   Profit after all operating costs including owners wage, economic depreciation was 1.01% for the median farm in our report. The Top 20% earned 5.87%.

Farm Operating Costs as percentage of Gross Farm Income:  The median farm outlaid 60% of gross farm income. The Top 20% of farms outlaid 41% over that 5-year period.

Farm Income generated from Farm Assets Under management (Asset Turnover Ratio): The median farm over the 5 years to 2019 earned 9.24% of the value of farm assets under management.  The Top 20% of farms averaged 14.64%.  This means that for every $100,000 of assets, the median farm earned $9,240 in farm income.  The Top 20% earned $14,640 in income for every $100,000 in assets managed over that five-year period.

It is only possible to gauge how any business including a Wimmera farm is performing is by measuring and monitoring the vital KPI’s such as those mentioned above?   This is not just a one-off task; it becomes an essential part of any business management.  KPI calculation needs to become an ongoing habit, an essential task that will provide feedback on each year’s results.   For many it will become an essential aspect to ensure long term viability, by helping build resilience in light of the many complex aspects of modern-day farm decision making as mentioned earlier on.

 

In a follow up article, the topic “A simple successful method to improve these three vital KPI’s” will be covered?

 

If any of the above is of interest to our Wimmera farm readers Watts Price Accountants of Horsham who have reported on Wimmera farm performance since 1991 prepare an annual report on 17 KPI’s together with a 5-year rolling average for Wimmera farms and welcome new participants.

What does the ‘Typical’ Wimmera Farm look like financially?

What does the ‘Typical’ Wimmera Farm look like financially?

By Brian Watts

 

Whilst this is not really possible, this will be fairly close!  We all know that farmers are very quick to help out a neighbour in times of need, in times of a crisis.   This almost goes without saying.  However, when it down to how they are coping financially, this is a different matter.   They will be very open with yields and prices but that is possibly where most will stop!

In the 2019 financial year (FY), this being the our most recently completed study of Wimmera Farm Financial Performance, an insight into what the ‘typical’ Wimmera Farm looks like follows

Wimmera Farms     Here are a few key facts:
 
  2019 2015 to 2019
Farm Operating Costs 51% 59%
Equity Ratio 93.7% 94.2%
Plant Productivity 92% 123%
Total Debt to Farmland Owned 7.4% 8.7%
‘Cash’ Profit before Interest Costs to Interest 4.4 times 4.4 times

 

The five interesting ratios or key performance indicators (KPI’s) above provide a snapshot of Wimmera Farms financial performance for the 2019 FY.  Five year rolling averages are probably more informative than ratios for one year alone, they are also listed.

Figures for the 2020 FY (the most recent harvest) will not be available until tax and financial statements are completed well into 2021.

So what do these five KPI’s really mean?  The numbers above are for the median or for the farm in the middle (from lowest to highest)  in our 2019 FY data base.  The median farm will differ for each of these five KPI’s.

The median farm in the 2019 FY:

  • Spent $51 on fuel, spray, fertilizer and other operating costs out of every $100 of farm Income earned.
  • Of the value of all their farm assets owned, the median farm has paid for 94% and borrowed 6%.
  • The current value of farm plant was equal to 94% of farm Income earned.
  • All Farm Loans amounted to 7.4 % of the value of farmland owned at current farmland value.
  • Cash profit (before depreciation and Finance/Interest costs) were 4.4 times the amount paid on interest/finance costs of running the median farm.

How can this information be used to help?  The above ‘snapshot’ provides a start to compare any Wimmera farm.    By knowing how a farm compares against the middle or median farm starts to provide direction on what next to look for and what direction to take if there is a need to improve or the desire to do better.

Watts Price Accountants of Horsham commenced reporting on Wimmera Farm Performance in 1991.   Work on the 30th Report (for the 2020 FY) has already commenced.  Any Wimmera Farm is welcome to be involved and receive a comprehensive Report on seventeen KPI’s for 2020 and the previous five year rolling average.