Keeping the score on the farm run-rate

By Matt McCarthy, Senior consultant, O"Callaghan Rural Management, Bendigo, Victoria

Have you asked yourself lately: "What"s the score? Is the farm profitable? How does this compare with other similar farms? Am I generating long-term wealth? Are we growing fast enough?"

Over summer you frequently hear the question: "What"s the score?" The answer, for cricket devotees, tells us how Australia is performing relative to the opposition. Indicators such as "run rate per over required to win" provide a target for success. And all these details are logged in a scorebook.

It is an analogy worth applying to any work or business that needs to know how it is performing.

Many farming families, for example, obtain financial analysis and feedback on their business performance. But how many actually get a handle on how their performance compares with that of their peers?

Have you asked yourself lately: "What"s the score? Is the farm profitable? How does this compare with other similar farms? Am I generating long-term wealth? Are we growing fast enough?"

These questions were tackled recently by more than 200 farm businesses in the Farm Management 500 network. Each business contributed seven years of data to the analysis. The result was one of the most comprehensive whole-of-farm business exercises undertaken in Australia.

The outcome of this huge database was a scoreboard for farm performance. The scoreboard provided the business health indicators to be monitored, and set targets based on real results achieved by real farms.

So, let"s get down to some specifics. The key performance indicators dubbed the "Big Three" were identified as:

In addition to the "Big Three" indicators, the Farm500 analysis has redefined benchmarks for the drivers of profit:

The key results of the Farm Management 500 farm performance project are now all available for anyone to use in their business. A publication, Business Health Indicators for Professional Farmers, is now available and provides:

For more information: Matt McCarthy, matt@orm.com.au; Farm Management 500, www.fm500.com.au

Details about how to obtain Business Health Indicators for Professional Farmers are available at fm500@netcon.net.au or from Farm Management 500 on 03 5441 6176

Measures the profit (before financing cost, eg interest) you are generating from the farm against the value of your farm assets (eg land, machinery, livestock etc). The resulting scorecard on this indicator was:

Added to this return is the capital growth in the value of land and productive improvements. This averaged four percent for the period of the analysis (1996-2002).

The annual change (%) in net worth (average over seven years) is a newly introduced indicator of wealth accumulation. Increasing net worth indicates that assets are growing faster than liabilities. The resulting benchmarking scorecard was set as follows:

* (average over a seven-year period)

Farm profit is what a business uses to pay off debt, pay tax, invest off-farm, increase investments in machinery and other capital purchases and pay for lifestyle choices. Farm Management 500 defines the farm profit as follows:

Farm profit = farm income - farm input costs - machinery costs - labour costs (including all family labour) - financing costs. The performance ratings on farm profit, as an average over a seven-year period, are: