Benchmarking Can Improve Your Profit Margins
Article By: Kristin Woodard, Relationship Manager for SFB
How do you know if you're doing the best you can on your farm operation? A tool frequently used to answer this question is benchmarking. But what exactly is benchmarking?
Benchmarking is a method of analysis that compares your operation's performance to similar size and/or type of operations that may be performing well in different areas of their businesses. It is like a report card of how you are doing compared to your peers of the same size operation as yours. This analysis can be helpful to dive into areas of improvement to what you may be currently doing, in order to improve your profit margins. For example, a dairy operation can utilize benchmarking to compare specific expenses, such as feed, labor, or repair costs to other operations of similar size. On the benchmarking report, there are no names or locations with the benchmarking information, just the income and expenses based on size (i.e. number of cows or number of acres) and/or type.
Benchmarks are typically derived by averaging actual performance data from a large group of farms. The high-profit benchmarks come from the top third of the farms that are the most profitable after averaging the financial performance measures. Farm Business Associations are the sources of this data (i.e. FINBIN | The Farm Financial Management Database (umn.edu)).
Benchmarks also help to establish performance goals or targets. In general, it is important to have your business' current cash flow performance and prior years for the consultant. Overall the analysis can lead to insights into trends in your operation's normal business performance. To find out more, ask to hear more about benchmarking with your banker.
Kristin Woodard is a commercial/agricultural loan officer for Jackson County Bank, which will merge into Security Financial Bank in August of 2021. She can be reached at 715.284.5341 ext. 1355.