Many farms and ranches that come to my team often ask a similar big question: How can they get more out of what they already have?
They know something isn’t quite right with their operation, but they’re unsure what it could be or where to begin. All around them, challenges arise — whether it’s finding qualified labour, dealing with the high cost of new equipment or trying to buy or rent land or quota.
When faced with these hurdles, many farmers turn inward, asking how they can make their farm work more efficiently with the resources they already have. However, the question remains: where should they start?
Most farm owners have a sense that more could be extracted from their operations, but identifying where to make changes isn’t always straightforward. Every farm has its own mix of land, people and equipment, making a one-size-fits-all solution impossible.
However, there is one tool that can benefit any farm: financial benchmarking. It helps pinpoint inefficiencies, offers direction on where improvements can be made, allows you to monitor progress and provides confidence in decision-making. In turn, it leads to better profitability.
Financial analysis and benchmarking let you measure your farm’s performance against your own past results or against industry standards. These comparisons can offer critical insights into what’s working well and what needs attention.
While financial analysis provides a snapshot of your farm at a single moment in time, benchmarking tracks changes over the years, showing you the impact of any adjustments you’ve made.
For example, tracking your operating expenses over several years might reveal whether your costs are under control or if they’re gradually creeping beyond what is reasonable for an operation of your scale.
It’s important to choose the right metrics for your goals and remain consistent in how you measure them. There are countless financial ratios you could examine but not all will be relevant to what you’re trying to achieve.
Financial ratios are generally grouped into four categories: liquidity, solvency, efficiency and profitability. Are you aiming to boost your input efficiency or improve liquidity? Maybe you want to manage current debt more effectively or assess your capacity to take on new debt.
The most important part of benchmarking is ensuring that ratios are calculated consistently year over year. Only then can you compare results properly.
One key measure of liquidity is the working capital ratio, which shows how easily your farm can cover its short-term liabilities.
For solvency, the debt-to-equity ratio reveals how much of your farm is financed by debt versus what you truly own.
Efficiency can be tracked using the gross margin efficiency ratio, showing how well your farm is converting inputs into revenue.
Profitability can be measured using the return on assets (ROA) ratio, which tells you how well your investments are performing.
While financial ratios often get the most attention in benchmarking, labour efficiency is equally crucial — and often overlooked.
Labour is often one of the largest expense categories on a farm, yet many operations don’t track labour efficiency as closely as they could.
Labour inefficiency can manifest in numerous ways: underutilized staff, poorly allocated tasks or processes that require more hands-on effort than necessary.
These inefficiencies can slow down operations, causing delays in planting, harvesting or day-to-day maintenance tasks. Over time, this can create a cascade of issues — higher overtime costs, increased wear and tear on equipment and lost productivity — all of which erode profitability.
For example, if your farm has a habit of needing extra labour hours during critical times such as planting or harvest, this might indicate an underlying inefficiency in how tasks are organized.
Labour inefficiency can also lead to bottlenecks in operations, where workers are forced to wait for equipment, tools or other resources. These lost minutes quickly add up, reducing the overall output per labour hour and driving up costs without a corresponding increase in productivity.
Benchmarking metrics such as revenue per worker or labour cost per unit of output can reveal whether your workforce is effectively contributing to the farm’s profitability or if there’s room to streamline tasks, automate certain processes or reallocate responsibilities to get more out of your team.
In essence, labour inefficiency affects operational efficiency, which in turn affects financial performance. When workers aren’t used effectively, it doesn’t just waste payroll dollars; it also disrupts the rhythm of the operation, resulting in lower yields, delayed timelines and higher overhead costs.
By keeping a close eye on labour efficiency through regular benchmarking, you can identify where these inefficiencies lie and take proactive steps to address them — whether that’s through restructuring tasks, investing in training or adjusting workflows to better match the skills of your team.
Improved labour efficiency ultimately helps to boost profitability by maximizing the value of every dollar spent on human resources.
Benchmarking not only highlights potential problems; it also helps you make decisions about where to focus your time, energy and money.
If your labour is inefficient, that’s the first place to direct your attention. If input costs are eating into your revenue, you might need to rethink your crop choices or adjust your marketing strategies. If your profitability is lagging, consider whether trimming expenses or finding ways to boost revenue will help.
By regularly reviewing your benchmarks, you can assess whether your efforts are making an impact or if a new approach is needed.
When should you start the benchmarking process? The simple answer is now.
Begin by gathering your past financial records, ideally covering the last three to five years. Use this data to get a clear picture of where your farm stands today, identify trends and determine what additional information might help improve your analysis. This could mean improving how you document assets and liabilities or asking your accountant for more detailed financial statements.
Once you have a clear picture, select a few key ratios to focus on and then develop a strategy to improve in the areas that matter most.
Review your benchmarks regularly — whether annually or quarterly — and adjust your plan as needed.
As you get more comfortable with benchmarking, don’t just compare yourself to industry averages. Compare your own performance year after year.
You might also consider joining a peer group of like-minded farm owners who are willing to share their financial data and ideas.
These groups provide valuable fresh perspectives and tried-and-true strategies. As well, you’ll have the opportunity to see what’s working for others and apply those lessons to your own farm. Sharing insights with other farmers gives you the best chance to improve your results, while also helping others in the group do the same.
When done consistently, benchmarking can help your farm improve efficiency, enhance decision-making and increase profitability. It allows you to unlock the untapped potential of your operation by using your resources more wisely. It also reduces the uncertainty and emotion that can cloud important decisions, helping you make more confident choices. Over time, your farm will grow stronger, more efficient and more profitable.
Whether you choose to start by focusing on financial ratios, labour efficiency, or both, benchmarking is the key to unlocking your farm’s hidden potential. Take the time to gather your data, compare your performance and make small, targeted improvements. Soon enough, you’ll see the results, setting the stage for long-term success.
Blake Copley is a farm management consultant with Backswath Management Inc. He can be reached at 825-712-7684 or .
