Key Metrics to Track for Farm Financial Health

By Blake Jackson

University of Missouri Extension agricultural business specialist Amie Breshears emphasizes the importance of understanding key financial metrics for successful farm management, particularly financial efficiency. This metric reveals how effectively a farm utilizes its resources to generate income.

"One of those key numbers is your farm’s financial efficiency," Breshears states. "Financial efficiency measures your farm’s ability to use all its valuable resources and produce income. In the words of Dave Ramsey, ‘If you don’t stay on top of numbers associated with your business, you will fail. You can’t outearn disorganization or the need to handle your finances wisely.”

Financial efficiency is assessed by analyzing how well assets generate income and how income is allocated. The interest expense ratio is a crucial component, measuring the percentage of farm income used to pay debt interest. This indicates the farm's ability to cover interest expenses with its generated income.

The other three components are the operating expense ratio, depreciation and amortization expense ratio, and income from operations ratio. These metrics collectively provide a comprehensive view of the farm's financial health.

The interest expense ratio is calculated by dividing total farm interest expense by gross revenues. "Total farm interest expense includes all interest expenses from farm debt," Breshears explains. "Gross revenues include payments from the sale of agricultural products, any crop insurance proceeds or agricultural program payments such as Agricultural Risk Coverage and Price Loss Coverage payments, and other payments such as cash rent payments, payments for custom work or dividends from farm cooperatives.”

A lower interest expense ratio is generally preferred. A ratio below 5% is considered strong, 5%-9% indicates a need for caution, and 10% or higher is deemed weak, suggesting potential difficulty in covering expenses.

This metric is essential because the farm should generate sufficient income to cover interest, operating, depreciation/amortization, and family living expenses. If not, the farm's financial position is vulnerable.

To improve the interest expense ratio, strategies include increasing profitability through higher revenues or lower expenses, reducing family living expenses, and restructuring debt.

“You can make improvements and improve your farm numbers, including financial efficiency,” Breshears concludes. “One step at a time, day by day, small changes and better habits can add up to measurable results, including better farm finances.”

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