Key farm business performance measures
What are some of the key business management questions you could be asking of your business financial records? The following 3 measures of business performance can help start your thinking:
This is the measure of whether there is enough cash coming into the business to be able to pay the expenses and financial costs on time. This helps answer questions about your business viability. Your tax return will not have any indication of cash flow. Most farmers would use an operational cash flow, even if it is on paper or an Excel spreadsheet.
The true value in using this performance measure is in comparing what actually happened against your planned cash flow. For example, keeping a history of these results over a number of years can be a persuasive tool to show a banker when applying for a loan, as demonstrating whether you are able to manage the flows of capital within your business and should be a reliable customer for a further loan.
Are the assets in the business of land, machinery, livestock and water being used as efficiently as possible, and providing the best financial return? How does this compare with returns in other industries or investments?
If we are not measuring this performance of the business, it will be very difficult to identify strategies to improve business efficiency and profitability.
Is the business building the wealth needed to assist the business manage risks and family business succession?
Interestingly, by itself, the tax return addresses none of these performance measures! However, with some adjustments the last two can be measured. So, are you making the most of your tax return?