When a discussion centers around the term efficiency, I immediately think of agriculture. Our farmers, ranchers and producers have grown and evolved to become highly efficient. This is born of necessity.
Efficiency is the result of minimizing waste. It’s something we’re naturally inclined to strive toward in our daily efforts. The agriculture industry is a leader in this area because of the nature of production. When you’re working to produce food and fiber, that effort demands a high level of efficiency. Efficiency becomes a natural by-product.
There are efficiencies that are applicable in the area of finance as well. Like all other aspects of farming, an efficient producer will benefit through developing a streamlined financial position relative to income and expenses. Here are some commonly accepted financial ratios to help measure efficiency:
Asset Turnover Ratio: Gross Farm Revenues divided by Average Total Farm Assets – This measures the level of efficiency used to generate revenue. An asset turnover ratio of 60 percent or higher is considered an efficient use of assets.
Operating Expense Ratio: Total Farm Operating Expenses divided by Gross Farm Revenues – This is used by many decision makers including bankers, brokers and investors to help identify expense efficiencies.
Depreciation Expense Ratio: Depreciation Expense divided by Gross Farm Revenues – Recognize that these can vary greatly because of different depreciation methods used and the different types of depreciable assets used in production.
Interest Expense Ratio: Total Farm Interest Expense divided by Gross Farm Revenues – Generally, if this ratio exceeds 20 percent, it is an indication the operation has an unsustainable debt load.
Net Farm Income from Operations Ratio: Net Farm Income from Operations divided by Gross Farm Revenues – Producers with lower ratios in this area tend to feel stress earlier as margins tighten. This can be a measure of financial resiliency.
As we consider the benefits of being efficient, let’s take note of some examples presented to us through agriculture:
• Technology offers us convenience and precision, ultimately leading to being efficient.
• Precision leveling, draining and contouring takes advantage of technology to gain the best uses of a plot of land.
• Ag equipment has advanced to a level where we can now till, mow and harvest with maximum production benefit.
We all utilize technology to enhance efficiencies. Efficiency drives us.
Ken W. Knies is an agricultural and rural consultant. He holds a bachelor’s of science and arts from the University of Arkansas and a master’s of business administration from Webster University in St. Louis, Mo. He formed Ag Strategies, LLC as a business unit focused on quality borrowers and lenders.