Are Your Farm’s Finances Healthy?

After talking with hundreds of farmers and reviewing their finances, we decided to build a calculator to help them assess the health of their business.

As an ag operator, you are a small business owner. Many operators we work with don’t know their numbers or whether or not they are “healthy.”

If you’re a corn farmer with less than $2.5 million in average revenue, the U.S. Small Business Administration (SBA) qualifies you as a “small business.”

In comparison, if you’re a dairy farmer, your revenue threshold is $3.75 million to be a small business.

Those aren’t small numbers; your farming business isn't headed toward profitability and prosperity if you aren’t paying attention to them.

But today is your lucky day, as we built out a calculator that can tell you the exact health of your farm’s finances, along with the 18 ratios targets you need to hit for your business to thrive. Enter your email below to get the ration and the calculator so you can plug in your farm’s finances from the past few seasons to see if you’re on track and where you can improve!

18 Essential Financial Ratios for Farmers and Ranchers

Here’s a quick rundown of 18 farm financial ratios you should be tracking, along with target values that indicate a healthy ag business:

1. Current Ratio: Measures your farm’s ability to pay off short-term liabilities. Target: Above 1.5.

2. EBITDA: Reflects your operating profitability. Target: Higher is better.

3. Debt to Equity Ratio: Compares farm debt to equity. Target: Below 1.

4. Net Income Ratio: Shows what percentage of revenue is net profit. Target: Above 20%.

5. Debt to Asset Ratio: Indicates the proportion of assets financed by debt. Target: Below 30%.

6. Asset Turnover Rate: Measures how efficiently your assets generate revenue. Target: Above 45%.

7. Interest Expense Ratio: The portion of your income spent on interest. Target: Below 5%.

8. Equity to Asset Ratio: Reflects financial stability and ownership. Target: Above 70%.

9. Net Farm Income: Shows your farm’s total profitability. Target: Higher is better.

10. Operating Profit Margin: Indicates the percentage of revenue that remains as operating profit. Target: Above 25%.

11. Rate of Return on Equity: Measures returns from owner’s equity. Target: Above 10%.

12. Rate of Return on Assets: Shows how efficiently assets generate income. Target: Above 10%.

13. Operating Expense Ratio: Reflects the proportion of revenue consumed by expenses. Target: Below 60%.

14. Depreciation Expense Ratio: Indicates the impact of depreciation on profitability. Target: Below 5%.

15. Debt Service Coverage Ratio: Measures your ability to cover debt payments with cash flow. Target: Above 1.5.

16. Capital Debt Repayment Coverage Ratio: Shows your ability to repay long-term debt. Target: Above 1.5.

17. Replacement Margin Coverage Ratio: Indicates if you can cover asset replacement costs. Target: Above 1.

18. Working Capital to Gross Revenues: Measures liquidity relative to farm revenues. Target: Above 25%.

How to Use Financial Ratios in Farm Management

Tracking your financial ratios over time allows you to monitor the progress of your operation. Here’s how to get started:

1. Gather Financial Statements: Collect your last three years of financial statements, including income statements, balance sheets, and cash flow statements.

2. Input Data: Use a financial ratios calculator (like the one provided by Braintrust Ag) to input your financial data and calculate your ratios.

3. Analyze Results: Compare your ratios to industry benchmarks. If your results are in the “green zone,” you’re in a healthy range. If you find any ratios in the “red zone,” it’s time to investigate and make adjustments.

4. Track Annually: Continue calculating these ratios each year to track trends and ensure ongoing financial health.

A Real-World Example Of Ratio Success

A beef cattle operation in the Midwest was struggling to balance its cash flow and debt obligations, particularly during the off-season. By calculating its current ratio, the owners realized their liquidity was below the recommended threshold, putting them at risk of not meeting short-term financial obligations. To improve, they adjusted their inventory management and collected outstanding receivables more aggressively, boosting their current assets and moving the current ratio back into a healthy range. This improvement helped them secure a better loan rate and keep the operation financially stable.

Closing Thoughts

Understanding and applying financial ratios to your farming operation isn’t just for accountants—it’s a vital practice for any pro manager looking to ensure long-term success. These ratios provide a snapshot of your financial health and guide you in making informed decisions, from investment strategies to managing debt.