Novel Methods for Judging Your Firm’s Performance
Information to help guide decisions and prepare for strategic moves
How well is your feed and grain firm performing? Are you doing the best that you can? What measures of performance help guide you as a manager? Are you doing as well as your peers? Are these questions you think about as a manager? Are there ways you can assess your firm’s performance — not just against your year-over-year results, but comparing things more broadly to the industry? We all like to know how we stack up, and here we will offer up suggestions for some unique internal and external reviews.
At the universities where we both work (Ohio State and Purdue), academic departments are required to do an “external review” about every eight to 10 years. This process generally entails putting together a “self-study” report which gathers facts and figures regarding departmental performance on grant dollars received, research conducted, number of students graduated, number of Extension presentations, including how many people were reached, and other similar metrics.
This is then followed by a visit from an external review team, who do a site visit, meet with groups of stakeholders then generate a report/critique/list of recommendations. It’s a productive process that helps guide decisions and allows for preparation of strategic plans for the future.
In the business world, similar exercises exist, and go by several names. An Independent Business Review is often undertaken on behalf of a lender when they are concerned about the financial stability of a business. A Diagnostic Business Review is done by an Independent Review Organization, though this appears to apply mostly to the health care field. In doing some research for this column, however, several of the major national accounting firms offer this type of service (see sidebar on page 46) and might be worth investigating to provide you with actionable managerial information.
Compare against yourself
One of the simplest methods of comparison is to look at your own firm’s metrics over time. You can track these easily by pulling off key numbers or ratios from your financial statements (probably easiest to do this looking at annual numbers). Key indicators include net income, return on investment, sales per employee, debt/equity ratio and others of your choosing. We’ll discuss ratios in a bit, but these are some of the same measures you can use to measure performance against peer businesses, if those figures are available somewhere. See the sidebar on page 49 for some specific examples.
Report your key statistics on a graph, with years on the horizontal axis and the relevant variable (e.g. income, debt/equity ratio) on the vertical axis. Analyses of business performance is most meaningful when you can look at trends like these on a graph over time. One bad year isn’t something to necessarily worry about, but three bad years in a row is a trend and likely requires action.
Compare against others
Comparing your company’s performance against others is a bit tougher. Many times, if you’re having your financial statements prepared by a regional accounting firm, you can ask if they have other clients in the feed and grain industry that would be willing to put together a summary of averages and ranges for comparison. Obviously, firms would have to give permission, or “opt in,” to make this possible. But if you can get a sample larger than just two companies, such an approach can yield useful results. For the “price of admission” (allowing your figures to be used), you get back industry averages and ranges for comparison, which then allows you to see how you rank.
Dr. Tim Herrman and Arun Manandhar at Texas A & M University have established an online “Feed Industry Benchmarking Program,” which was initiated following a series of Feed Mill Profitability Workshops held in 2005-06. While data has not been collected for a number of years, the website is still active and can be found here: benchmarkfeed.com.
The user ID is: feeduser; the password is: Feed123 (note capital “F”). It has comparison data you may find useful. As the site is in archive mode, users can enter their data, but it won’t be saved so the next user can write over it.
Users cannot alter the existing data, and the site will be up until approximately June 15, 2020.
Herrman and Manandhar have indicated if there is sufficient traffic to the site from readers of this column, they would consider restarting it. Originally, there was no cost to participate — just providing your information to the database allowed you to see results.
Their system does assure anonymity, and as mentioned above, does not currently save your data.
Key ratio analysis
Ratios are calculated by dividing one number by another, for example, total sales divided by the number of your employees. Ratios enable business owners to examine the relationships between items and measure that relationship.
They are simple to calculate, easy to use, and provide business owners and managers with insight into what is happening within the business — insights that are not always apparent upon review of your financial statements alone.
Typically these ratios will look at liquidity (a measure of a firm’s ability to cover its immediate and short-term debts), solvency (the ability of a company to meet its long-term debts and financial obligations), efficiency (defined as a process characteristic indicating the degree to which the process produces the required output at minimum resource cost) and profitability.
Where do you stand?
The bottom line is that it’s important to track metrics — both your ongoing progress as a feed and grain business, but also how you compare against other firms.
Using this information to make changes in spending, increasing or reducing employee numbers, or adjusting your level of debt are all levers you can use to fine-tune your company’s operations and increase profitability for your firm’s owners whether those be individuals or members in an agricultural cooperative. ■
Dr. Joan Fulton is Professor and Associate Department Head, Department of Agricultural Economics, Purdue University, West Lafayette, IN.
Dr. John Foltz is Chair, Department of Animal Sciences, The Ohio State University, Columbus, OH, and Dean Emeritus, College of Agricultural and Life Sciences and Professor Emeritus, University of Idaho, Moscow, ID.
SEVERAL KEY RATIOS
A brief listing of several key ratios and how they are calculated are found below. Inc. Magazine has a more extensive listing of ratios that is worth looking at here.
Return on investment: Net Income/Owners’ Equity — indicates how well the company is using its equity investment. There are other ways ROI can be calculated – this is just one.Due to leverage, this measure will generally be higher than return on assets.
ROI is considered by many experts to be one of the best indicators of profitability. Companies usually need at least 10% to 14% ROI in order to fund future growth.
Sales per employee: Total Sales/Number of Employees can provide a measure of productivity.
Current ratio: Current Assets/Current Liabilities — measures the ability of your company to pay your near-term obligations. “Current” usually is defined as within one year. A general rule of thumb is that it should be at least 2:1 (though the ideal current ratio depends on the type of business).
Leverage ratios look at the extent to which your business has depended upon borrowing to finance your operations. A common leverage ratio is Debt/Equity.
Debt to equity: Debt/Owners’ Equity — indicates the relative mix of your company’s investor-supplied capital. A company is generally considered safer if it has a low debt-to-equity ratio — meaning a higher proportion of owner-supplied capital (though a very low ratio can indicate excessive caution). In general, debt should be between 50% and 80% of equity.
By assessing a company’s use of credit, inventory and assets, efficiency ratios can help feed and grain business owners and managers conduct business better.
Annual inventory turnover: Cost of Goods Sold for the Year/Average Inventory — shows how efficiently your company is managing its production, warehousing and distribution of product, considering its volume of sales. Higher ratios, over six or seven times per year, are generally thought to be better, although extremely high inventory turnover may indicate a narrow selection and possibly lost sales. A low inventory turnover rate, on the other hand, means that your company is paying to keep a large inventory and may be overstocking or carrying obsolete items.
Below are a few national accounting firms that offer Business Reviews (for information only, no endorsement of their services is being provided).
- KPMG offers a number of analytical services, several of which are focused on restructuring and turnaround management. Their programs are geared toward strategy to optimize your business. Click here for more information.
- Deloitte indicates its “restructuring services” works with “stressed” to “insolvent” businesses to incorporate a business plan review among other services. This may be a deeper dive than your firm desires, but perhaps useful depending upon circumstances. For more information, click here.