Key Performance Indicators | Equity to Asset Ratio and Asset Turnover Ratio
The year 2017 can go down as one holding many challenges for cattle raisers. We are sincerely grateful to everyone who shared their time, talents and treasure with those in need.
Take these last two months of the year to examine the balance sheet for your operation. Will you make a profit? The answer this year may be a disappointing “no”. If that is the case, the next step is to determine why. If you did everything right and the natural disasters were the underlying reason, that’s one thing. However, take a hard look at your practices and determine what you may have been able to control. What can you change, starting in January, that will lead to showing a profit by this time next year?
We have been looking at Key Performance Indicators (KPI) for Beef Cow-calf Operations, as identified by Stan Bevers, a long-time economist with Texas A&M AgriLife Extension Service and popular speaker at Cattle Raisers Conventions. Much like a marathon runner starts with a race date and works backwards to create a training program, using the KPIs will give clear measurement goals with the end goal (profit) in mind.
The KPIs will work for any size operation. This month, we are doubling up and looking at 2 KPIs.
Equity to Asset Ratio (Market Basis) Greater than 50 percent
“The equity to asset ratio is the percentage of a ranch the owner owns. To calculate this KPI, divide the net equity by the total assets. Both figures come from a ranch’s balance sheet. The opposite image of this KPI is the debt to asset ratio that shows the percentage of the ranch owned by others, such as a lender. Few lenders will want to finance a ranch if they already own more than 50 percent of it. This being the case, you should strive to own more than half of the assets. The type of ranch assets you own will influence whether you can get financing. For example, if your share is made up of land you own, a lender may find it easier to lend money against an equity to asset ratio of less than half.”
Asset Turnover Ratio (Cost Basis) Greater than 15 percent
“Because ranching is a highly capitalized business, it is vital that the manager generate the greatest possible net income from those assets. The asset turnover ratio illustrates how much those assets are generating (turning). To achieve a KPI target of 15 percent, every dollar of asset making up a particular ranch must generate $0.15. This figure may seem quite low, but it demonstrates the nature of the ranching business. To calculate this KPI, divide the net income by the value of assets from the balance sheet.”
Bevers operates RanchKPI, a ranch management consulting business specializing in building ranch management information systems that allow for ranch accounting, analysis and finding efficiencies measured as Key Performance Indicators.
To find more information about KPIs, what it takes to be a successful rancher, or to schedule a consultation, visit ranchkpi.com. ❚
“Key Performance Indicators” is excerpted from the November 2017 issue of The Cattleman magazine.