18 Farm Financial Ratios

Sep 26, 2023 | Uncategorized

If I told you as a farmer or rancher that you’re a small business owner, would you nod your head in agreement or wrinkle your face and say, “huh?” Often times, our perception of small businesses is the local mechanic, HVAC, boutique, or online Etsy store.

But, as an ag operator, you are also a small business owner. For example, if you’re a corn farmer and have 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.

You can check out your operation’s category on pages 2 & 3 of this SBA Table of Size Standards.

Interesting enough, but what does this mean to you, the small business owner?

Well, it means we ought to treat our farm and ranch finances as every healthy small business should. By paying attention to them. One of the ways to accomplish this is by tracking and monitoring farm financial ratios.

We track a lot of data in the ag industry, but often we don’t know what financial Key Performance Indicator (KPI) or ratio targets are healthy. Don’t fear – today’s your lucky day. With resources from Michigan State University, I put together this “Farm Financial Ratios Cheat Sheet.”

Here’s 18 Farm Ratio Targets for a healthy ag operation:

  • Current Ratio – Above 1.5
  • EBITDA – Higher the better
  • Debt to Equity Ratio – Below 1
  • Net Income Ratio – Above 20%
  • Debt to Asset Ratio – Below 30%
  • Asset Turnover Rate – Above 45%
  • Interest Expense Ratio – Below 5%
  • Equity to Asset Ratio – Above 70%
  • Net Farm Income – Higher the better
  • Operating Profit Margin – Above 25%
  • Rate of Return on Equity – Above 10%
  • Rate of Return on Assets – Above 10%
  • Operating Expense Ratio – Below 60%
  • Depreciation Expense Ratio – Below 5%
  • Debt Service Coverage Ratio – Above 1.5
  • Capital Debt Repayment Coverage – Above 1.5
  • Replacement Margin Coverage Ratio – Above 1
  • Working Capital to Gross Revenues – Above 25%

Use these benchmarks to gauge and monitor your agri-business financial health.

A comprehensive eBook and Calculator are available here⤵

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