Your farm needs productive assets.
Agricultural businesses utilize a variety of assets: land, buildings, equipment, vehicles, grain inventories, and livestock inventories, just to name a few major assets. Asset management is a critical factor in the success of your farm business. Because assets can represent a significant investment of cash, you cannot afford to own “lazy” assets. Livestock animals are assets, not pets, and like other assets, they must provide a return on your business investment. Business assets have one purpose; to generate revenue!
An important measure of your farm’s financial efficiency in terms of asset management is the asset turnover ratio (ATO). ATO is a measurement of how much revenue in dollars and cents your business is generating with each dollar of assets it owns.
Do you know your ATO? Is it high, average, or low?
This is how we assess the health of a farm’s ATO at AgriSolutions:
- A high ATO is .6 or above.
- An ATO between .3 and .6 is average.
- An ATO below .3 is low.
To illustrate, here are a couple of actual examples:
Farm #1 Total Revenue = $3,189,660 / Total Assets = $10,275,163 = .31 ATO
Farm #2 Total Revenue = $6,140,367 / Total Assets = $6,157,773 = 1.00 ATO
The ATO is impaced bu the types of assets owned: productive assets generatehigher ATO, while investment type assets (e.g., most land) usually return a low ATO. While knowing your current ATO is important, the historical trend of your ATO is critical to properly assess the impact of your business’s asset management.
Assets are purchased for a number of reasons, such as
- Tax reasons
- Impulse (we see it, we buy it)
- Heritage reasons (e.g., “We always wanted to own that piece of land”)
- Perceived family expectations
- Trends toward purchasing certain assets
- Environmental issues
- Risk management
Operations management involves using assets to generate revenues and controlling expenses to generate profits. Operating profit is the only renewable source of cash for your business and is used to fund interest expenses, owner demands, principal payments, and asset reinvestment.
What if your ATO is low?
A low ATO can be a particular problem for startup businesses, those with high debt, and owners who want to grow their businesses.
A low ATO:
- Reduces funds for the owners (i.e., family living expenses) and tax payments
- Reduces the amount of interest expense and debt a business can service
- Slows growth and increases risk to the business
While knowing and managing you farm business’s ATO is just one element of successful asset management, it is a vital one. Businesses whose assets that fail to generate revenues have many limitations; they aren’t able to grow; they can’t carry as much debt, and the owners will have fewer dollars to reach the goals they have in life. Every business needs a solid foundation, and one of the most important cornerstone foundation blocks are highly productive assets.
AgriSolutions can help you understand farm financials.
If you could use some help understanding all the financial considerations involved in asset management decisions or otherwise believe your farm operation could benefit from agricultural financial consulting, contact the experts at AgriSolutions. We can start with a free consultation, where we’ll gain an understanding of your financial management needs and let you know how we can help.