Benchmarking is a tool, not a scorecard

Farmers are handed benchmarks for all sorts of things: cost of production, gross margin, return on assets, equity, operating costs, yield and stocking rates.

And the instinct when a figure lands in front of you is almost always the same. Am I above or below the benchmark? It's a natural question, and it's rarely the most useful one.

The more useful questions move slower. What is this benchmark actually measuring? Is the comparison genuinely comparable to my business? What is my own trend telling me, over years rather than a single season? And what decision am I actually trying to make from any of this?

Last month, I was in Temora delivering an AgCelerate Know Your Numbers workshop for a group of women involved in farming businesses across Southern NSW. We worked through equity ratio, return on assets, interest cover, cost of production and cashflow. And almost inevitably, once someone calculates a number, the next question arrives quickly. Is that good?

And I understand why we keep asking that. We want an answer, particularly when we've just calculated a ratio we've never actually looked at before. The frustrating truth is that the answer is often: compared with what? That's not avoiding the question, it's the start of using the number properly.

Done well, benchmarking is genuinely useful. It can validate a decision you've already made. It can unsettle one you were about to make without quite realising it. None of that matters, though, unless the data behind it is accurate and you're prepared to use it to make a decision. Look at a benchmark once and file it away, and it hasn't done anything for the business. Build it on inconsistent numbers and it can send you confidently in the wrong direction.

Three different things people call benchmarking

When someone tells me they're benchmarking their business, I usually want to know what they mean. Are they comparing themselves with an industry dataset? A group of similar businesses? Or comparing this year's business with their own performance over time? They're all useful, but for different reasons. Mixing them up is where most of the confusion starts.

Against industry data. Useful for understanding roughly where you sit, but only once you know what's inside the figure, the enterprise mix it was drawn from, the region, the season, how assets were valued. Skip that step and you're comparing your business to a number you don't actually understand.

‍Against similar businesses. This can be much more useful, but only if you're genuinely comparing similar businesses. A 1,000-hectare mixed farm and a 5,000-hectare cropping operation can both post a 5% return on assets. The fact they've both landed at the same number doesn't make them comparable businesses.

‍Against yourself. This is the one worth leaning into, and the one most people skip. What was your cost of production three years ago? Your interest cover before you took on the latest debt? Your equity ratio five years back? The trend is the story, not the single figure sitting in front of you today. A benchmark you hit once tells you very little. A number that's been climbing, or slipping, for three years straight is trying to tell you something.

None of this works if the numbers underneath it aren't right, and this is probably the boring part of benchmarking that nobody wants to talk about. You need consistency. If repairs were categorised one way three years ago and differently this year, or you've lumped all your enterprises together, the comparison starts to lose meaning. The same goes for one-off costs. Know they're there and know what they've done to the result. Otherwise, you're comparing numbers that were never built on the same basis to begin with.

The number is never the whole story

Your equity ratio might be lower than it was five years ago. That could mean the business is under pressure. Or perhaps you've deliberately taken on debt to buy land, fund succession, rebuild livestock numbers after drought or invest in infrastructure. The ratio can't tell you which of those things happened.

Your return on assets might look soft this year. Before deciding that's a problem, go back to the season. Well below average rainfall, lower lambing percentages and lighter weaning weights will all be sitting somewhere underneath that result. The reverse is true too. A strong season can make a number look good without necessarily telling you much about management. A number tells you what happened. It doesn't tell you why, and it doesn't tell you what kind of year produced it.

It's also why I've been building my own benchmarking tool for AgCelerate clients. I've become increasingly frustrated with looking at a single year's result and trying to draw too much from it. I want to sit with a client, pull up three or five years and see what's changed. The tool is built around the metrics I focus on with clients, with relevant external benchmarks included where the comparison is genuinely meaningful.

A number is also a conversation

Once you know your trend, and the story behind it, it stops being just a management tool. It becomes a communication one too. Say your interest cover has improved from 1.3x to 2.1x over three years. That's a very different conversation with your bank than walking in with this year's figure alone and hoping it speaks for itself. A gross margin trend broken down by enterprise is a conversation with your family about where the next dollar of investment should go, built on evidence rather than on whoever feels most strongly in the room.

The number on its own is a result. Put the trend and the context around it, and you've got a much better conversation.

It's tempting to say benchmarks are simply an average, and that the average includes the businesses that are struggling. But not every published agricultural benchmark is an average. Some datasets report quartiles, top-performing cohorts, medians. Before you compare yourself to any benchmark, find out what sits behind it and who was in the dataset it came from. Know the number and understand what's sitting behind it before you use it.

Benchmark better, not less

The answer isn't to stop benchmarking, the challenge is to do it properly and use the information in a way that helps your business.

Know what you're comparing and how the number was calculated. Compare like with like. Look at your own trend over time and understand the story sitting behind it before you draw a conclusion. And most importantly, know what decision you're trying to make before deciding which number matters.

Because the purpose of knowing your numbers is never to beat somebody else's farm, it's to make better decisions in your own.

If you want help getting properly across your numbers, there are two ways we can work together. If it's your own farming business, you can find out more about AgCelerate and book an introductory meeting to talk through where you're at. Or, if you're part of a farming group, ag bureau or industry group and you'd like me to bring an AgCelerate Know Your Numbers workshop to your region, let's talk.

This article is general in nature and does not constitute financial or tax advice. I am not a tax accountant, and you should always seek independent financial advice before making decisions about your business, your finances, or your tax position. If you know you need to remove things from your plate but still haven’t made the move, that is a conversation worth having. Reach out directly or book an introductory call to explore whether working together through AgCelerate would suit your business.