Most producers spend plenty of time monitoring yields, livestock performance and input costs. But keeping a close eye on a handful of financial indicators can be just as valuable. These numbers offer insights about how the business is performing, identify early signs of financial stress and indicate whether the operation is positioned to handle future opportunities and challenges.
“Strong financial monitoring helps you manage cash flow, maintain liquidity, control costs and assess whether your operation is generating sustainable returns,” says Mike de Morais, senior credit manager with Farm Credit Canada. “Without it, even strong operations can face unexpected shortfalls and be forced into reactive decisions.”
You don’t need to be a financial expert to understand the basics. Here are five financial indicators that de Morais recommends every farm should monitor.
Why It Matters
Tracked monthly rather than at year end, these ratios work as an early warning system. De Morais says waiting until cash flow is already tight leaves an operation with fewer options and more reactive decisions.
1. Liquidity: Can the farm pay its bills?
Liquidity measures whether your farm has enough short-term assets, such as cash, inventory or receivables, to cover upcoming expenses and debts.
One common measure is the current ratio, which compares current assets to current liabilities. As a general guideline, de Morais says a ratio of 1.5:1 or higher is considered good, and 2:1 is strong. He says that if the ratio drops below one, it signals time for a review.
De Morais points out that liquidity also provides options. Farms with adequate working capital are better positioned to handle unexpected expenses, make timely input purchases and avoid marketing decisions driven solely by cash-flow pressures.
2. Debt service coverage: Can the business support its debt?
Borrowing is part of many successful farm businesses. The important question isn’t simply how much debt you have, but whether your operation generates enough cash to comfortably make principal and interest payments.
The debt service coverage ratio (DSCR) compares cash generated by the business with annual debt payments. De Morais notes that a ratio of at least 1.25:1 is generally considered acceptable, while 1.5:1 or higher provides a stronger margin.
“The higher the ratio, the stronger the farm’s ability to repay debt commitments,” says de Morais, explaining that if the ratio falls below one, the operation isn’t generating enough cash flow to cover debt payments, which can create financial pressure.
3. Leverage: How much of the farm is financed by debt?
The debt-to-equity ratio compares the farm’s total liabilities (what the farm owes) to the owner’s equity (the owner’s investment or ownership interest) in the business. Generally, a debt-to-equity ratio below one is favourable. Along with the other financial indicators, this number provides an early picture of the farm’s financial position and can highlight trends before they become larger issues.
4. Operating expense ratio: How efficiently is the farm operating?
The operating expense ratio (OER) measures the operating expenses as a percentage of gross revenue. In other words, it measures the overall efficiency of the farm operation.
Lower numbers generally indicate greater efficiency and higher profitability because less revenue is being consumed by day-to-day costs. De Morais is careful to point out that the target ratio varies depending on the type of farm. For example, grain and oilseed operations average between 60 and 70 per cent.
“Generally, farms should target between 50 and 70 per cent OER,” he says, recommending that farms benchmark their numbers against similar operations. “Comparing your results with peers and tracking the ratio over time can help identify trends and highlight opportunities to improve efficiency.”
5. Return on assets: Are your assets working for you?
Farming requires significant investment in land, buildings and equipment. The return on assets (ROA) measures how efficiently farm assets are being used to generate profit. A higher ratio indicates the farm is producing more income with fewer investments, and the higher the ratio, the better because that means the farm is maximizing the resources it owns.
“Because asset values and production systems differ across agriculture, there isn’t a single target number. Instead, farmers should focus on improving their own trend over time while comparing results with similar operations,” advises de Morais.
THE BENCHMARK NUMBERS
Current ratio: 1.5:1 good, 2:1 strong, below 1 needs review
Debt service coverage: 1.25:1 acceptable, 1.5:1 or higher stronger
Debt-to-equity: below 1 favourable
Operating expense ratio: 50 to 70 per cent target, 60 to 70 per cent typical for grain and oilseed
Return on assets: no single target, track your own trend
Numbers are only the beginning
No single ratio tells the whole story. Financial indicators work best when viewed together and tracked consistently. “It’s important to understand the underlying figures driving the ratios,” explains de Morais.
“Benchmarking your financial performance and discussing the results with your accountant and lender can provide valuable insights into how the operation is performing and where improvements can be made.”
De Morais reminds farmers that waiting until cash flow is tight often means fewer options and more reactive decisions.
Improving financial performance doesn’t always require major changes. Often, small adjustments made consistently have the greatest impact.
De Morais recommends:
- Reviewing cash flow monthly rather than only at year-end.
- Building and maintaining working capital reserves to improve liquidity.
- Improving cost control and operational efficiency.
- Strategically timing input purchases/produce sales to better stabilize cash flow.
- Avoiding unnecessary capital spending that adds debt without improving returns.
Today’s farming environment requires producers to manage production and business performance. Financial indicators provide an early warning system to identify stress, evaluate opportunities and support better decisions.
“The goal isn’t simply to produce more; it’s to build a business that’s profitable, resilient and prepared for the future,” says de Morais.
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