Benton County MU Extension Center
100 W. Washington, PO Box 969
Warsaw, MO 65355
Phone 660-438-5012
extension.missouri.edu/benton
Facebook: MU Extension in Benton County
Amie Breshears, Specialist in Ag Business
Better Numbers, Better Farm
Profitability: Is there anything left after the farm business pays all of its bills?
“If you don’t stay on top of numbers associated with your business, you will fail. You can’t
outearn disorganization or the need to handle your finances wisely.” Dave Ramsey
Handling your finances wisely means knowing some key numbers that indicate the health of
your farm. One of those key numbers is your farm’s profitability. Profitability measures the
farm’s financial performance over a given period of time, such as a month, quarter, or year.
Profitability measurements. Profitability measurements answer the question, “What’s left after
the farm business pays all of its bills?”
‘Rate of return on farm assets (ROA)’, ‘rate of return on farm equity (ROE)’, ‘operating profit
margin ratio’, and ‘asset turnover ratio’ are common profitability measurements. For the
purposes of this article, we will consider ROE now and the other two measurements will be
explored in future articles. (ROA was the subject of last month’s article.) ROE measures the
return the farm is receiving on equity invested in the farm business. ROE looks at the farm’s
equity, including assets and liabilities, and estimates how fast equity is growing. As with any
investment, a larger number is better!
ROE is the net income after the farm has deducted all farm labor and interest expenses. This is
done by dividing the income from operations (minus owner withdrawals for unpaid labor and
management if the farmer is not taking a salary withdrawal) by the average total farm equity.
The formula for ROE is: ROE = income from operations – owner withdrawals for unpaid labor
and management / average total farm equity. If the farm has $100,000 in income from
operations (after subtracting the owner’s withdrawals) and $1,000,000 in farm equity, the ROE
is .10. This means that every $1.00 of equity is generating a 10% return. Is that a good number?
It is! Generally, an ROE greater than .10 is considered ‘strong’. A ROE of .03 to .09 is considered
‘caution’. If the ROE is less than .03, that is considered ‘vulnerable’. The example ROE of .10 is in
the ‘strong’ range.
Why does this matter? The farm should be performing at an acceptable level for the equity
that is invested in it. In short, the owner(s) should be asking, ‘Is it worth it?’; is the rate of
return worth the time, effort, and money that it takes to get it when compared to the rates of
return for other forms of investment, such as certificates of deposit; stocks, bonds, and others?
While a higher ROE is desirable, attention should be paid to the farm’s capitalization level and
the owner’s tolerance of risk. It is possible that a lower ROE might indicate a more conservative
(risk-averse) approach to farm financial management. It is also possible that a higher ROE might
be the result of a highly-leveraged farm business. As always, a financial measure such as ROE
should not stand alone, but be utilized together with other financial measures in order to
provide a more complete, better understanding of the farm’s finances.
You CAN make improvements and improve your farm numbers, including profitability. One step
at a time, day by day, small changes and better habits can add up to measurable results
including better farm finances.
Take a look at MU Extension ‘Farm Accounting’ resources including Missouri Farm Record Books,
budgets and spreadsheets available online (http://tinyurl.com/mr2knym8),
muext.us/FarmAccounting,, or at your county MU Extension office.
Have a recordkeeping or budgeting question? Want to pass along your experiences with farm records?
Contact Amie at abreshears@missouri.edu, 660-619-7994, and follow MU Extension in Benton County
on Facebook. Dr. Amie Breshears is an MU Extension specialist in Ag Business. She serves the West-
Central Region. She and her husband, David, have three sons and raise beef cattle on their family farm
near Warsaw, Missouri.
