As expansion of the national beef herd accelerates and leads to lower prices, it is an excellent opportunity to review financial performance numbers that ranches should try to attain. Key performance indicators (KPIs) are measurements based on production and financial performance data and are used to evaluate those factors that are crucial to the success of an operation.
They can provide a rancher with insight into whether the operation is fulfilling the goals of ownership. In a sense, they can become a report card, but more importantly, KPIs can be utilized to identify weaknesses in the operation that can then be addressed. While there is an endless number of KPIs, three rise to the top and should be evaluated for any operation.
It is important that KPIs be calculated correctly and based on good data. Be honest with yourself. In some instances, ranchers who try to calculate these will find that their financial record keeping isn’t as good as it should be. The most accurate KPIs are calculated from financial accrual-adjusted records.
Remember that not one KPI assures success. As with a ranch’s resources, the ranch manager must balance the use of these resources. To focus on one KPI, at the expense of a second, does no good to the overall performance of the ranch. As an example, increasing pounds weaned per exposed female does no good if the nutritional base expense KPI is too high. Thus, one KPI balanced with a second KPI can make for an excellent performance.
1. Pounds weaned per exposed female: More than 460 pounds per exposed female
The primary objective for owning breeding beef females is to wean calves. While every rancher has this goal, how they get it accomplished over time may vary between ranchers. But, the number of calves weaned and how heavy those calves are serve as indicators of ranch productivity. Thus, from a production standpoint, the pounds of weaned calf per exposed female remains the most important production KPI for the ranch management team.
The calculation for this KPI is the total pounds of weaned calves divided by the total number of exposed breeding females that were intended to be bred. This KPI is a function of weaning percentage and weaning weights. A high weaning percentage begins with a high pregnancy rate followed by a high calving percentage. While weaning weights are certainly a function of genetics and management, weather and days of age are the most important determinants. A rancher should look to reproduction first to solve low pounds weaned per exposed female, not increasing weaning weights.
2. Cost per hundredweight (cwt) of weaned calf: Less than $170.00 per cwt
As an overall ranch manager, there is no better number to know than what it takes to produce a pound of weaned calf, or in this case, 100 pounds of weaned calf. This KPI incorporates the productivity of the ranch along with the total expenses it took to create that productivity. Every ranch has a different set of resources that it uses to create calves. This KPI illustrates how efficiently that manager is using those resources. Thus, this figure is one that, when calculated correctly, can be compared with other ranchers from across the country regardless of the resources that the manager is utilizing. Given the current fundamental situation, a cost of less than $170 per cwt is a target ranchers should shoot for.
3. Rate of return on assets (market basis): Greater than 1.5 percent
A ranch owner should depend on the rate of return on assets to evaluate the overall performance of the ranch team. The owner has charged the manager with utilizing his assets in such a way as to generate a return to those assets to create a positive net income. Ranch managers are no different from any fund manager on Wall Street. The difference is the return on assets (ROA) expectations. While the long-term return from Wall Street may be greater than 6 percent, the long-term return from breeding beef cows is closer to 0.5 percent.
When calculated correctly, the ROA can be compared to any other asset management business, including your savings account at the local bank. To calculate this KPI, start with the net income and add to it the interest expenses for the year. Then divide this figure by the average value of the assets from the balance sheet. In this case, we use the market value basis as opposed to the cost basis of the assets. Successful ranches have an ROA more than 1.5 percent over time.
Three KPIs have been presented here. These certainly are not the only measures that a ranch should consider. However, these KPIs provide an excellent starting point for evaluating the financial targets a ranching operation should be striving to achieve. It should be noted each ranch is unique and quite possibly is involved in multiple enterprises that contribute to the financial well-being of the operation, which may alter how certain KPIs are viewed.
- Professor and Extension Economist
- Texas A&M AgriLife Extension Service