To accurately determine the financial health of a business is beyond the scope of this course. However, readily available industry benchmarks provide a point of reference to indicate how a business is performing compared to others in the industry. These benchmarks allow business operators to do one or all of the following:
- Quickly assess business health.
- Identify opportunities for further improvement in a business (benchmark comparison).
- Monitor the progress of a business over time (multi-year benchmark comparison).
Benchmarking in the sheep industry
Benchmarking can either be:
- indirect — where sheep producers calculate their own performance indicators and compare them against published industry benchmarks; or
- direct — where sheep producers contribute their farm information into a service that generates the benchmarks for comparison with other sheep producers.
Indirect benchmarking
Indirect benchmarking is a great place to start the benchmarking journey. The best athletes monitor their performance in detail before competing in bigger events against others, and business operators can employ the same tactics for their business through benchmarking. Indirect benchmarking is the first step.
To determine which benchmarks will be relevant to a business, start with the primary benchmarks in the Indicative industry benchmarks tool. At the whole-farm or business level these will identify how healthy a business is. At the enterprise level they will identify those areas of the business with the greatest opportunity for improvement.
After the overall health of the business is determined and opportunities for improvement identified in individual enterprises, secondary enterprise benchmarks can be applied selectively as a guide to make specific changes and monitor progress. Guides to performance are not provided here because they differ considerably depending on location, sheep enterprise, genetics used, farm enterprise mix and many other variables. These benchmarks are best tracked internally to improve specific areas of enterprise performance.
For indirect benchmarking, cost of production ($/kg of meat or wool produced) can be a useful benchmark as it integrates many aspects of the business.
Direct benchmarking services
Both public and private service providers carry out direct benchmarking. These services are worthwhile because they:
- calculate more complex benchmarks
- provide a consistent methodology between years
- cover financial and physical aspects of the whole business or sheep enterprise
- provide direct comparisons to other businesses, highlighting opportunities
- often provide professional services to help interpret the information generated and identify the best course of action.
Benchmarking services are available in all states, either through farm management consultants or accountants, or through larger service providers.
Monitoring and reporting
All businesses will undertake some level of monitoring and reporting. Some of it is legally enforceable, such as the reporting associated with the Australian Tax Office (ATO), Workplace Health and Safety (WH&S) and livestock sales. In addition, some markets require a level of reporting, such as wool sales by description. However, this compulsory monitoring and reporting is seldom sufficient to be accepted as whole-of-business reporting.
Best practice requires some level of reporting of progress against the business objectives, at least annually. In the corporate world, annual reports are compulsory and must come with an independent audit by a qualified accounting firm. This is rarely an appropriate approach for small businesses, where tax returns are often the only ‘annual report’. However, tax returns give no indication of progress towards objectives and are usually structured to minimise tax rather than provide a useful summary of the financial health of the business.
The extent of reporting is a personal and business choice, but minimum best practice is to document progress against objectives and to update short-term, medium-term and long-term objectives in the light of the past year.