Our first blog post in 2014. brings all you need to know about the most important key performance indicators (KPI) - finance KPIs. They are the bottom line of every business and they give answer to the question: TO BE, or NOT to BE? In order to achieve long-term sustainability, a business must be profitable and the return must be higher than the investment in the long-term. Without long-term profits, every business will collapse, so finance KPIs let you monitor your financial progress and see how your business is performing. There are four major finance KPIs that every agriculture producer should track to maintain good agriculture management practice:
- Return on investment
- Cash flow
- Fixed vs variable costs.
Return on investment (ROI) measures the efficiency of an investment into agriculture production, to calculate gains from investment. It is measured by formula: The ROI is expressed as percentage, so 60% ROI means that current return on investment is 60% from the amount of cost of investment, or in other words, you invested more than you earned. Also, it is important to measure the time period needed to reach 100% ROI (ROI break-even point). All profits before ROI break-even point are returning your investment and when the ROI break-even point is met, future profits are your earnings. Profitability shows if you are earning or losing money with your production. It is calculated as revenues minus expenses in a period. Profitability is also used for calculating ROI (gain from investment). For annual crops, production should be profitable every year, but profit per hectare is much lower than for permanent crops that have much higher investment costs and first profits come after 2-3 years.
Cash is the king. Therefore, cash flow is the heart beat of your finances. You can have very profitable business, but if you aren't able to charge your receivables, you can get in trouble with paying your obligations towards your vendors. With cash flow, you know at each moment how much money you have at disposal. Measuring fixed and variable costs can help you determine how much you should scale your business to achieve satisfying level of productivity. Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc. and are often called overhead costs. Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc. With scaling up the production, you are reducing the share of fixed costs in total costs, which reflects positively on your profitability since total cost per output is falling. This is often called the economy of scale and is the reason why big producers have competitive advantage over small producers. Tracking finance KPI is important part of successful agriculture management. If you don't know how to track it and calculate it, we can help. Agrivi lets you easily track your sales, expenses and investments and gives you insight into your finance KPIs. We make agriculture management easy.