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FARM RECORDS

FARM RECORD ANALYSIS

FARM RECORDS CONCEPTS1. INTRODUCTION TO RECORDS

2. ACCOUNTING EQUATION

3. BALANCE SHEET

4. INCOME STATEMENT

5. INVENTORY

6. DEPRECIATION

7. ACCOUNTING METHODS

8. CASH FLOW

9. RECORD S SYSTEMS

10. COMPUTERIZED RECORDS

11. LABOR RECORDS

12. FARM RECORDS ANALYSIS13. INCOME TAX

TEXT BOOK READINGS

KAY & EDWARD. FARM MANAGEMENT 5TH ED. PGS 73-75; 88- 93

FARM RECORDS RESOURCE BOOK: PGS 79 - 86

FARM RECORDS ANALYSIS

LESSON OBJECTIVES

1. DISCUSS THE PROCESS OF USING RECORDS TO ANALYZE A

FARM BUSINESS

2. CALCULATE AND EVALUATE CAPITAL POSITION RATIOS:

LIQUIDTY AND SOLVENCY

3.CALCULATE AND EVALUATE PROFITABILITY MEASURES AND

RATIOS

4. CALCULATE AND EVALUATE FINANCIAL

EFFICIENCY RATIOS

5. MAKE SUGGESTIONS ON HOW TO IMPROVE LIQUIDITY,

SOLVENCY, AND PROFITABILITY.

6. DISCUSS NON-FINANCIAL MEASURES OF PERFORMANCE

AFTER THIS LESSON, THE STUDENT SHOULD BE ABLE TO:



DISCUSSION POINTS

I. BUSINESS ANALYSIS

II. FINANCIAL POSITIONS RATIOS

III. CAPITAL POSITION STANDARDS

IV. IMPROVING CAPITAL POSITION

V. FIN PERFORMANCE RATIOS

VI. IMPROVING FIN PERFORMANCE

VII. NON-FINANCIAL PERFORMANCE

I. BUSINESS ANALYSIS

1. RECEIPTS

2. EXPENSES

3. DEPRECIATION

4. GARBAGE IN = GARBAGE OUT

A. KEEPINGKEEPING FINANCIAL RECORDS

Learning Objective

12-112-1 DISCUSS USING RECORDS TO ANALYZE A FARM BUSINESS

"KEEPING comprehensive farm business records is only the first step. Some business operators keep very well organized and detailed records, provide information to their income tax preparer, and then file them away, never actually using the information to either evaluate the current status of the business or to plan for its future. The information which can be obtained from farm business records is a valuable tool for business management decisions.”

www.griffin.peachnet.edu/caes/agcrisis/content/records.htm

Learning Objective

CALCULATE AND EVALUATE CAPITAL POSITION RATIOS

12-112-1

B. SUMMARIZINGSUMMARIZING FINANCIAL RECORDS1. INCOME STATEMENT

3. CASH FLOW

2. BALANCE SHEET

Learning Objective


12-112-1

1. WHY

a. FIND STRENGTHS & WEAKNESS

b. MAKE COMPARISONS

C. ANALYZINGANALYZING FINANCIAL RECORDS:

1) AT THE FARM LEVEL

a). TREND ANALYSIS

b). COMPARE TO HISTORY

c). IDENTIFY GROWTH/DECLINE

d). COMPARE TO PLANS

Learning Objective


12-112-1

2). AT THE INDUSTRY LEVELa). INDUSTRY TRENDS

b). COMPARE TO INDUSTRY AVE

YOU INDUSTRY

Learning Objective


12-112-1

2. HOW: RATIO ANALYSIS

e. EFFICIENCY

a. LIQUIDITYABILITY TO PAY BILLS ON TIME WITHOUT DISRUPTING NORMAL BUSINESS OPERATIONS

b. SOLVENCYMEASURES AMT OF BORROWED CAPITAL (DEBT) A BUSINESS USES RELATIVE TO OWNER'S EQUITY

c. PROFITABILITYMEASURES THE EXTENT TO WHICH A BUSINESS GENERATES A PROFIT FROM RESOURCES

d. REPAYMENTMEASURES ABILITY TO REPAY FARM DEBT FROM FARM AND NON-FARM INCOME

MEASURE HOW INTENSIVELY A BUSINESS USES ASSETS TO GENERATE GROSS REVENUES

Learning Objective


12-112-1

A. FINANCIAL MEASURES ($’S) 1. FINANCIAL POSITION:BAL SHEET a. GUAGE WHERE WE ARE b. CAPITAL POSITION (1). LIQUIDITY (a). PAY BILLS ON TIME (2). SOLVENCY (a). PAY ALL BILLS (3). REPAYMENT CAPACITY (a.). ABILITY FOR NEW DEBT

MGT MEAS OVERVIEW

Learning Objective


12-112-1

a. HOW WE DID

b. EFFICIENCY

c. PROFITABILITY

B. NON-FINANCIAL PERFORMANCE

(PHYSICAL UNITS)

1. PRODUCTIVITY

2. EFFICIENCY

2. FINANCIAL PERFORMANCE

Learning Objective


12-112-1

II. FINANCIAL POSITION RATIOS

A. CAPITAL POSITION RATIO (BAL SHEET)

1. LIQUIDITY: PAY BILL ON TIME

a. CURR RATIO = CUR ASSETS / CUR LIAB

b. WORKING CAP = CUR ASSETS - CUR LIAB

Reflects your farms ability to meet short term debt without disrupting normal business

Measures amount of money you would have left if current assets were sold and current liabilities paid

Learning Objective


12-112-1

c. WORKING RATIO =

( CURR ASSETS + WORKING SSETS)

(CURR LIAB + WORKING LIAB)

d. CURR DEBT % = CURR LIAB / TOTAL LIAB

What proportion of total debt is is due within one year

Learning Objective


12-112-1

a. ASSET-DEBT RATIO = TOT ASSETS / TOT LIAB

b. ASSET-EQUITY RATIO = TOT ASSETS / EQUITY

c. DEBT-ASSET RATIO = TOT LIAB / TOT ASSETS

d. DEBT-EQUITY RATIO = TOT LIAB / EQUITY

e. EQUITY-ASSET RATIO = EQUITY / TOT ASSETS

f. EQUITY-DEBT RATION = EQUITY / TOT LIAB

2. SOLVENCY: PAY ALL BILLS

Learning Objective


12-112-1

III. CAPITAL POSITION STANDARDS

A. LIQUIDITY

1. CURR RATIO

2. CURR DEBT %

GOOD

>1.5:1

<30%

MID

1.5-1.0:1

30-40%

BAD

<1.0:1

>40%

Learning Objective


12-112-1

B. SOVENCY

1. ASSET/DEBT

2. ASSET/EQUITY

3. DEBT/ASSET

4. DEBT/EQUITY

5. EQUITY/ASSET

6. EQUITY/DEBT

GOOD

>1.5 :1

<30%

<.4 :1

<.6 :1

>.6 : 1

>2.3 :1

MID

1.5-1.1 :1

30-40%

.4 - .7 : 1

.6 - 2.3 : 1

.6 - .3 : 1

2.3 - .4 :1

BAD

<1.1 :1

>40%

>.7 :1

>2.3 : 1

<.3 : 1

<.4 : 1

Learning Objective


12-112-1

DIFFERENT AG INDUSTRY RATIOS

CASH GRAIN

GRAIN& LVSTK

LVSTKONLY

COW/CALF

COMMFEEDLOT

LIQUIDITY CURR RATIO

SOLVENCY DEBT/ASSET

DEBT/EQUIT

2.5:1 2.0:1 1.75:1 2.5:1 1.5:1

40% 50% 60% 35% 65%

.67:1 1.0:1 1.5:1 .54:1 1.86:1

Learning Objective


12-112-1

IV. IMPROVING CAPITAL POSITION

A. IMPROVING LIQUIDITY 1. RESTRUCTURE DEB PAYMENT a. TIMING AND/OR AMOUNTS 2. REDUCE FAMILY SPENDING 3. INCREASE CASH INFLOW 4. DECREASE CASH OUTFLOWB. IMPROVING SOLVENCY 1. SOLICIT OUTSIDE OWNERSHIP 2. SELL AND LEASE BACK 3. REFINANCE

Learning Objective 55

SUGGEST HOW TO IMPROVE LIQUIDITY, SOLVENCY, AND PROFITABILITY

V. FINANCIAL PERFORMANCE A. PROFITABILITY FROM INCOME ST 1. NET CAST INCOME = CASH OPER REC - CASH OPER EXP(F&V) 2. NET OPERATING INCOME = NCI + (NON-CASH REC) - (NON-CASH EXP) 3. NET FARM INCOME = NET OPER INC + CAP GAINS - CAP LOSSES 4. OPERATING PROFIT MARGIN = NET FARM INC + INC EXP - VAL OF OPER LABOR VALUE OF PRODUCTION 5. ABSOLUTE MEASURES 6. INTERNAL COMPARISONS ONLY!!


CALCULATE & EVALUATE PROFITABILITY MEASURES

1. RETURN TO CAPITAL a. RETURN ON ASSETS (ROA)= (NET FARM INC + INT EXP – OPER LAB VAL) TOTAL FARM ASSETS

DOESN’T CONSIDER DEBT IMPACT

C. FROM INC ST & BAL SHEET

b. RETURN ON EQUITY (ROE) = (NET FARM INC – OPER LABOR VALUE) TOTAL FARM EQUITY

Learning Objective

CALCULATE & EVALUATE PROFITABILITY MEASURES33

a. LABOR & MGT INCOME [$’S]=

(NET FARM INC + INT EXP-LAB VAL-OPP INT)

b. MGT INC [VAL OF MGT SKILLS] =

LABOR & MGT INC - (OPER LABOR )

c. RETURN ON LABOR [$/HR] =

LAB & MGT INC - (0PER REC * .05) HOURS WORKED

2. RETURN TO LABOR

Learning Objective


VII. FINANCIAL PERFORMANCE STANDARDSA. EFFICIENCY

1. GROSS RATIO

2. VAR RATIO

3. FIXED RATIO

4. INTEREST

5. DEPREC

6. NET FARM INC

7. ASSET T.O.

GOOD

<85%

<65%

<20%

<10%

<10%

>15%

>25%

MID

85-95%

65-80%

20-35%

10-20%

10-15%

10-15%

15-25%

BAD

>95%

>80%

>35%

>20%

>15%

<05%

<15%

Learning Objective


B. PROFITABILITY

1. RET ON ASSETS

2. RET ON EQUITY

3. MGT INCOME

4. OPER PROFIT

5. RET ON LABOR

GOOD

>9%

>6%

>5%

>25%

>$8 /HR

MID

4 - 9%

3 - 6%

25 - 10%

$4 - 8 /HR

BAD

<4%

<3%

<5%

<10%

<$4

Learning Objective


DIFFERENT AG INDUSTRY RATIOS

CASH GRAIN

GRAIN& LVSTK

LVSTKONLY

COW/CALF

COMMFEEDLOT

PROFIT ROA

ROE

ASSETTURNOVER

3% 7.5 5.5 2.5% 4.4%

5% 15%13.8% 3.85% 12.6%

0.35 0.80 1.5 0.25 1.75FIN EFF

Learning Objective


VIII. IMPROVING FINANCIAL PERFORMANCE RATIOS

A. IMPROVE PRODUCTION MANAGEMENT 1. IMPROVE ENTERPRISE EFFICIENCY 2. IMPROVE ENTERPRISE COMBINATIONSB. IMPROVE MARKETING MANAGEMENT 1. ASSES MARKETING EFFECTIVENESS 2. INCREASE AVERAGE PRICE RECEIVEDC. IMPROVE FINANCIAL MANAGEMENT 1. ASSES LOAN TERMS 2. DO ENTERPRISE COSTING


SUGGEST HOW TO IMPROVE LIQUIDITY, SOLVENCY, AND PROFITABILITY

DU PONT EQUATION

ROE = ASSET TURNOVER

XNET

PROFITMARGIN

X LEVERAGE

ASSETMANAGEMENT

REV & EXPENSEMANAGEMENT

DEBTMANAGEMENT

Learning Objective


ASSET TURNOVER

1) ASSET TURNOVER MEASURES THE RATE AT WHICH THE FARM CAN PRODUCE SALES EQUAL TO THE ASSET VALUE USED

2. BIOLOGICAL PRODUCTION USUALLY RESULTS IN LOW TURN OVER RATES

3. FACTORS REDUCING TURNOVER

a. REPRODUCTION PROBLEMSb. PRODUCTION PROBLEMS

ATO = GROSS REC / TOTAL ASSETS

Learning Objective


NET PROFIT MARGIN NET PROFIT MARG = NET INCOME / GROSS REC

1) PROFIT EFFICIENCY RATHER THAN PROFIT LEVEL

a). EXPENSE CONTROL: FEED EFFICIENCY;COST / # OF GAIN LABOR EXPENSE FACILTIES EXP: DEPREC & INTEREST

b). REVENUE MANAGEMENT: BETTER BASE MKT, PRICE PREMIUMNS

Learning Objective


LEVERAGE

LEVERAGE = 1 / EQUITY/ TOTAL ASSETS

1) IF YOUR ARE LEVERAGED & PROFITABLE, ROE WILL INCREASE

2) LEVERAGE: MULTIPLES YOUR PROFITS MULTIPLES YOUR LOSSES

Learning Objective


ASSET MANAGEMENT(GROSS REV/TOT ASSETS)• CULLING RATE• CALVING INTERVAL• DAYS OPEN• MORTALITY RATES• SERVICES PER CONCEPTION• INVESTMENT PER COW• AGE AT FRESHING• INVESTMENT PER MAN

DU PONT EXAMPLE FOR DAIRY FARM

Learning Objective



•LABOR EXPENSE• DEPREC EXPENSE• FEED EXPENSE• FEED EFFICIENCY• MILK PRICE

• % FAT• % SOLIDS• SOMATIC COUNT• % PROTEIN• ROLLING HERD AVE• MILK PER MAN

NET PROFIT MARGIN (NET INC/GROSS REV)

Learning Objective


LEVERAGE

(1/(EQUITY/TOTASSETS)• WORKING CAPITAL• CURRENT RATIO• WC/GROSS RATIO• WC/COW• TOTAL EQUITY• TERM DEBT/EQUITY• TOT DEBT/EQUITY• INTEREST EXPENSE


Learning Objective


1. WHERE DOES $1 OF REVENUE GO? 2. GROSS RATIO = TOT EXP/GROSS OPER REC a. FR $1 REV; HOW MUCH PD IN EXPENSES? 3. VARIABLE RATIO=VAR EXP/GROSS OPER REC a. FR $1 REV; HOW MUCH PD IN VAR EXP? 4. FIXED RATIO = FIXED EXP/GROSS OPER REC a. FR $1 REV; HOW MUCH PD IN FIX EXP? 5. DEPR RATIO = DEPR EXP/ GROSS OPER REC a. FR $1 REV; HOW MUCH PD IN DEPR EXP? 6. INTEREST RATIO = INT EXP/GROSS OPER REC A. FR $1 REV; HOW MUCH PD IN INT EXP?

A. FINANCIAL EFFICIENCY FR INCOME ST.


CALCULATE AND EVALUATE FINANCIAL EFFICIENCY RATIOS

VIII. NON-FINANCIAL PERFORMANCE STANDARDS:A. LIVESTOCK PRODUCTION

1,000,000 #’S

2,500 HEAD

400,000 #’S

250,000 #’S

1,000,000 #’S

1,300 HEAD

DAIRY: 50-70 COWS @18,000

FEEDER PIG: 150-175 SOWS @16

FAR/FIN: 100-125 SOWS @ 16

COW/CALF: 500 COWS:500# CALF

FEED LOT: 1000 HD @1100 #

SHEEP: 750 EWES @1.75 LAMBS


DISCUSS NON-FINANCIAL MEASURES OF PERFORMANCE

B. LIVESTOCK EFFICIENCY

4 LBS FEED/LB OF GAIN

1.5-2.0 #’S/HD/DAY

8 LBS FEED/LB OF GAIN

2.0-2.5 #’S/HD/DAY

SWINE

FEED EFFICIENCY

RATE OF GAIN

BEEF

FEED EFFICIENCY

RATE OF GAIN



:C. CROP PRODUCTION

700-1000 ACRES

YIELDS

125 BU

42 BU

65 BU

85 BU

6.5 TONS

4.0 TONS

20.0 TONS

CROP

CORN

SOYBEANS

WHEAT

OATS

ALFALFA HAY

MIXED HAY

CORN SILAGE



SUMMARY

1. MGT MEASURES ARE RELATIVE NO’S THAT ALLOW US TO COMPARE BETWEEN FARMS

2. THE MAJOR AREAS FOR COMPARISON ARE:

A. FINANCIAL POSITION

B. PROFITABILITY

C. REPAYMENT CAPACITY

D. FINANCIAL EFFICIENCY

3. NON FINANCIAL PERFORMANCE RATIO ANALYZE ENTERPRISE PERFORMANCE

RECORD ANALYSIS

RECORDS ANALYSISCONCEPT REINFORCEMENT

WHO : YOU

WHERE: Pg 85; FARM RECORDSRESOURCE BOOK

WHEN: ANNOUNCED IN CLASS

HOW: CALCULATE EACH OF THE RATIOS USING INFO AT THE TOP


ASSOCIATED LAB ACTIVITIES

LAB 9: MANAGEMENT MEASURES


PERFORMANCE QUIZ1 TRY: 1/2 LETTER GRADE

USING A SHEET OF FORMULAS AND DATA THAT YOU WILL BE GIVEN, YOU WILL NEED TO CALCULATE VARIOUS MGT MEASURES

9 CORRECT: 60% LEVEL

15 CORRECT: PEFECT SCORE

16-20 CORRECT: EXTRA CREDIT


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