High-Stakes Workshop

December 17, 2010Doug Marshall

Farm Mgt. InstructorMadison Area Technical College

Looking At The Numbers…

Whose Perspective?

Farm Transfers

• Is there enough money for everyone?– 2 projections need to be done

• Exiting Cash Flow (Parents)• Entering (You)

Exiting Cash Flow Budget

• Enough Money to be “Comfortable”– Living costs

• Food • Household operating• Travel • Car• Any remaining debt

– Health care / insurance– Nursing home / insurance

Entering Farmer Questions?

• Same or different type of farm?

• Same or different management?

• Same or different financial control?

• Answers dictate budgeting numbers…

What Type of Operation Are You Going to Have?

• Where have we been? = Analyze past performance

• New Management = New ways?

• Coordinated effort with prior generation?

Commercial Commodity Production?

• High level of Competition between Producers

• Long run, who produces the cheapest

• Slim margins

• High Volume X Slim Margin = Living

• Higher Investment

Value Added Commodity Production?

• Specialty product

• Name, organic, natural, humane, etc.

• Lower Volume

• Wider margin

• Lower Volume x wider margin = living

• Higher labor pay rate

Get Help!!!!!

• UW Extension Agents

• Tech School Farm Business Instructors

• Independent Consultants

• Wisconsin Farm Center - DATCP

Entering Farmer Must Do Feasibility / Cash Flow Budgets

• FINPACK Computer program to see where the farm is now and determine long run feasibility of your farming operation as you intend to run it….– Looks at everything:

• Investment• Income/Expense• Cropping & livestock• Added debt and repayment• Calculates profitability and cash surplus/deficit• Tax impact

Determine it’s Feasible, Then….

• Do monthly cash flow budgets to see how you get there.

• This is your best estimate of how money will move in your business.

• First 2 years the hardest.

Where Do I Go for Planning Numbers?

• Depends on direction you’re going…– Same operation mode ?– Same management ?– Etc.

Where do I go for planning numbers?

• Industry benchmarks or standards are a good place to start.

• Use as a guide and interject past actual farm numbers where applicable.

• Every farm is different:– Graze or not– Tillable acres– Genetic potential– Etc.

Benchmarks?

• Wisconsin– UW Center for Dairy Profitability

– www.cdp.wisc.edu• Click on Financial Benchmarks• Ag Financial Advisor• Several hundred Wisconsin Dairies• Sort by herd size, production level, crop acres, etc.• Production and Financial performance benchmarks

• Handout

Benchmarks

• University of Minnesota

• Center for Farm Financial Management– “Finbin”

• Production data on all types of farms– Crops, dairy, hogs, cattle

–www.cffm.umn.edu/

Assessing past and future performance????

Each Leg is Important

Productivity

Debt/Investment

Cost Control

Cost Control is Important…

• Expense including Interest as % of Income should be 70% or less.

• Expense without Interest 60% or less

Debt & Investment Structure is Important

• Limit Investment to $10000 per cow

• Limit debt to $2500 to $5000 per cow

• Asset/liabilities = 40% or less

• Not feasible at the start….

Productivity is Important

• Decent production per cow 22000+

• Good crop yields5-7 TDM Alfalfa

160-180 bu corn

50+ bu beans

20-25 ton Silage

Liquidity Measures

• Indicators of positive cash flow

• Current Ratio of 1.5 to 2.0

• Working Capital should be positive

Solvency Measures

• Debt / Asset Ratio < .4 or 40% in debt– Not at entry

• Equity / Asset Ratio > .6

• Debt / Equity Ratio < .66

Profit Measures

• Net Farm Income should be as high as possible --- really no standard

• Rate of Return On Assets > 5%

• Rate of Return on Equity > RROA

• Operating Profit Margin > 15%

Loan Repayment Capacity Measures

• Term Debt Coverage Ratio > 1.2

Financial Efficiency Measures

• Asset Turnover > 30%

• Operating Expense Ratio < 70%

Without Interest < 60%

• Depreciation Expense Ratio < 15%

• Interest Expense Ratio < 10%

• Net Farm Income Ratio > 15%

Thumb-rule per cow costs

• Breeding fees• Purchased feed• Supplies• Vet, Medicine• Seed, Chemicals,

Fertilizer• Fuel• Repairs• Other

$56.

$600. add $40/1000Lb RHA

$150.

$125

$500

$125

$225

$ 364

Generally Looks Like This Per Cow….

• Gross Farm Income = $3300

• Gross Operating Expense = $2145 65%

• Debt Service = $ 500 15%

• Family Living = $ 500 15%

• Left for Cap. Replacement = $ 155 5%

Dr. David Kohl’s Quick AnalysisRedRed YellowYellow GreenGreen

LiquidityLiquidity Current Ratio Working Capital

< 100%< 20%

100 – 150%

20 – 50%

> 150%

> 50%

SolvencySolvency Debt/Asset > 70% 30 – 70% < 30%

ProfitabilityProfitability Return on Assets < 1% 1 – 5% > 5%

RepaymentRepayment Term debt coverage < 100% 100 – 150% > 150%

EfficiencyEfficiency Operating Expense > 80% 65 – 80% < 65%

Business Success Factors

Baseline Yr 1 Yr 2 Benchmark

Breakeven/cwt Milk < $14.50

CDRD (Repayability) >115%

Expense Ratio <70%

Solvency > 50%

Term Debt/cwt <$20

Net Cash Income/cow >$600

Net Profit/cow >$200

Return on Assets (ROA)

>9%

Business Success Factors

Baseline Yr 1 Yr 2 Benchmark

Return on Equity (ROE)

> 12%

C&I Equity 50%

Working Capital/AGI 10%

CDRC Margin/AGI >5%

Debt/cow (total cows) <$3,500

Milk Income/cow (avg. milking)

>$2,500

Debt Service as % of total income

<25%

Business Success Factors

Baseline Yr 1 Yr 2 Benchmark

Principal Reduction/ cow/year

$200

Interest Expense/ Gross Revenue

<12%

Feed Costs - $/cwt <$3.50

Debt Service - $/cwt <$3.20

Labor Costs - $/cwt <$2.25

Labor Costs as % of Total Income

<15%

In Summary….

1. Analyze past business performance– Strengths/weaknesses

2. Determine future production scheme

3. Project feasibility and cash flow

4. Monitor financial performance