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Transcript of Strategic Business Planning for Commercial Producers Assessing Financial Performance: How Am I...
Strategic Business Planning for Commercial Producers
Assessing Financial Performance: How Am I Doing?
Strategic Business Planning for Commercial Producers
Topics
• Data required• Calculation worksheet• Interpretation
Financial assessment worksheets
Strategic Business Planning for Commercial Producers
Data required
• Balance sheets– Beginning of the accounting period– Ending of the accounting period
• Schedule F and Form 4797 from federal tax return
• Miscellaneous information
Strategic Business Planning for Commercial Producers
Worksheet 1- Schedule F DataSchedule F Data Taxable Year:
Cost of livestock sold (Schedule F, line 2) aGross income (Schedule F, line 11) bDepreciation (Schedule F, line 16) cMortgage interest (Schedule F, line 23a) dOther interest paid (Schedule F, line 23b) eTotal expenses (Schedule F, line 35) f
Balance Sheet Beginning Ending
Balance sheet date
Cash g lTotal current farm assets h mTotal current farm liabilities I nAccrued Interest j oFarm accounts payable and accrued exp. k pTotal farm assets qTotal farm liabilities rOwner's equity s
Miscellaneous DataBreeding stock sales (Form 4797) tNumber of operators and employees (annual full-time equiv.) u
Family living expenses (all families supported by the farm)1v
1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Balance Sheet DataSchedule F Data Taxable Year:
Cost of livestock sold (Schedule F, line 2) aGross income (Schedule F, line 11) bDepreciation (Schedule F, line 16) cMortgage interest (Schedule F, line 23a) dOther interest paid (Schedule F, line 23b) eTotal expenses (Schedule F, line 35) f
Balance Sheet Beginning Ending
Balance sheet date
Cash g lTotal current farm assets h mTotal current farm liabilities I nAccrued Interest j oFarm accounts payable and accrued exp. k pTotal farm assets qTotal farm liabilities rOwner's equity s
Miscellaneous DataBreeding stock sales (Form 4797) tNumber of operators and employees (annual full-time equiv.) u
Family living expenses (all families supported by the farm)1v
1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.
Ending Balance Sheet
Strategic Business Planning for Commercial Producers
Worksheet 1- Miscellaneous DataSchedule F Data Taxable Year:
Cost of livestock sold (Schedule F, line 2) aGross income (Schedule F, line 11) bDepreciation (Schedule F, line 16) cMortgage interest (Schedule F, line 23a) dOther interest paid (Schedule F, line 23b) eTotal expenses (Schedule F, line 35) f
Balance Sheet Beginning Ending
Balance sheet date
Cash g lTotal current farm assets h mTotal current farm liabilities I nAccrued Interest j oFarm accounts payable and accrued exp. k pTotal farm assets qTotal farm liabilities rOwner's equity s
Miscellaneous DataBreeding stock sales (Form 4797) tNumber of operators and employees (annual full-time equiv.) u
Family living expenses (all families supported by the farm)1v
1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Miscellaneous DataSchedule F Data Taxable Year:
Cost of livestock sold (Schedule F, line 2) aGross income (Schedule F, line 11) bDepreciation (Schedule F, line 16) cMortgage interest (Schedule F, line 23a) dOther interest paid (Schedule F, line 23b) eTotal expenses (Schedule F, line 35) f
Balance Sheet Beginning Ending
Balance sheet date
Cash g lTotal current farm assets h mTotal current farm liabilities I nAccrued Interest j oFarm accounts payable and accrued exp. k pTotal farm assets qTotal farm liabilities rOwner's equity s
Miscellaneous DataBreeding stock sales (Form 4797) tNumber of operators and employees (annual full-time equiv.) u
Family living expenses (all families supported by the farm)1v
1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Case Problem DataSchedule F Data Taxable Year: X4
Cost of livestock sold (Schedule F, line 21) A -$ Gross revenue (Schedule F, line 112) B 1,432,549$ Depreciation (Schedule F, line 16 or "use cost" number from income statement)
C136,922$
Mortgage interest (Schedule F, line 23a) D 89,808$ Other interest paid (Schedule F, line 23b) E 11,788$ Total expenses (Schedule F, line 35 or B of income statement + depreciation or "use cost" number)
F1,517,050$
Balance Sheet Beginning EndingBalance sheet date 12/31/X5 12/31/X5
Cash G 157,689$ L 5,016$ Total current farm assets H 337,747$ M 485,376$ Total current farm liabilities I 252,136$ N 321,867$ Accrued Interest J 16,968$ O 14,088$ Farm accounts payable and accrued exp. K 4,169$ P 6,131$ Total farm assets (remove all nonfarm real estate) Q 4,655,476$ Total farm liabilities (remove all nonfarm liabilities) R 1,121,439$ Owner's equity S 3,534,037$
Miscellaneous DataBreeding stock sales (Form 4797) T 63,800$ Number of operators and employees (annual full-time equiv.) U 9Family living expenses3 (all families supported by the farm) V 150,000$
Strategic Business Planning for Commercial Producers
Worksheet 1 - Net Farm Income Calculations
Net Farm IncomeGross revenues [A+B+T+(M-L)-(H-G)] WInterest expense [D+E+(O-J)] XOther expenses [A+F-(D+E)+(P-K)] YNet farm income [W-X-Y] Z
Strategic Business Planning for Commercial Producers
Net Farm Income Calculations for Case Problem
Net Farm IncomeGross revenues [A+B+T+(M-L)-(H-G)] W 1,796,651$ Interest expense [D+E+(O-J)] X 98,716$ Other expenses [A+F-(D+E)+(P-K)] Y 1,417,416$ Net farm income [W-X-Y] Z 280,519$
Strategic Business Planning for Commercial Producers
Worksheet 2Profitability Your Farm Benchmark Strong/Weak
Return on Assets [(z+x-v)/q]*100Return on Equity [(z-v)/s]*100Operating Profit Margin [(z+x-v)/w]*100
LiquidityCurrent Ratio [m/n]
SolvencyDebt-to-Asset Ratio [r/q]*100
Financial EfficiencyAsset Turnover Ratio [w/q]*100Revenue per Full Time Laborer [w/u]Operating Expense Ratio [ (y-c)/w]*100 Depreciation Expense Ratio [ c/w]*100 Interest Expense Ratio [ x/w]*100 Net Farm Income Ratio [ z/w]*100
Strategic Business Planning for Commercial Producers
Worksheet 2 - Case Problem Profitability Your Farm Benchmark*
Return on Assets [(Z+X-V)/Q]*100 4.9% 5.8%Return on Equity [(Z-V)/S]*100 3.7% 5.7%Operating Profit Margin [(Z+X-V)/W]*100 12.8% 13.5%
LiquidityCurrent Ratio [M/N] 1.51 3.62
SolvencyDebt-to-Asset Ratio [R/Q]*100 24.1% 14.5%
Financial EfficiencyAsset Turnover Ratio [W/Q]*100 38.6% 43.0%Revenue per Full Time Laborer [W/U] 199,628$ 251,998$ Operating Expense Ratio [ (Y-C)/W]*100 71.3% 55.2%Depreciation Expense Ratio [ C/W]*100 7.6% 7.2%Interest Expense Ratio [ X/W]*100 5.5% 3.3%Net Farm Income Ratio [ Z/W]*100 15.6% 34.3%
Strategic Business Planning for Commercial Producers
Diagnosis
• Assessment in four areas– Profitability– Liquidity– Solvency– Financial efficiency
Strategic Business Planning for Commercial Producers
Indicators of Financial Strength
• Values larger than benchmark– ROA– ROE– Operating profit margin– Asset turnover ratio– Revenue per full-time worker– Net farm income ratio
Strategic Business Planning for Commercial Producers
Indicators of Financial Strength
• Values smaller than benchmark– Debt-to-asset ratio– Operating expense ratio– Depreciation expense ratio– Interest expense ratio
Strategic Business Planning for Commercial Producers
Worksheet 2 - Assessing Financial Performance
Profitability Your Farm Benchmark* Strong/WeakReturn on Assets [(Z+X-V)/Q]*100 4.9% 5.8% weakReturn on Equity [(Z-V)/S]*100 3.7% 5.7% weakOperating Profit Margin [(Z+X-V)/W]*100 12.8% 13.5% weak
LiquidityCurrent Ratio [M/N] 1.51 3.62 weak
SolvencyDebt-to-Asset Ratio [R/Q]*100 24.1% 14.5% strong
Financial EfficiencyAsset Turnover Ratio [W/Q]*100 38.6% 43.0% weakRevenue per Full Time Laborer [W/U] 199,628$ 251,998$ weakOperating Expense Ratio [ (Y-C)/W]*100 71.3% 55.2% weakDepreciation Expense Ratio [ C/W]*100 7.6% 7.2% weakInterest Expense Ratio [ X/W]*100 5.5% 3.3% weakNet Farm Income Ratio [ Z/W]*100 15.6% 34.3% weak
Strategic Business Planning for Commercial Producers
Source of problems
• Scale• Employment• Efficiency• Debt structure
Strategic Business Planning for Commercial Producers
Diagnostic tree
Not OK
Diagnostic factorsEfficiency Scale Debt structure
Courses of action
OKNot OK
OK
OK
OK
OK
OK
OK
Not OK
Not OK
Not OK
Not OK
Not OK
…………. ………….
Source:Financial Troubleshooting
Strategic Business Planning for Commercial Producers
Courses of action to improve efficiency
• Increase analysis of production records looking for clues that will lead to improved efficiency
• Use advisory services to help focus on productivity and thruput
• Work at improving production skills• Improve marketing skill and performance • Devote more time to management
Strategic Business Planning for Commercial Producers
Courses of action to improve scale• Examine whether management
ability is sufficient to handle business of the current size or an expansion
• Use fixed resources fully by adding enterprises and/or custom work
• Expand existing enterprises with low-capital requirements
• Merge with another farming unit
Strategic Business Planning for Commercial Producers
Courses of action to improve employment• Increase off-farm employment• Eliminate hired family employees• Add labor intensive enterprises with low
capital requirements (increase the scale)• Reduce family withdrawals to a level
that is consistent with efficiency or part-time employment
Strategic Business Planning for Commercial Producers
Courses of action to improve debt structure
• Restructure debt• Sell unproductive assets to reduce debt• Reduce debt through write-off• Scale back farm to allow significant
increases in off-farm employment• Don’t own what you can control through
leases• Evaluate the rate of return expected
from capital investments and compare to interest rate
Strategic Business Planning for Commercial Producers
Summary
• Utilize existing data• Identify appropriate benchmarks• Assess efficiency, scale,
employment, and debt structure to identify actions that will improve performance