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© 2009, University of Minnesota
FinancialManagement
ForSmall Farms
© 2009, University of Minnesota
Department of Applied Economics
800-234-1111 www.cffm.umn.edu
Dale Nordquist
© 2009, University of Minnesota
Financial Management For Small Farms
• Today’s agenda– Financial management concepts (FINPACK)– AgPlan Business Planning Software– MN Organic Farm Business Management Project– Interpreting Financial Statements and Measures
workshop
© 2009, University of Minnesota
A comprehensive whole farm financial planning and analysis system
© 2009, University of Minnesota
FINPACK Components• Balance sheets Where Am I?
• FINAN Annual Financial Analysis
• FINFLO Monthly Cash Flow Planning
• Annual Plan Annual Cash Flow Planning
• FINLRB Financial Long Range Planning
© 2009, University of Minnesota
Financial Management For Small Farms
• Is there a difference?
© 2009, University of Minnesota
Financial Management For Small Farms
• Small farms: – Use less debt– Rely more on labor than technology– Manage risk through diversification – Earn more off farm income– Have more interests than just maximizing profit– Tend to be more entrepreneurial– Need to focus on margin (marketing and operating
efficiencies)
© 2009, University of Minnesota
Financial Management For Small Farms
• Is there a difference?– Yes and no– All want to be profitable– All want to be able to pay bills– All want to grow net worth
© 2009, University of Minnesota
Financial Management For Small Farms
• Commodity producers– Focus on producing at the lowest cost– Earn a small margin on sales– Make their money on volume
© 2009, University of Minnesota
Financial Management For Small Farms
• Small farms– Focus on selling at a profitable margin– Need to earn a high margin on sales– Need to be entrepreneural to take advantage of
niche markets and market opportunities
© 2009, University of Minnesota
Financial Analysis vs Business Management
Financial Analysis• Uses the numbers• Diagnostic• Keep score (trends)
Business Management• Uses knowledge of the
business• Prescriptive• Decision-making
© 2009, University of Minnesota
Financial Management For Small Farms
© 2009, University of Minnesota
Interpreting Financial Statementsand Measures
© 2009, University of Minnesota
Farm Financial Standards Guidelines
• Financial statements:– Balance sheet– Income statement– Statement of owner’s equity– Statement of cash flows or cash flow budget
© 2009, University of Minnesota
Farm Financial Standards Guidelines
• Financial ratios and measures:– Farm Financial Standards Sweet 16+
© 2009, University of Minnesota
Balance Sheet
A snapshot of:
– Assets– Liabilities– Net worth (owners equity)
• At a specific point in time
© 2009, University of Minnesota
Balance Sheet
The accounting equation:
Assets = Liabilities + Net worth (Equity)
© 2009, University of Minnesota
Balance Sheet
• Assets– Everything owned or payable to
the business
© 2009, University of Minnesota
Balance Sheet
• Assets– Everything owned or payable to
the business
• Liabilities– All obligations owed
© 2009, University of Minnesota
Balance Sheet
• Assets– Everything owned or payable to
the business
• Liabilities– All obligations owed
• Net worth/Owners Equity– Total assets minus total
liabilities
© 2009, University of Minnesota
Balance Sheet
• Measures financial position:
© 2009, University of Minnesota
Balance Sheet
• Measures financial position:– Liquidity
•The ability of the business to generate cash when needed
© 2009, University of Minnesota
Balance Sheet
• Measures financial position:– Liquidity
•The ability of the business to generate cash when needed
– Solvency•The relation ship between
total assets and total liabilities
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Cash accountsCrop inventoriesLivestock held for salePrepaid expenses SuppliesAccounts receivable
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Machinery & equipment Breeding livestock
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
LandBuildings
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Accounts payableAccrued expensesOperating loansPrincipal due on term debt
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Loans with an original term of from 1 to 10 years
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Loans with an original term of greater than 10 years
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
Non-current
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Personal Personal
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Personal Personal
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Personal Personal
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Assets Liabilities
Current (< 1 year) Current
Intermediate (1–10 yrs) Intermediate
Long term (> 10 years) Long term
Personal Personal
Total liabilities
Net worth
Total assets Total Liabs + Net worth
Balance Sheet
© 2009, University of Minnesota
Balance Sheet
• Management implication– Match financing to asset life
© 2009, University of Minnesota
• A snapshot at a specific point in time
Balance Sheet: When
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Financial structure• Total solvency • Net worth change
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position– Current assets vs. current liabilities– Measures of liquidity
• Balance sheet structure• Total solvency • Net worth change
© 2009, University of Minnesota
Working Capital
= Current assets minus current liabilities
• Important in financial risk management• Reduced by cash capital purchases and family
withdrawals
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Balance sheet structure
– Where is the equity– Are assets matched with liabilities– No right or wrong answer
• Total solvency • Net worth change
© 2009, University of Minnesota
Balance Sheet Structure
• High current debt to assets – Liquidity problems
• High intermediate debt to assets – Capital replacement problems
• High long term debt to assets– Limited expansion capacity
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Balance sheet structure• Total solvency
– Net worth – Overall financial risk position of the business– Future borrowing capacity– Debt to asset ratio = Total Debt ÷ Total Assets
• Net worth change
© 2009, University of Minnesota
Balance Sheet Analysis
Let’s look at a balance sheet.
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Balance sheet structure• Total solvency • Net worth change
– Measures overall progress
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Balance sheet structure• Total solvency • Net worth change
– Measures overall progress– Net worth growth can only happen if:
•Earnings exceed consumption or
© 2009, University of Minnesota
Balance Sheet Analysis
• Current position• Balance sheet structure• Total solvency • Net worth change
– Measures overall progress– Net worth growth can only happen if:
•Earnings exceed consumption or•Market values are increased
© 2009, University of Minnesota
Earned Net Worth Change
Net farm income $75,000Non-farm income + 25,000Family living/owner withdrawals - 50,000Income taxes - 10,000Earned net worth change = $40,000
© 2009, University of Minnesota
Balance Sheet Challenge
Asset Valuation
© 2009, University of Minnesota
Balance Sheet ChallengeAsset Valuation
• Market Valuation– assets valued at estimated fair market value– a price that could be expected is sold at arms
length to an unrelated buyer– after selling costs
© 2009, University of Minnesota
Market Value Balance Sheet
Total estimated market value of assets- Total debts= Net worth
© 2009, University of Minnesota
Market Value Balance Sheet
•Advantage– Best estimate of solvency - amount remaining if
all assets were sold and all debts paid
© 2009, University of Minnesota
Market Value Balance Sheet
•Advantage– Best estimate of solvency - amount remaining if
all assets were sold and all debts paid
•Disadvantage– Mixes net worth changes from earnings with
market value changes
© 2009, University of Minnesota
Market Value Balance Sheet
• Uses– Evaluate solvency– Evaluation of debt capacity– Collateral analysis– External comparison with other farms– Estate planning
© 2009, University of Minnesota
Balance Sheet ChallengeAsset Valuation
• Cost (Book) Valuation– assets valued at original cost less depreciation– land value never changes
© 2009, University of Minnesota
Cost Value Balance Sheet
Total depreciated value of assets- Total debts= Retained earnings
© 2009, University of Minnesota
Cost Value Balance Sheet
•Advantage– Includes only net worth changes resulting from
earnings
© 2009, University of Minnesota
Cost Value Balance Sheet
•Advantage– Includes only net worth changes resulting from
earnings
•Disadvantage– Does not provide accurate solvency picture
© 2009, University of Minnesota
Cost Value Balance Sheet
•Uses– Monitor earned net worth change– Internal periodic performance– Calculation of periodic net income
© 2009, University of Minnesota
Balance Sheet Challenge
Asset Valuation• Market
– Assets valued at a conservative market value adjusted for selling costs
• Cost of book value– Assets valued at original
cost minus depreciation
© 2009, University of Minnesota
Balance Sheet Challenge
Asset Valuation• Be consistent• Depreciation
– Machinery 10%– Buildings 5%
© 2009, University of Minnesota
Balance Sheet
A snapshot of:
– Assets– Liabilities– Net worth (owners equity)
• At a specific point in time
© 2009, University of Minnesota
FFSC Financial Guidelines
Four financial statements:
– Balance sheet– Income statement– Statement of owners equity– Statement of cash flows
© 2009, University of Minnesota
Income Statement
Purpose– Measure profitability– How much money did we
make
© 2009, University of Minnesota
Income Statement
Types of income statements– Cash – IRS Schedule F
© 2009, University of Minnesota
Income Statement
Types of income statements– Cash – IRS Schedule F– Accrual
© 2009, University of Minnesota
Income Statement
Accrual method– Revenues recognized when earned – Expenses recognized when incurred– More accurately matches income with the expenses
incurred to produce that income
© 2009, University of Minnesota
Income Statement
Types of income statements– Cash – IRS Schedule F– Accrual– Accrual adjusted
© 2009, University of Minnesota
Accrual Adjusted Income Statement
CashAccounting
Records
© 2009, University of Minnesota
Accrual Adjusted Income Statement
CashAccounting
Records
BeginningBalance
Sheet
EndingBalance
Sheet
© 2009, University of Minnesota
Accrual Adjusted Income Statement
Jones Farm
Gross income $500,000
Cash expenses -450,000
Net cash income 50,000
Depreciation -40,000
Schedule F income 10,000
Smith FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Depreciation -40,000
Schedule F income 10,000
© 2009, University of Minnesota
Accrual Adjusted Income Statement
Jones FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change +100,000
Depreciation -40,000Schedule F income 10,000
Smith FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Depreciation -40,000
Schedule F income 10,000
© 2009, University of Minnesota
Accrual Adjusted Income Statement
Jones FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change +100,000
Depreciation -40,000Net farm income 110,000
Smith FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Depreciation -40,000
Schedule F income 10,000
© 2009, University of Minnesota
Accrual Adjusted Income Statement
Jones FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change +100,000
Depreciation -40,000Net farm income 110,000
Smith FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change -100,000
Depreciation -40,000Schedule F income 10,000
© 2009, University of Minnesota
Accrual Adjusted Income Statement
Jones FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change +100,000
Depreciation -40,000Net farm income 110,000
Smith FarmGross income $500,000
Cash expenses -450,000
Net cash income 50,000Inventory change -100,000
Depreciation -40,000Net farm income -90,000
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