1 Financial Planning with FAST Tools By Paul N. Ellinger Gary Schnitkey Travis Farley

1

Financial Planning with Financial Planning with FAST Tools FAST Tools

By Paul N. EllingerGary Schnitkey

Travis Farley

2

Women in Agriculture: April 2006Women in Agriculture: April 2006

FAST ToolsFAST Tools• farmdocfarmdoc companion project initiated in 1999

• Development of 42 spreadsheet-based tools to aid decisions for producers, lenders, consultants and investors

• Facilitate use, access, distribution of tools and resources through CD and internet distribution– Quarterly subscription– farmdocfarmdoc download– via workshops

• Approximately, 30,000 CDs produced and another 35,000 downloads

• Increased demand for education and training

3


Current Resources and Current Resources and ActivitiesActivities

• 45 laptop computer lab• FAST educator / coordinator • CD duplication

– internal and cooperate w/other extension programs

• 50+ annual meetings in Illinois / integrated FAST– 80% were supported w/RMA

• Teaching modules for each program– Case studies and examples

Theme & FocusTheme & FocusTeach Decision Making Teach Decision Making

Integrate and utilize FAST Integrate and utilize FAST

Not just computer trainingNot just computer training

4


Educational EffortsEducational Efforts3 Dimensions3 Dimensions

Content/Meeting Type

Inte

nded

Audie

nce

Host(s)

5


Content: ModulesContent: Modules

• Financial planning• Crop insurance • Grain inventory pricing and

management• Machinery management• Land investment and lease

analysis• Enterprise analysis

6


AudiencesAudiencesTargeted and GeneralTargeted and General

• Farmers– General and women via Annie’s project

• Lenders• FSA• Farm bureau managers• College and High School Students• Educators (train the trainer programs)

– College and Jr College instructors– Vo-Ag Teachers– Extension Educators– State record fieldstaff (Iowa, KY, Illinois and Alabama)

7


HostsHosts“Getting the right people at the “Getting the right people at the

table”table”• Typical Extension Channels• Farm Bureau• Farm Credit System• Commercial Banks• Growmark • State Record Keeping Associations

8


FAST Tools - OverviewFAST Tools - Overview

farmdocfarmdocmaterialsmaterials

ComputerizedComputerizedDecision AidsDecision Aids

Financial Financial AnalysisAnalysis

InvestmentInvestmentAnalysisAnalysis

Loan Loan AnalysisAnalysis

FarmFarmManagementManagement

Grain Marketing & Grain Marketing & ManagementManagement

Risk Risk ManagementManagement

Yield and LandYield and LandDatabase UtilitiesDatabase Utilities

AgMasAgMas

Crop InsuranceCrop Insurance

Proceedings:Proceedings:

FarmFarmManagementManagement

Financial Financial ManagementManagement

PolicyPolicy

Law and TaxationLaw and Taxation

Grain MarketingGrain Marketing

9


Financial AnalysisFinancial Analysis

Appraisal of current financial position Balance sheet Ratio calculator Cash flow planning Cash to accrual income approximation Estimates of deferred taxes Repayment capacity analysis Personal financial planning Longer-term planning – in development Net worth allocation

Assist in preparing and interpreting financial Assist in preparing and interpreting financial information and information and

measuring financial healthmeasuring financial health

10


Investment AnalysisInvestment Analysis

Assist in measuring the economic returns and Assist in measuring the economic returns and performance performance

of alternative types of investments.of alternative types of investments.

Capital budgeting Grain bin analysis Land purchase analysis Lease versus purchase Machinery financing MACRS calculator Savings calculator Time value of money calculator

11


Loan AnalysisLoan Analysis

Loan amortization Loan comparison Revolving loan calculator

Assist in calculating loan payments and schedules;Assist in calculating loan payments and schedules;comparing alternative loans; and measuring the comparing alternative loans; and measuring the

sensitivity of payments to changes in loan parameterssensitivity of payments to changes in loan parameters

12


Farm ManagementFarm Management

Assist in developing enterprise budgets and Assist in developing enterprise budgets and breakeven levels; estimating costs of machinerybreakeven levels; estimating costs of machineryoperations; and comparing crop insurance andoperations; and comparing crop insurance and

farmland leasing alternativesfarmland leasing alternatives

Break even analysis Crop budgeting tool Crop insurance calculator Enterprise allocation and analysis Farmland lease analysis Machinery lease analysis

13


Grain Marketing and ManagementGrain Marketing and Management

Assist in tracking grain inventory and Assist in tracking grain inventory and estimating the costs and returns of grainestimating the costs and returns of grain

storage and deliverystorage and delivery

Crop storage analysis Grain delivery model Grain pricing model Grain inventory management

14


Risk ManagementRisk Management

Assist in evaluating the impact of farmland lease types Assist in evaluating the impact of farmland lease types as well as marketing and crop insurance strategies onas well as marketing and crop insurance strategies on

revenue and income distributions.revenue and income distributions.

Crop insurance historical evaluator Farm rent evaluator Marketing and crop insurance risk model

15


Yield and Land Database Yield and Land Database UtilitiesUtilities

Assist in analyzing county-level historical cropAssist in analyzing county-level historical cropyields and land prices and assist with common yields and land prices and assist with common

computations related to soil productivity computations related to soil productivity measures and yield predictionsmeasures and yield predictions

Illinois, Indiana, Iowa crop yield database Illinois farmland sales database Illinois soil productivity index utilities

16

Financial Planning ModulesFinancial Planning Modules

17


Day ProgramDay Program

• Repayment analysis

• Ratio analysis

• Financial Planning– Annual and multi-year

18


Repayment CapacityRepayment Capacity

• Critical for determining and understanding the income needs from the farming operation

• Good discussions regarding family living budgets– Resources:

• Illinois record keeping data • Consumer expenditure studies www.bls.gov/cex/

19


Repayment Capacity, cont.Repayment Capacity, cont.Name

Family living withdrawals 44,000$

Net non-farm income 35,000$

Income and social security taxes 12,000$

Capital expenditures: farm business 26,000$

Capital expenditures: nonfarm business and family -$

Desired annual savings for education -$

Desired annual retirement savings/contributions 6,000$

Excess carryover operating debt -$

Other cash needs -$

Tillable acres 1,400

Number of term loans and capital leases 2

Typical ratio of farm operating income to gross revenue

Total depreciation 26,500$

Joe and Elise Farmall

15%

20


Stage 1: Repayment AnalysisStage 1: Repayment Analysis

Required Earnings AnalysisJoe and Elise Farmall $ Per acre

Debt and capital lease obligations:Term interest 21,750$ 15.54Scheduled term principal payments 30,318 21.66

Family living expenses 44,000 31.43 Income and SS taxes 12,000 8.57 Excess carryover operating debt - 0.00 Net non-farm income - 35,000 25.00

Required net earnings before interest, taxes and depreciation (EBITDA) 100% 73,068$ 52.19$ Sensitivity 110% 80,374$ 57.41$ Range 125% 91,334$ 65.24$

Stage 1

21


Stage 2: Repayment AnalysisStage 2: Repayment Analysis

Required Earnings AnalysisJoe and Elise Farmall $ Per acre

Desired Investment flows: Capital expenditures for the farm business 26,000$ 18.57$ Capital expenditures for non-farm and family - - Desired annual savings for education - - Desired annual retirement savings/contributions 6,000 4.29

EBITDA required to meet all investment flows, interest, taxes and deprec. 100% 105,068$ 75.05$ Sensitivity 110% 115,574$ 82.55$

125% 131,334$ 93.81$

Stage 2

22


For Illinois: Risk Analysis For Illinois: Risk Analysis

• Enter Budget and Crop Insurance Data

• Based on 31 years of county level production and price data

• Assess the likelihood of achieving income levels needed

1 1 1

Owned Share Fixed Operator's Land Rent Cash Farm

50-50 Rent

Total Acres 200 600 600 1,400

Percent 14% 43% 43% 100%

REVENUE LESS CASH NONINTEREST COSTS (per acre)

Budgeted average1 $133 $49 $28 $52

Variability analysis2

Historical average 3 $142 $53 $37 $59

High (1 in 33 years)4 $216 $91 $111 $118

Low (1 in 33 years)4 -$21 -$28 -$126 -$69

Chance of revenue below:4

Stage 1 $52 3% 33% 67% 43%

$57 3% 61% 70% 56%

$65 6% 73% 79% 66%

Stage 2 $75 6% 88% 85% 75%

$83 9% 91% 88% 78%

$94 12% 100% 91% 84%

Stage 3 $75 6% 88% 85% 75%

$83 9% 91% 88% 78%

$94 12% 100% 91% 84%

Required net earnings before interest, taxes and depreciation (EBITDA).

EBITDA required to meet all investment flows, interest, taxes and deprecation.

EBITDA required to meet all investment flows, interest, taxes and deprecation and other.

Repayment Capacity & Income Needs Risk Analysis

24


Ratio CalculatorRatio Calculator

• Designed to assess financial health through ratio and trend analysis

• Minimum set of data needed to complete the “sweet 16” ratios

• Calculate “scaled” health and trend index for each ratio.

• Store multiple years

• Professional version for multiple customers

25


Educational ProgramsEducational Programs

• Case study

• Drawbacks and cautions of financial ratios

• Evaluate the strong and weak areas (liquidity, profitability, leverage, repayment capacity)

• Assess strategies to improve the various areas

26


27


Why Budget?Why Budget?• Decision analysis benchmarks

– Cost control– Marketing– Identify opportunities– Contingency planning– Meet financial goals – discipline– Managing cash surplus/deficits profitably

• Organization • Communication• Monitor performance• And … my lender wanted one

28


Desired Components of a Desired Components of a Financial PlanFinancial Plan

• Focus on projected profitability profitability of a plan – not just cash flow– What do we need to break even?– What cushion do we have to meet debt payments?

• Sensitivity analysis (stress testing)– Prices– Production– Costs– Interest rates

• Basis of comparison and validation– Benchmarks– Previous year comparison– Comparison to actual

29


Getting OrganizedGetting Organized

• Synchronize cash, loan, and inventory balances

• Total cash expenses for 2005

• Current inventories– Units and price

• Status of government payments– Due from 2005 crop

• Balance and payment schedules for loans– Interest owed at end of year– Scheduled payments

• Items prepaid for 2006 crop and payable for 2005 crop at the end of the year

30


Getting Organized, continuedGetting Organized, continued• Enterprise cropping plan

– acres – share of acres – lease type and share– expected production– government payments– costs per acre

• Crop insurance protection– Level of yield or revenue protection

• Livestock plan– Expected production– Expected sales and purchase price– Feed costs– Other livestock expenses

31


Getting Organized, continuedGetting Organized, continued

• Planned capital purchases– Expected level and cost of financing

• Nonfarm sources and uses of cash– Wages– Business income/expenses– Family withdrawals

• Before visiting lender– Check if lender is using suggested commodity prices– View Consumer Credit Report: See handout

32


Financial AnalysisFinancial Analysis

• Case Study

• Enter complete set of cash flow information

• Customize budget entries per site location

33


Financial Planning AttributesFinancial Planning Attributes

• Built-in risk parameters• Quarterly projections

– Cash flow – Income statements– Commodity sensitivity and break even– Previous year comparison– Scenario analysis

34

Financial PlanningFinancial PlanningDemos Demos

35


Comments and QuestionsComments and Questions

• Complimentary CDs

• Looking for reviewers, partners and ideas

• Cooperate in CD production

• Facilitate your programs

Documents

1 Financial Planning with FAST Tools By Paul N. Ellinger Gary Schnitkey Travis Farley