Habits for Effective Farmers Webinar Series:

Evaluating Financial Health

Iris CuiExtension Farm Management SpecialistUniversity of Tennessee

July 3, 2019

This series is supported by USDA/NIFA under Award Number 2018-70027-28585.

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https://www.linkedin.com/pulse/why-only-few-super-successful-people-naveen-raju/

Habit 3: Evaluating Financial Health

Business Planning Recordkeeping

Budgeting

Financial Health

Financial Risk

Human Risk

Marketing

Succession Planning

Production Skills

IRIS'S PIE OF FARM SUCCESS

Management Skills

Overview

• What do I need to evaluate the financial health of farm business?

• How do I evaluate? • What are some financial criteria I need to look at?

First, Records can tell you a LOT

• Profit and Loss / Income Statement• Cash Flow by Enterprise• Budget by Enterprise

Examples by Recordkeeping method

• Excel• Quicken

Excel Farm Sales Record Example

Cash Flow by Enterprise

Quicken Example

Cash Flow by Enterprise

Center for Profitable Agriculture Upcoming Workshop: ’Got Farm Records, Now What?’• Face to Face, whole day. • Farmers will learn using Excel spreadsheets & other tools to evaluate

performance.• Tennessee and Kentucky workshops to be conducted September 2019

through April 2020.

1 year data doesn’t tell you as much as years of data

Financial Criteria

• Profitability• Liquidity• Solvency• Financial Efficiency

Financial records to prepare

Balance Sheets (Net Worth Statements)• All Assets minus All Debts• Typically – Beginning / End of Year• Track / Measure financial progress

Why do I need to construct a balance sheet?

• Tracks all farm and nonfarm assets, debt payments, and loan receipts (monthly or annual basis)

• Evaluate debt repayment ability and planning credit• Succession planning

Balance Sheet

AssetsShort term: Checking, Cash,

Credit CardMid-term: Machinery,

Breeding livestockLong term: Land, Buildings

LiabilitiesCredit cards, operating loans

Machinery loans

Farm loans

Financial Criteria

√ Profitability• Liquidity• Solvency• Financial Efficiency

Profitability Measures• Rate of return on farm assets- can be thought of as the averageinterest rate being earned on all (yours and creditors’) investments in the farm.• Operating profit margin- shows the operating efficiency of thebusiness. If expenses are low relative to the value of farm production, thebusiness will have a healthy operating profit margin. A low profit margincan be caused by low product prices, high operating expenses, or inefficientproduction.

University of Minnesota Comparisons

ROAHigh 20%

ROALow 20%

OPMRHigh 20%

OPMRLow 20%

2013 8.3 -5.4 21.4 -17.0

2014 11.0 -5.1 27.0 -16.5

2015 5.5 -5.3 15.8 -18.9

2016 6.8 -4.1 19.1 -14.2

2017 6.6 -3.7 19.1 -12.2

Financial Criteria

• Profitability√ Liquidity• Solvency• Financial Efficiency

Liquidity Ratios

• Current ratio- measures the extent to which current farm assets, if sold tomorrow, would pay off current farm liabilities.

• Working capital- tells us the operating capital available in the short term from within the business.

• Working capital to gross revenues - measures operating capital available against the size of the business.

University of Minnesota Comparisons

Current RatioHigh 20%

Current RatioLow 20%

Working Capital to GRHigh 20%

Working Capital to GRLow 20%

2013 2.8 1.5 46.1 24.0

2014 2.4 1.3 35.0 18.5

2015 2.2 1.3 38.7 14.0

2016 2.1 1.2 43.1 10.7

2017 2.2 1.1 40.0 8.0

Financial Criteria

• Profitability• Liquidity√ Solvency• Financial Efficiency

Solvency Ratios

• Farm debt-to-asset ratio - is the bank’s share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity.

University of Minnesota Comparisons

D/AHigh 20%

D/ALow 20%

2013 30.0 44.0

2014 33.0 45.0

2015 34.0 46.0

2016 35.0 51.0

2017 36.0 49.0

Financial Criteria

• Profitability• Liquidity• Solvency√ Financial Efficiency

Financial Efficiency

• Asset turnover ratio- measures efficiency in using capital. You could think of it as capital productivity. Generating a high level of production with a low level of capital investment will give a high asset-turnover rate.

• Revenue/full-time labor ratio – measures labor efficiency

http://southcentral.edu/images/departments/foundation_nm/ag_symp_2016/Ag%20Symp%20-%20Farm%20Finance%20Scorecard.pdf

After Financial Evaluation…

What you do next or different is the key to improve your financial health!

What if I Hate Math or Numbers?

The MANAGE Program

https://ag.tennessee.edu/arec/Pages/manage.aspx

Management for a Lifetime

• Programs offered• Whole-farm planning• Record Keeping• Budgeting• Risk Management• Goal Setting

easuring,

nalyzing,

avigating, and

chieving

oals

ffectively

Area Farm Management Specialist Map 2019

Contact Information

Objective of MANAGE

Work with farm families to help them evaluate their financial situation and make

better informed decisions

How Do We Do This?

One-on-One farm visits• Financial analysis of the current farm operation• Changing the operation and analyzing the outcomes• Fine tuning the various scenarios for comparisons

Your Input

• Provide production information• Provide financial information• Describe alternatives• Set family and financial goals

Go Crazy with All the Analysis

All financial and personal information remains

CONFIDENTIAL

Iris Cui(931) 648-5725xcui10@utk.edu

Please complete the session evaluation at https://tiny.utk.edu/7HabitsEval