High-Stakes WorkshopDecember 17, 2010Doug MarshallFarm Mgt. InstructorMadison Area Technical College
Looking At The Numbers
Whose Perspective?
Farm TransfersIs there enough money for everyone?2 projections need to be done
Exiting Cash Flow (Parents)Entering (You)
Exiting Cash Flow BudgetEnough Money to be ComfortableLiving costsFood Household operatingTravel CarAny remaining debtHealth care / insuranceNursing 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 ProducersLong run, who produces the cheapestSlim marginsHigh Volume X Slim Margin = LivingHigher Investment
Value Added Commodity Production?Specialty productName, organic, natural, humane, etc.Lower VolumeWider marginLower Volume x wider margin = livingHigher 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 BudgetsFINPACK 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:InvestmentIncome/ExpenseCropping & livestockAdded debt and repaymentCalculates profitability and cash surplus/deficitTax impact
Determine its 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 youre goingSame 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 notTillable acresGenetic potentialEtc.
Benchmarks?WisconsinUW Center for Dairy Profitabilitywww.cdp.wisc.eduClick on Financial BenchmarksAg Financial AdvisorSeveral hundred Wisconsin DairiesSort by herd size, production level, crop acres, etc.Production and Financial performance benchmarksHandout
BenchmarksUniversity of MinnesotaCenter for Farm Financial ManagementFinbinProduction data on all types of farmsCrops, dairy, hogs, cattle
www.cffm.umn.edu/
Assessing past and future performance????
Each Leg is ImportantProductivityDebt/InvestmentCost 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 ImportantLimit 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 ImportantDecent production per cow 22000+
Good crop yields5-7 TDM Alfalfa160-180 bu corn50+ bu beans20-25 ton Silage
Liquidity MeasuresIndicators of positive cash flow
Current Ratio of 1.5 to 2.0
Working Capital should be positive
Solvency MeasuresDebt / Asset Ratio < .4 or 40% in debtNot at entry
Equity / Asset Ratio > .6
Debt / Equity Ratio < .66
Profit MeasuresNet Farm Income should be as high as possible --- really no standardRate of Return On Assets > 5%
Rate of Return on Equity > RROA
Operating Profit Margin > 15%
Loan Repayment Capacity MeasuresTerm Debt Coverage Ratio > 1.2
Financial Efficiency MeasuresAsset 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 costsBreeding feesPurchased feedSuppliesVet, MedicineSeed, Chemicals, FertilizerFuelRepairsOther
$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 Kohls Quick Analysis
Business Success Factors
Business Success Factors
Business Success Factors
In Summary.
Analyze past business performanceStrengths/weaknessesDetermine future production schemeProject feasibility and cash flowMonitor financial performance
