SmallFarm.ppt [Compatibility Mode]

© 2009, University of Minnesota

FinancialManagement

ForSmall Farms


Department of Applied Economics

800-234-1111 www.cffm.umn.edu

Dale Nordquist


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


A comprehensive whole farm financial planning and analysis system


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



• Is there a difference?



• 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)



• 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



• Commodity producers– Focus on producing at the lowest cost– Earn a small margin on sales– Make their money on volume



• 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


Financial Analysis vs Business Management

Financial Analysis• Uses the numbers• Diagnostic• Keep score (trends)

Business Management• Uses knowledge of the

business• Prescriptive• Decision-making




Interpreting Financial Statementsand Measures


Farm Financial Standards Guidelines

• Financial statements:– Balance sheet– Income statement– Statement of owner’s equity– Statement of cash flows or cash flow budget


Farm Financial Standards Guidelines

• Financial ratios and measures:– Farm Financial Standards Sweet 16+


Balance Sheet

A snapshot of:

– Assets– Liabilities– Net worth (owners equity)

• At a specific point in time


Balance Sheet

The accounting equation:

Assets = Liabilities + Net worth (Equity)


Balance Sheet

• Assets– Everything owned or payable to

the business


Balance Sheet


the business

• Liabilities– All obligations owed


Balance Sheet


the business

• Liabilities– All obligations owed

• Net worth/Owners Equity– Total assets minus total

liabilities


Balance Sheet

• Measures financial position:


Balance Sheet

• Measures financial position:– Liquidity

•The ability of the business to generate cash when needed


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


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


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Cash accountsCrop inventoriesLivestock held for salePrepaid expenses SuppliesAccounts receivable


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Machinery & equipment Breeding livestock


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

LandBuildings


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Accounts payableAccrued expensesOperating loansPrincipal due on term debt


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Loans with an original term of from 1 to 10 years


Assets Liabilities




Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Loans with an original term of greater than 10 years


Assets Liabilities




Total liabilities

Net worth


Balance Sheet

Non-current


Assets Liabilities




Personal Personal

Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Personal Personal

Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Personal Personal

Total liabilities

Net worth


Balance Sheet


Assets Liabilities




Personal Personal

Total liabilities

Net worth


Balance Sheet


Balance Sheet

• Management implication– Match financing to asset life


• A snapshot at a specific point in time

Balance Sheet: When


Balance Sheet Analysis

• Current position• Financial structure• Total solvency • Net worth change



• Current position– Current assets vs. current liabilities– Measures of liquidity

• Balance sheet structure• Total solvency • Net worth change


Working Capital

= Current assets minus current liabilities

• Important in financial risk management• Reduced by cash capital purchases and family

withdrawals



• Current position• Balance sheet structure

– Where is the equity– Are assets matched with liabilities– No right or wrong answer

• Total solvency • Net worth change


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



• 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



Let’s look at a balance sheet.



• Current position• Balance sheet structure• Total solvency • Net worth change

– Measures overall progress




– Measures overall progress– Net worth growth can only happen if:

•Earnings exceed consumption or




– Measures overall progress– Net worth growth can only happen if:

•Earnings exceed consumption or•Market values are increased


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


Balance Sheet Challenge

Asset Valuation


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


Market Value Balance Sheet

Total estimated market value of assets- Total debts= Net worth



•Advantage– Best estimate of solvency - amount remaining if

all assets were sold and all debts paid



•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



• Uses– Evaluate solvency– Evaluation of debt capacity– Collateral analysis– External comparison with other farms– Estate planning


Balance Sheet ChallengeAsset Valuation

• Cost (Book) Valuation– assets valued at original cost less depreciation– land value never changes


Cost Value Balance Sheet

Total depreciated value of assets- Total debts= Retained earnings



•Advantage– Includes only net worth changes resulting from

earnings



•Advantage– Includes only net worth changes resulting from

earnings

•Disadvantage– Does not provide accurate solvency picture



•Uses– Monitor earned net worth change– Internal periodic performance– Calculation of periodic net income



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



Asset Valuation• Be consistent• Depreciation

– Machinery 10%– Buildings 5%


Balance Sheet

A snapshot of:

– Assets– Liabilities– Net worth (owners equity)

• At a specific point in time


FFSC Financial Guidelines

Four financial statements:

– Balance sheet– Income statement– Statement of owners equity– Statement of cash flows


Income Statement

Purpose– Measure profitability– How much money did we

make


Income Statement

Types of income statements– Cash – IRS Schedule F


Income Statement

Types of income statements– Cash – IRS Schedule F– Accrual


Income Statement

Accrual method– Revenues recognized when earned – Expenses recognized when incurred– More accurately matches income with the expenses

incurred to produce that income


Income Statement

Types of income statements– Cash – IRS Schedule F– Accrual– Accrual adjusted


Accrual Adjusted Income Statement

CashAccounting

Records



CashAccounting

Records

BeginningBalance

Sheet

EndingBalance

Sheet



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


Net cash income 50,000Depreciation -40,000




Jones FarmGross income $500,000


Net cash income 50,000Inventory change +100,000

Depreciation -40,000Schedule F income 10,000










Depreciation -40,000Net farm income 110,000













Net cash income 50,000Inventory change -100,000

Depreciation -40,000Schedule F income 10,000









Net cash income 50,000Inventory change -100,000

Depreciation -40,000Net farm income -90,000

Economy & Finance

SmallFarm.ppt [Compatibility Mode]